The financial leverage captures the capital structure of the company. In other words, it gives you an idea of the way that the company is funded. There are two different ways to raise funds, either by raising equity or by raising debt.
The financial leverage is a ratio that shows how much debt a company has raised compared to it’s equity. The simplest ratio formula is debt (interest bearing debt) divided by equity.
Raising debt has benefits but also disadvantages. Debt tends to be cheaper and the interest costs are also tax deductible. However, raising too much debt might drive the company to insolvency.