in a higher overall ROE. Similarly, if the asset turnover increases, the firm generates more sales for every unit of assets owned, again resulting in a higher overall ROE. Finally, increasing accounting leverage means that the firm uses more debt financing relative to equity financing. Interest payments to creditors are tax-deductible, but dividend payments to shareholders are not. Thus, a higher proportion of debt in the firm's capital structure leads to higher ROE. Financial leverage benefits diminish as the risk of defaulting on interest payments increases. If the firm takes on too much debt, the cost of debt rises as creditors demand a higher risk premium, and ROE decreases. Increased debt will make a positive contribution to a firm's ROE only if the matching return on assets (ROA) of that debt exceeds the interest rate on the debt. See also DuPont analysis List of business and finance abbreviations Return on assets (RoA) Return on brand (ROB) Return on capital employed (ROCE) Return on capital (RoC) Return on net assets (RoNA) Leverage effect Notes External links Annual Ratio Definitions Return On Equity Screener- figures from financial statements Online Return On Equity Calculator Return On Equity Explained Financial ratios Investment indicators