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Return on Equity
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| Financial Leverage Index =
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[ Net Earnings + Interest Expense(1 - Tax Rate) ]
Total Assets
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Explanation of Financial Leverage Index:
The Financial Leverage Index measures how well a company is
using its debt. The Financial Leverage Index compares two other financial
performance ratios: Return on Equity and a modified version of
Return on Assets - mainly adding in the affects of Interest Expense and the Tax
Rate.
Importance of Financial Leverage Index:
If the Financial Leverage Index is greater than 1, then means the
company is using its debt in a positive way. Its Return on Equity is
larger than its Return on Assets. This ratio will be able to tell you
that as borrowing increases for a company, to determine if the debt the company
took on was beneficial or detrimental to the company.
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