Leverage: Difference between revisions
imported>Doug Williamson No edit summary |
imported>Doug Williamson No edit summary |
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1. <br /> | 1. <br /> | ||
Debt divided by Debt plus Equity = D / (D + E).<br /> | Debt divided by Debt plus Equity = D / (D + E).<br /> | ||
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<b>Example</b><br /> | <b>Example</b><br /> | ||
If the amounts of debt and equity were equal then leverage under this definition would be calculated as:<br /> | If the amounts of debt and equity were equal then leverage under this definition would be calculated as:<br /> | ||
1 / (1 + 1) = 50%.<br /> | 1 / (1 + 1) = 50%.<br /> | ||
<br /> | |||
2. <br /> | 2. <br /> | ||
The term 'leverage' is also used in a broader sense to refer to the amount of debt in a firm's financial structure.<br /> | The term 'leverage' is also used in a broader sense to refer to the amount of debt in a firm's financial structure.<br /> | ||
Used in this broader sense, 'leverage' means very much the same as 'gearing'. <br /> | Used in this broader sense, 'leverage' means very much the same as 'gearing'. <br /> | ||
However, leverage and gearing are normally quantified by different calculations.<br /> | However, leverage and gearing are normally quantified by different calculations.<br /> | ||
<br /> | |||
3. <br /> | 3. <br /> | ||
To increase the level of gearing in an operational or financial structure. The intention of leveraging is to improve expected net results. <br /> | To increase the level of gearing in an operational or financial structure. The intention of leveraging is to improve expected net results. <br /> | ||
A consequence of leveraging is normally to increase financial risk.<br /> | A consequence of leveraging is normally to increase financial risk.<br /> | ||
Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods. | Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods. | ||
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== See also == | == See also == | ||
* [[Debt]] | * [[Debt]] | ||
Revision as of 12:11, 29 May 2015
1.
Debt divided by Debt plus Equity = D / (D + E).
Example
If the amounts of debt and equity were equal then leverage under this definition would be calculated as:
1 / (1 + 1) = 50%.
2.
The term 'leverage' is also used in a broader sense to refer to the amount of debt in a firm's financial structure.
Used in this broader sense, 'leverage' means very much the same as 'gearing'.
However, leverage and gearing are normally quantified by different calculations.
3.
To increase the level of gearing in an operational or financial structure. The intention of leveraging is to improve expected net results.
A consequence of leveraging is normally to increase financial risk.
Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods.
See also
Other links
Masterclass: Measuring financial risk, The Treasurer, July 2012
