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Well, the âadvantageâ of increased financial leverage is a potentially higher return on equity. The disadvantage, on the other hand, is that the business is now riskier as it is financed with more debt (when revenue falls for unexpected reasons, there's now a whole lot of interest that still has to be paid).
Again, higher interest coverage ratios are typically better, and interest coverage close to or less than one means the company has some serious difficulty paying its interest. A company's leverage relates to how much debt it has on its balance sheet, and it is another measure of financial health. Generally, the more debt a company has, the riskier its stock is, since debtholders have first claim to a company's assets.