A leverage ratio

is any one of several financial

measurements that look at how much
capital comes in the form of debt
(loans), or assesses the ability of a
company to meet financial obligations.
• What is leverage in financial management?

• Leverage is the use of various

• financial instruments or borrowed capital, such
as margin, to increase the potential return of an
investment.
• What is the leverage ratio for a bank?

• The Tier 1 leverage ratio is the relationship

between a banking organization's
• core capital and
• its total assets.
• How do you calculate financial leverage ratio?
• The key steps involved in the calculation of Financial Leverage are:

• Compute the total debt owed by the company

• Estimate the total equity held by the
shareholders in the company. ...
• Divide the total debt by total equity
• There are three concepts, of leverage

• The first is based on balance sheet concepts,

• the second on market-dependent future cash
flows
• , and the third on market risk.
• Measuring formula
• Accounting leverage
• Is total assets divided by
• the total assets minus total liabilities
• Notional leverage
• is total notional amount of assets plus total
notional amount of liabilities divided by equity

• Economic leverage
• is volatility of equity divided by volatility of an
unlevered investment in the same assets
• Abbreviations
• EBIT means Earnings before interest and taxes.
• DOL is Degree of Operating Leverage
• DFL is Degree of Financial Leverage
• DCL is Degree of Combined Leverage
• ROE is Return on equity
• ROA is Return on assets
• OPERATING LEVERAGE
• Operating leverage,
• =contribution/opetring profit
• FINANCIAL LEVERAGE
• =%CHANGE IN EPS/%CHANGE IN EBIT

• COMBINED LEVERAGE
• =%CHANGE IN EPS/%CHANGE IN SALE