nixie24

think about it in a real world situation…..say you go to the bank and ask to borrow $100k. who are they going to give the money to: the guy with no assets or the guy with a $1 million house?
the more assets you have compared to your debt, the better your leverage ratios will be.
the financial leverage ratio is assets / equity. or to look at it another way (seeing as the accounting equation tells us that assets = liabilities + equity):
financial leverage ratio = (liabilities + equity) / equity.
if you understate your assets you reduce the equity. the liabilities, or debt, stays the same. therefore the ratio goes up, which makes your business more highly leveraged (ie the ratio gets worse).
hope this makes sense, cheers