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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).
Leverage metrics compare the costs and returns of funds from both sourcesâdebt funding and equity funding. As a result, Leverage metrics measure the increase in earning power a firm can expect from borrowing, when the business is doing well. And, the same leverage metrics show how the firm loses earning power when business is doing poorly. Capital Structure and Financial Structure. Note that the leverage metric Long term debt to equities ratio equates to the firm's capital structure.