The Fed Spike In 2019Q1 Leverage Ratios The Impact Of Operating Leases

Cover Fundamentals of financial statement analysis. (Lecture 1) презентация онлайн (1024x768)

Table of Contents:

1. What is financial leverage ratio?
2. Why is financial leverage ratio important?
3. How to calculate financial leverage ratio?
4. What are the types of financial leverage ratio?
5. What are the advantages and disadvantages of financial leverage ratio?

1. What is financial leverage ratio?

Financial leverage ratio is a measure of the company's ability to meet its financial obligations using borrowed money. It is a ratio that compares the company's total debt to its total assets. The higher the ratio, the more leveraged the company is, and the greater the risk of default.

Financial leverage ratio is also known as debt-to-equity ratio. It shows the proportion of a company's financing that comes from debt compared to equity. In other words, it indicates how much of the company's assets are financed by debt and how much by equity.

2. Why is financial leverage ratio important?

Financial leverage ratio is important because it helps investors and analysts understand the company's financial risk. A higher ratio indicates that the company is more dependent on borrowed money to finance its operations. This means that the company has higher interest expenses and is more vulnerable to changes in interest rates.

Additionally, a high financial leverage ratio means that the company has less equity in the business. This means that if the company experiences financial difficulties, it may have trouble raising additional capital to pay off its debt or invest in new projects.

3. How to calculate financial leverage ratio?

The formula to calculate financial leverage ratio is:

Financial Leverage Ratio = Total Debt / Total Assets

To calculate the total debt, you need to add together all of the company's short-term and long-term liabilities. To calculate the total assets, you need to add together all of the company's current and non-current assets.

For example, if a company has $500,000 in total debt and $1,000,000 in total assets, the financial leverage ratio would be:

Financial Leverage Ratio = $500,000 / $1,000,000 = 0.5

This means that the company's financing is split evenly between debt and equity.

4. What are the types of financial leverage ratio?

There are two main types of financial leverage ratio:

1. Debt-to-Equity Ratio: This is the most common type of financial leverage ratio. It compares the amount of debt a company has to the amount of equity it has. The formula is:

Debt-to-Equity Ratio = Total Debt / Total Equity

2. Debt-to-Assets Ratio: This ratio measures the percentage of a company's assets that are financed by debt. The formula is:

Debt-to-Assets Ratio = Total Debt / Total Assets

5. What are the advantages and disadvantages of financial leverage ratio?

Advantages:

1. Financial leverage ratio helps investors and analysts understand the company's financial risk.

2. It provides a quick and easy way to compare the financial structure of different companies.

3. It can help companies identify potential problems with their debt levels before they become a major issue.

Disadvantages:

1. Financial leverage ratio does not take into account the company's ability to generate cash flow.

2. It does not consider the company's future growth potential.

3. It does not account for differences in accounting practices between companies.

Conclusion:

Financial leverage ratio is an important measure of a company's financial risk. It helps investors and analysts understand the company's dependence on borrowed money to finance its operations. However, it is important to consider other factors such as cash flow and future growth potential when evaluating a company's financial strength. By understanding the advantages and disadvantages of financial leverage ratio, investors can make informed decisions when investing in companies.