Financial leverage is positive when the return on equity (ROE) is higher than the return on assets (ROA).

Question

Quizplus · Accepted Answer

Financial leverage refers to the use of debt to finance assets or operations. When the return on equity (ROE) is higher than the return on assets (ROA), it means that the company is earning a higher return on the funds that were invested by the shareholders, compared to the return on the total assets employed by the company. This indicates that the company is effectively using financial leverage to amplify the returns to its shareholders.

Financial Leverage Is Positive When the Return on Equity (ROE)