What's the correct formula of Fin. Leverage another, correct, meaning

edgeon

All over Net, I see debt/equity as the formula for FInancial Leverage whereas in CFA they say its Total Asset/Total Equity! why?

My another query is, do we always consider Equity as the Total Equity meaning combination of RE, Net Income, Minority Interest, Preferred Stock, Common Stock in the Ratio Analysis?

kasinkei

Please don't accept everything you see over the net. Debt/equity is debt-to-equity ratio and financial leverage is Total Asset/Total Equity. Yes, the denominator is " Total equity". However, the debt-to-equity ratio also measures financial leverage of a firm too because of the apparent relationship between the two ratios. Here's how they relate :

Financial leverage = Total Asset/Total Equity = (Liabilities + Equity)/ Equity = debt-to-equity ratio + 1

Hope this helps.