Enter the return on equity (% or $) and the return on assets (% or $) into the Calculator. The calculator will evaluate the Leverage Index. 

Leverage Index Formula

LI = ROE / ROA * 100

Variables:

  • LI is the Leverage Index (%)
  • ROE is the return on equity (% or $)
  • ROA is the return on assets (% or $)

To calculate Leverage Index, divide the return on equity by the return on assets, then multiply by 100.

How to Calculate Leverage Index?

The following steps outline how to calculate the Leverage Index.


  1. First, determine the return on equity (% or $). 
  2. Next, determine the return on assets (% or $). 
  3. Next, gather the formula from above = LI = ROE / ROA * 100.
  4. Finally, calculate the Leverage Index.
  5. After inserting the variables and calculating the result, check your answer with the calculator above.

Example Problem : 

Use the following variables as an example problem to test your knowledge.

return on equity (% or $) = 300

return on assets (% or $) = 400

FAQs

What is Return on Equity (ROE)?

Return on Equity (ROE) is a financial ratio that measures the profitability of a business in relation to the equity. It is calculated by dividing net income by shareholder’s equity, indicating how well a company uses investments to generate earnings growth.

How does Return on Assets (ROA) differ from ROE?

Return on Assets (ROA) measures a company’s efficiency in using its assets to generate profit, while Return on Equity (ROE) measures how well a company generates profit from its shareholders’ equity. Essentially, ROA focuses on asset utilization, whereas ROE focuses on the return to shareholders.

Why is the Leverage Index important?

The Leverage Index is important because it provides insight into the financial leverage a company is using. A higher Leverage Index indicates that a company is using more debt to finance its assets, which can increase the return on equity but also increases financial risk.

Can the Leverage Index be negative?

Yes, the Leverage Index can be negative if the return on assets (ROA) is negative, indicating that the assets are generating a loss rather than a profit. This situation reflects poorly on the company’s financial health and operational efficiency.