Leverage describes how much of a company's asset base is funded by debt relative to shareholders' own capital (equity). A company can fund its assets in only two ways — borrowing or equity — and leverage is a way of describing the balance between the two.

Debt to equity is the most direct leverage figure: total borrowings divided by total shareholders' equity, expressed as a multiple. A debt-to-equity ratio of 0.5 means a company's borrowings amount to half its shareholders' equity; a ratio of 2 means borrowings are twice equity. A ratio of zero means a company carries no interest-bearing debt at all, funding its entire asset base through equity alone.

The equity multiplier — total assets divided by total shareholders' equity — measures the same underlying idea from a different angle: how many rupees of assets a company holds for every rupee of shareholder equity. An equity multiplier of 2 means a company's asset base is twice the size of its equity, meaning half of those assets are funded by liabilities of some kind rather than by shareholder capital. This is one of the three factors this app's DuPont breakdown uses to decompose ROE, alongside net margin and asset turnover — a higher equity multiplier increases ROE for a given net margin and asset turnover, since the same profit is being measured against a comparatively smaller equity base.

Leverage isn't inherently high or low in some absolute sense — what counts as a typical debt-to-equity ratio varies substantially by industry. Businesses with large, stable, predictable cash flows (such as some utilities or infrastructure companies) commonly carry more debt relative to equity than businesses with more variable earnings, simply because predictable cash flow makes consistent debt repayment more feasible. Comparing a company's leverage against others in the same industry, rather than against an unrelated one, is what makes the comparison meaningful.

Leverage affects both sides of the DuPont decomposition at once: it can raise ROE for a given level of underlying profitability, but it also means a fixed obligation — interest, and eventually principal — has to be paid regardless of how the business performs in a given period, which is a different kind of consideration from the return figure alone.