One of the best ways in which companies will profit by increasing its financial leverage. Financial leverage uses debt, so that the expected return would increase in the equity of the company. The level of financial leverage of a particular company is always the total value of debt and equity and the ratio of debt determined.
Leverage is generally considered the use of borrowed money to make a return on investment and described from whichInvestment.
It is risky for a company to have a high ration of financial leverage. It was also noted that the outcome of financial leverage: If the level or point of the high financial leverage, the more is expected to increase profit on the equity of the company. Thus the financial leverage is used in different circumstances as a means to change the cash flow and financial position of a company.
There are four positions that a showRelationship with the level of financial leverage. First, the ratio of equity and debt, for example, the rate of capital. Another reason is the influence on the production and business cycle of financial leverage. Then the company industry and sector level throughout the financial leverage level. And the correlation between the current financial leverage ratio of the company and the average level of leverage. Finally, the compliance of the company's mission and philosophy with which it isSituation with the ratio of financial leverage associated.
The result of the financial leverage can also be used to promote income growth, however, it is common for many industrial enterprises in the phase of the young and young people. Financial leverage ratio relative to the variability of profit and, in contrast to stability. Company profits with high leverage levels differ in the state in which profits of the company with less leverageLevel.
Another factor that affects leverage ration is the flexibility, dynamism and openness that concern about the changes and the development of technologies, facilities and industry. Companies with high leverage level, a decrease flexible procedure because of the fact that they use more complete responsibility for all the creditors, and sometimes some of the restrictions and agreements have on their investments and capital.
Companies with high leverage level, usually lesssuccessful because of the location of the transformation of the environment and the necessity of taking decisions is uncertain. For this reason, they might not be able to apply or take advantage of growth opportunities and expansion of business activities.
Another danger of using financial leverage as a tool for increasing sales is the reality that the transition between profits and debts of the company remains positive. If the profit of the company in proportion to the amount of capital is higher, the debt exceeds the amount of earnings then the effect ofLeverage is gone, and remains the indebtedness.
It is, therefore, that the level of financial leverage a good understanding of financial, business management must have. To determine the response rate with regard to return, simply use the difference between the interest rate on assets and liabilities, then multiply the difference by the relative level of responsibility or blame for the stock and add the expected return on assets.
Assign sectors that are growing fast onlylow levels than the stable growing company.
In most cases, the impact of financial leverage are used to improve their financial condition and results of the company, but it should not be accepted as a principle, but rather requires a comprehensive analysis of the current state of the environment.
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