A long period of slow growth risks making Company B insolvent. But during a market downturn, it will struggle. When markets are growing, Company B will do well. In finance, leverage refers to using borrowed capital or financial derivatives to magnify the results of an investment. Here, Company B is much more highly leveraged than Company A. It’s capital structure is 75% debt and 25% equity. In other words, for every dollar contributed by shareholders, the company has borrowed $3. Its capital structure is 25% debt and 75% equity.Ĭompany B has total debt of $750,000 and total shareholders’ equity of $250,000. In other words, for every dollar the company has borrowed, shareholders have contributed $3. In the example below, two companies in the same industry have assets of $1,000,000.Ĭompany A has total debt of $250,000 and total shareholder’s equity of $750,000. Comparing these ratios with those from other companies in the same industry illustrates their utility. Two ratios are used to measure a company’s leverage: Debt-to-equity and debt-to-total-assets. However, when revenues are low, a highly leveraged business might fall behind on debt payments and it might not be able to borrow additional money to stay afloat. When revenues are growing, payments are made with comfortable surpluses and additional debt is acquired to take advantage of market opportunities. A company with more debt than average for its industry is said to be highly leveraged. Leverage is the amount of debt a company has in its mix of debt and equity (its capital structure). Growth & Transition Capital financing solutions Kauffman Fellows Program Partial Scholarship Venture Capital Catalyst Initiative (VCCI) Industrial, Clean and Energy Technology (ICE) Venture Fund
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