![]() We can say that a company with a high debt ratio indicates that it utilizes its debt to finance its assets and resources profitably. However, this option is profitable only when the company has the vision to easily generate more profit from the investment to pay off the debt. Indeed, companies can also utilize equity to purchase assets, but they prefer debts as the cost of equity is always higher than the cost of borrowing. When borrowing any asset or capital, a company has two options available, i.e., equity and debt. The most common ratios used to measure financial leverages are the Debt-to-Equity Ratio, Debt to Capital Ratio, Debt to EBITDA Ratio, and Interest Coverage Ratio.Investors utilize the financial leverage ratios to find whether a company is worth investing in or not.A high leverage ratio indicates that the company uses its debt to expand its resources more than the available equity.It is calculated by dividing a company’s total debt by the shareholder’s equity.Financial leverage, also known as leverage or trading on equity, is a strategy companies use to finance projects or buy more assets. ![]() However, if the ratio is above 1, we can conclude that the company has a poor investment strategy and may be unable to pay back its debt. ![]() If its financial leverage ratio is less than 1, it means that the company has made practical investments and can pay off its debt. Start Your Free Investment Banking Courseĭownload Corporate Valuation, Investment Banking, Accounting, CFA Calculator & othersĪssume Starstruck, a shoe manufacturing company, borrows $10 million in debt to expand its business globally.
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