Total assets divided by shareholder equity. Measures how much a company relies on debt to finance its assets. Below 2.5 is moderate. High leverage boosts returns in good times but amplifies losses in downturns.
Formula
Description
Measures the degree to which a company uses debt and other liabilities to finance its assets. This is one of the three components of the DuPont decomposition of ROE (margin x turnover x leverage). High leverage boosts ROE but increases risk.
Interpretation
Below 2.5 is moderate. Above 3.0 is aggressive for non-financial companies. Compare to ROE: if a company has high ROE but also high financial leverage, the profitability may be less sustainable than it appears.
Related Quality Indicators
The percentage of revenue left after paying all operating expenses but before interest and taxes. This shows how efficiently the core business runs. Above 15% is generally strong. Consistently expanding margins signal improving business quality.
The percentage of every revenue dollar that becomes bottom-line profit after all expenses. Above 10% is strong for most industries. Persistently high net margins often indicate a company has a competitive moat protecting its business.
Profitability before the effects of debt, taxes, and depreciation. Useful for comparing companies across different tax jurisdictions and capital structures. Above 20% is generally strong. Often used in merger and acquisition analysis.
The percentage of revenue that converts to free cash flow. This is arguably the most honest profitability metric because free cash flow is difficult to manipulate. Above 10% is strong. Capital-light businesses like software companies tend to have the highest FCF margins.
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