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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).
Financial Leverage can be defined as the degree to which an investor or business is utilizing borrowed money as compared to the equity to fund its operatons. The operating leverage is a measure of how revenue growth translates into growth in operating income.t is a measure of leverage, and of how risky (volatile) a company's operating income is. Both operating and financial leverage result in the magnification of changes to earnings due to the presence of fixed costs in a company's cost structure. The difference is only the part of the income statement we are looking at.