Definitions for "financial leverage"
Keywords:  leverage, equity, refl, nancing, ratio
In finance, leverage is the general term used to describe the ratio between...
Arises from the partial use of debt or other fixed-income securities to finance investments. Fixed-financing charges have the effect of magnifying the potential variations of returns on the equity portion of the investment. The degree of financial leverage is sometimes defined as the percentage change in earnings per share (EPS) caused by a given percentage change in earnings before interest and taxes (EBIT).
Financial leverage measures the ratio of owners' equity to liabilities from external sources. Capital from external uses is not considered as a negative indicator as long as the ratio to owners' equity is. Leveraging the company's activity if the company is profitable increases the earnings per share ratio. This occurs when the return on capital is higher after-tax than the cost of raising external funds. On the other hand, a high ratio of external sources to owners' equity creates dependence on the lenders and might cause liquidity problems and instability. This ratio is calculated using the following formula: Financial Leverage = Liabilities to external sources / Owners Equity or Financial Leverage = Owners Equity / Liabilities to external sources See also Gearing.
The magnification of an entity's risk and return that occurs when the entity incurs fixed financing costs, usually by borrowing funds.
Foreign Bonds Full-duplex transmission
The use of other people's money for investment purposes.
The use of borrowed money to complete an investment purchase.