- Financial Leverage Ratio = Return on Equity / Return on Capital Employed
- Return on Equity = Earnings Before Taxes (EBT) / Equity
- Return on Capital Employed = Earnings Before Taxes (EBT) / Capital Employed
- It shows the effect that the use of capital employed has on the profitability of the company’s equity.
- If the ratio is >1, the effect of the use of external capital on the company’s profits is positive and beneficial
- If the ratio is <1, the effect of the use of external capital is negative and the company borrows on onerous terms.
Business actions to improve the Index
Reduce Equity through dividend payment or through Increase in provisions
Increase in Capital Employed
- through Reduction in Total Liabilities
- through Increase in Total Assets
