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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).
(1) The best-known financial leverage ratio is the debt-to-equity ratio. For example, if a company has $10 million in debt and $20 million in equity, it has a debt-to-equity ratio of 0.5 ($10 million/$20 million).enerally, companies with higher leverage as determined by a leverage ratio are thought to be more risky because they have more liabilities and less equity. A leverage ratio is also called a gearing ratio or an equity multiplier.