Leverage is the extent to which a business uses liabilities relative to equity to finance it’s assets. The debt ratio is the ratio of liabilities to assets and is used in the financial projections template as one indicator of financial leverage.
Leverage is the extent to which a business utilizes liabilities relative to equity funding, to finance its operations. The equity multiplier is the ratio of assets to equity and is used in the financial projections template as one indicator of leverage.
A business with a high level of financial leverage (sometimes referred to as being highly geared) is considered to be more risky as finance costs need to be paid before equity owners get their return. However, in return for this higher risk a high level of financial leverage will give greater returns to the owners provided cash and profit are managed correctly.
Last modified November 17th, 2022 by Michael Brown