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.
Net Debt divided by EBITDA for the previous twelve months.
A ratio which reflects the role of borrowings within the financing structure of a company. It is calculated by dividing net total borrowings by shareholders' equity.
The effect that contracting debt has on the profitability of a company, which may produce better results than it would if it relied solely on its own resources.
a financial ratio obtained by dividing total assets by net assets. Used to measure how effectively a business uses debt to boost return on equity or net assets.
The relationship of debt to equity. Expressed for financial services businesses as borrowings divided by equity. Expressed for industrial businesses as borrowings divided by total capital.
A performance measure based on the relationship between a retailer's total assets and net worth. It is equal to total assets divided by net worth.
Use of debt to increase the expected return and the risk to equity.
The ability to increase earnings for stockholders by earning more on assets than is paid in interest on debt incurred to finance the assets. Also called trading on the equity.
To learn more, see Explanation of Financial Ratios. To Top
This ratio refl ects the role of borrowings within the fi nancing structure of a company. It is calculated by dividing net total borrowings by shareholders' equity.
The use of borrowed money to complete an investment transaction. If the asset purchased with borrowed money offers annual financial benefits at a rate in excess of the loan's interest rate, leverage is said to be positive or favorable. 'Me investor makes money by borrowing. Conversely, if an asset purchased with borrowed money fails to increase in value or if it fails to provide benefits in excess of the interest rate paid on the borrowed money, then leverage is negative. Leverage is neutral when the property earns at the same rate as the interest rate on borrowed money.
A concept describing the relative proportions of debt and equity supporting a company’s assets. The greater the proportion of debt to equity, the greater the financial leverage in the business.
The use of borrowed money to increase the return on equity of an investment purchase
Financial Leverage refers to the capacity to borrow (Assets divided by Book Value) and depends on a company's leverage with lending sources and the stock market.
the relationship of debt and equity used to finance the firm’s assets.
Ratio of debt to equity or ratio of fixed financial charges to operating profit before fixed charges. Financial leverage is a financing technique that uses borrowed funds or preferred stock to improve the return on an equity investment.
Use of debt to increase the expected return on equity. Measured by the ratio of debt to debt plus equity.
The use of interest bearing debt or other fixed payment financial obligations in the capital structure of a business.
The ratio of debt and debt-like instruments to capitalization
