Скачать или смотреть Financial Leverage Expalined in Hindi - Key Financial Ratio For Understanding Business

Financial Leverage Expalined in Hindi - Key Financial Ratio For Understanding Business

Financial leverage is a strategy that involves using borrowed money (debt) to finance a company's assets and operations. The goal is to magnify the returns on equity—if the return generated from the assets exceeds the cost of borrowing, the company's profits and shareholders' earnings will increase at a faster rate.

It's a double-edged sword: while it can amplify profits, it can also magnify losses if the investment underperforms.

How to Measure Financial Leverage
Financial leverage is most commonly measured using the Debt-to-Equity (D/E) ratio, which compares a company's total debt to its total equity.

Debt−to−EquityRatio=
TotalShareholder
′
sEquity
TotalDebt
​


A D/E ratio greater than 1 indicates that a company is using more debt than equity to finance its assets.

Risks and Benefits
Benefits of Financial Leverage Risks of Financial Leverage
Increased Returns: Magnifies returns on equity when the return on assets is higher than the interest rate on the debt. Amplified Losses: If the return on assets is less than the cost of debt, the company's losses will be magnified.
Tax Advantage: Interest payments on debt are tax-deductible, which can lower a company's tax liability. Increased Bankruptcy Risk: High debt levels increase the risk of bankruptcy if the company is unable to make its interest payments.
Retaining Control: Companies can raise capital without issuing new shares, allowing existing owners to maintain their percentage of ownership and control. Limited Flexibility: High debt can restrict a company's ability to raise further funds or invest in new projects.

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High vs. Low Financial Leverage
High Financial Leverage (High D/E Ratio): This indicates that a company is more reliant on debt. It can be a sign of a high-risk, high-reward strategy. While it has the potential for significant profit growth, it also leaves the company vulnerable during economic downturns or periods of low sales, when it may struggle to meet its debt obligations.

Low Financial Leverage (Low D/E Ratio): This suggests a company is more conservatively financed, relying more on equity. It indicates lower financial risk and greater stability, as the company has more flexibility and is less susceptible to market volatility. However, it may also mean the company is missing out on opportunities to boost returns and could be underutilizing its capital.

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