As we now Dupont carried out an analysis of ROE.
ROE =NET PROFIT MARGIN × ASSET TURNOVER RATIO × FINANCIAL LEVERAGE. Please explain Financial Leverage formula on the basis of Total asset upon Net worth.
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FL = Assets/Equity
Denominator: Equity is also known as Net Worth. Equity can be calculated as Assets minus Liabilities
Numerator: Assets is total assets on the B/S
Financial Leverage is also known as Equity Multiplier. Financial Leverage can also be stated as Avg Assets/Avg Equity.
Hope it helps.
Thanks brother.
FL=1+(debt/equity),
total asset= debt + equity
total asset is the how many times of equity , so it can say equity multiplier.
The best way to understand Financial Leverage Formula is by intuition:-
The formula is TA/NW
Mtlb apna jo total assests hai usme se kitna apne khudke paiso se liya hua hai.
Suppose company ka Total Assets is 1 Cr. and company ke balance sheet me 50 Lakh equity + Reserves hai i.e. net worth. Here Financial Leverage is 1/0.5 =2 Times.