A higher financial leverage ratio indicates that:

The correct answer is option 1- The dependency of the firm on the debt is more.

A higher financial leverage ratio indicates that the dependency of the firm on the debt is more.

The proportion of debt in the overall capital is also called financial leverage. Financial leverage is computed as D/E or D/(D+E) when D is the Debt and E is the Equity. As the financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases. A higher financial leverage ration, thus means, use of more debt in the capital structure.