Leverage different, comparing, following, reporting, familiar

mkytz15

I have a quick question on leverage. I kind of see different calcualtions between the CFAI books and the Schweser notes.I am familiar with the DuPont ROE etc.

So the CFAI book says: Financial Leverage= Assets/ Equity

I was going over the financial reporting on intercompany investments (comparing the ratios for proportionate conslodidateion, aquisition and equity method) and saw the following leverage calcualtion:

Leverage=Liabilities/Equity.

So which on is right when we mean leverage in a normal (average) term.

Can you guys help me with this?

Thanks!

Sportsman

How about Total assets = Total liabilities (double-entry book keeping)?

economicz

mihau10, according to my knowledge: The basic accounting equation is

assets= liabilites + equity

I am not sure whther you just wanted to sound like a smart guy or you actually wanted to help?

I use this forum to get into touch with professional people who can help other candiadtes.

If you have a different intention then please find another thread!

Thanks

tikfed

yo fritos, it's assets/equity baby

wilslm

You are right - please accept my apologies. Only now I realised how lofty my answer sounded. I had no intention to underrate your knowledge or skills - no question is stupid, only the answer can be.
What I had in mind was that the asset side should equal the liabilities side and sometimes the terminology is used in this sense.

Valid point as well, CFAcountry.

neil1234

assets to equity is one way to evaluate leverage and is used in the ROE equation because it is the only was to cancel out the assets in the denominator of the prior ratio.

More often (at least in banking), leverage refers to Liabilities/Equity. I would expect that any CFA question would make it obvious what ratio the question is referring to.