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Definition of

financial leverage


relationship between firm’s borrowings and stockholders’ funds the relationship between a company's borrowings (which includes both prior charge capital and long-term debt) and its stockholders' funds (common share capital plus reserves). Calculations can be made in a number of ways, and may be based on capital values or on earnings/interest relationships. Overdrafts and interest paid thereon may also be included:

Profit before interest and tax / Profit before tax

shows the effect of interest on the operating profit.

Profit before interest and tax / Interest expense

shows the number of times that profit will cover interest expense.

Total long-term debt / (Shareholders' funds + long-term debt)

shows the proportion of long-term financing which is being supplied by debt.

Total long-term debt / Total assets

a measure of the capacity to redeem debt obligations by the sale of assets.

(Operating cash flows − Taxation paid − Returns on investment and servicing of finance) / Repayments of debt due within one year

measures ability to redeem debt.

A company with a high proportion of prior charge capital to shareholders' funds is highly leveraged, and is lowly or lightly leveraged if the reverse situation applies.

Related definitions of "financial leverage"

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Definitions of ’financial leverage’ and meaning of ’financial leverage’ are from the book publication, QFINANCE – The Ultimate Resource, © 2009 Bloomsbury Information Ltd. Find definitions for ’financial leverage’ and other financial terms with our online QFINANCE Financial Dictionary.

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