Monday, January 10, 2011

(247)---MEASURES OF FINANCIAL LEVERAGE

Measures of Financial Leverage


The most commonly used measures of financial leverage are:
  • Debt ratio.
The ration of debt to total capital

L1 = D / (D+E) = D/V

Where D is value of debt, E is value of shareholders’ equity and V is value of total capital. D and E may be measured in terms of book value. The book value of equity is called net worth. Shareholder’s equity may be measured in terms of market value.

  • Debt-equity ratio
The ratio of debt to equity,

L2 = D/E

  • Interest coverage
The ratio of net operating income to interest charges

L3 = EBIT/Interest

The first two measures of financial leverage can be expressed either in terms of book values or market values. The market value to financial leverage is theoretically more appropriate because market value reflects the current attitude of investors. But it is difficult to get reliable information on market values in practice. The market values of securities fluctuate quite frequently.

There is no difference between the first two measures of financial leverage in operational terms. They are related to each other in the following manner.

L1 = L2 / (1+L2) = (D/E) / (1+D)/E = D/V

L2 = L1 / (1-L1) = (D/V) / (1-D)/V = D/E


These relationships indicate that both these measures of financial leverage will rank companies in the same order. However, the first measure is more specific as its value will range between zeros to one. The value of the second measure may very from zero to any large number. The debt-equity ratio, as a measure of financial leverage, is more popular in practice. There is usually an accepted industry standard to which the company’s debt-equity ratio is compared. The company will be considered risky if its debt-equity ratio exceeds the industry standard. Financial institutions and banks also focus on debt-equity ratio in their lending decisions.


The first two measures of financial leverage are also measures of capital gearing. They are static in nature as they show the borrowing position of the company at a point of time. These measures, thus, fail to reflect the level of financial risk, which is inherent in the possible failure of the company to pay interest and repay debt.

The third measure of financial leverage, commonly known as coverage ratio, indicates the capacity of the company to meet fixed financial charges. The reciprocal of interest coverage, that is, interest divided by EBIT, is a measure of the firm’s income gearing. Again by comparing the company’s coverage ratio with an accepted industry standard, investors can get an idea of financial risk. However, this measure suffers from certain limitations. First, to determine the company’s ability to meet fixed financial obligations, it is the cash flow information, which is relevant, not the reported earnings. During recessionary economic decisions, there can be wide disparity between the earnings and the net cash flows generated from operations. Second, this ratio, when calculated on past earnings, does not provide any guide regarding the future risk ness of the company. Third, it is only a measure of short-term liquidity rather than of leverage.

80 comments:

sherlina halim said...

Pengen yang lebih seru ...
Ayo kunjungi www.asianbet77.com
Buktikan sendiri ..

Real Play = Real Money

- Bonus Promo Red Card pertandingan manapun .
- Bonus Mixparlay .
- Bonus Tangkasnet setiap hari .
- New Produk Sabung Ayam ( minimal bet sangat ringan ) .
- Referal 5 + 1 % ( seumur hidup ) .
- Cash Back up to 10 % .
- Bonus Royalty Rewards setiap bulan .

Untuk Informasi lebih jelasnya silahkan hubungi CS kami :
- YM : op1_asianbet77@yahoo.com
- EMAIL : melasian77cs@gmail.com
- WHATSAPP : +63 905 213 7234
- WECHAT : asianbet_77
- SMS CENTER : +63 905 209 8162
- PIN BB : 2B4BB06A / 28339A41

Salam Admin ,
asianbet77.com

Download Disini

HIMT said...


Thank you for taking the time to publish this information very useful! I've been looking for books of this nature for a way too long. I'm just glad that I found yours. Looking forward for your next post. Thanks :)

Distance Education Institute in Gurgaon

Niranjan R said...

I am glad to find your impressive way of writing the post.Thanks for sharing the post.Also see my blog Best Web Designing Certified courses in Chennai

bestinsolesflatfeet said...

Thanks with regard to taking a few minutes to publish this information very helpful! I've been searching for publications with this character to get a way too extended. I'm simply delighted which i identified the one you have. Looking forward on your subsequent submit.

Cheers: ).
Have a good day!

for IT the said...


Great Article

HTML5 Online Training India | JavaScript Training India | Javascript Online Course India | Angularjs Online Training India | Backbone.JS Online Training India | Bootstrap Training India | Node.js Online Training India | Typescript Online Training India | Java Online Course

Lakshman said...

Thanks for sharing excellent Information on Financial Leverage. It has very rich content as every one will like to read your blog information. dealstoall

Shiya Priya said...

Nice Website...
Hey JOIN now fblikesbot.com and Increase Facebook Likes your profile and websites.
Increase Facebook Likes and check your website worth worth my websites
FB Likes and check your website worth Website Value Calculator
Hot Wallpapers seo tools website
its may be very beneficial for you also really

naik said...

thanks for sharing


whatsapp tips and tricks

James Corden said...

Free Download All MBA Final Year Finance Project Reports, B School Projects, Business Project Abstracts, MBA Papers, MBA Presentations. Final Year mba students can find mba Finance Project Reports, MBA Projects on banking, MBA Projects on marketing with project reports and abstracts for free download.

Anurag 77 said...

I love it. I hope that more and more Blogger will use this feature in the future, because it just makes the internet better I think!
NEET 2017 Results
Neet admit-card Institution
RRB Exams 2016 – 2017

runningshoesforsupination said...

Thanks for sharing, I love it much
keep posting more and more

Salman Ayub said...

This is very informative and comprehensive blog

Download Free Microsoft Excel APK

Priyatamil said...

Great articles, first of all Thanks for writing such lovely Post! Earlier I thought that posts are the only most important thing on any blog. But here at Shoutmeloud I found how important other elements are for your blog.Keep update more posts..

Study Abroad Consultants in Chennai | Study in Germany Consultants in Chennai | Germany Education Consultants in Chennai

malik.habib said...

Thanks for sharing such beautiful post, regards TETinfo

malik.habib said...

Thanks for sharing this post, Regards @ TETinfo

MBBS ABROAD said...

Great article....Thanks for sharing ....

MBBS IN USA

NEET2017 said...

NEET2017

NEET Eligibility Criteria 

NEET Application form

Bharat Rawat said...

Nice article thanks for sharing with us.
RRB Admit Card

Anonymous said...

Students are eagerly waiting for their mah results 2017.

Anonymous said...

Students are eagerly waiting for their maharashtra ssc results at official website.

Anonymous said...

The maharashtra hsc result will be available on the official website that is www.mahresult.nic.in.

Asha Deepti said...

Leading IELTS training. Guaranteed results. Visit website.

Best Spoken English classes. Read More.

Anonymous said...

Click here to check Maharashtra ssc, hsc result 2017.

Anonymous said...

Students are eagerly waiting for their maharashtra ssc results at official website.

Anonymous said...

check your mah hsc results 2017 at official website.

apple said...

TS Polycet Aplication form

Anonymous said...

Click here to get karnataka sslc result 2017.

Anonymous said...

Click here to check Maharashtra ssc, hsc result 2017.

Anonymous said...

Students are eagerly waiting for their mah results 2017.

Anonymous said...

Students are eagerly waiting for their mah results 2017.

zimi said...

Very good financial information

iWEB TECHNOLOGIES said...

Your Blog is a Wonderfull Creativity ...!!
Social Media Management Tools

Anonymous said...

Students can check TN HSC Result at official website.

Anonymous said...

Click here to get karnataka sslc result 2017.

Sharukh Khan said...




overseas education consultants in hyderabad do you want to study in abroad today or in the next intake. we are the best and top rated study abroad consultancies in india with good visa assurance.we help you in filing the f1 visa for you in very less time. study abroad consultants in hyderabad we are also help you with information needed to apply for the college university.

Anonymous said...

Click here to get TN 12th results

Anonymous said...


Students can check the karnataka sslc results here.

Priyatamil said...

It’s the best time to make some plans for the future and it is time to be happy. I’ve read this post and if I could I want to suggest you few interesting things or suggestions.You can write next articles referring to this article. I desire to read even more things about it..
Study in Germany Consultants in Chennai | Germany Education Consultants in Chennai

Anonymous said...

Students can check TN HSC Result at official website.

Anonymous said...

Students can check TN HSC Result at official website.

Anonymous said...

Students can check TN HSC Result at official website.

Anonymous said...

Click here to get HSC Result Gujarat at official website.

Anonymous said...

Click here to get HSC Result Gujarat at official website.

Anonymous said...

Click here to get HSC Result Gujarat at official website.

Anonymous said...

Click here to get HSC Result Gujarat at official website.

sravan rao said...

SBI PO Answer Key available here. Get the complete results about SBI PO Answer Key. For more click here
Download here

sravan rao said...


IBPS RRB Clerk Online Application available here. click here for more details of IBPSRRB Clerk Online application and how to apply.
IBPS RRB Clerk Application Form

sravan rao said...

Union Public Service Commission (UPSC) conducts a competitive examination for recruitment and selection to the post of Geologist.
Geoscientist Exam

sravan rao said...

view the Income Tax Slabs and Rates for the Assessment Year 2017-18. click here to
Know more

questionpapers said...

Great article .. keep writing! Its very nice reading your article, thanks for this matter.ts ssc results 2017

sravan rao said...

Click here to get the Complete Syllabus for RRB JE, SE, ALP & NTPC Exams. From here you can get RRB NTPC Syllabus Pdf free Download
RRB Syllabus

sravan rao said...

Here you can get the complete details about tan number search. For more details
Go here

sravan rao said...

View Top 10 Xiaomi Mobile Phones in India with price. Click here to check Top ten Xiaomi phones and find their prices, reviews, specifications and features
Xiaomi Mobile Price

sravan rao said...

To know all the information regarding Media center suite Click on the below link and get the required information.
Kodi Media Player

sravan rao said...

Check Oriental Insurance Policy Status, Claim Status through Online, click here.
Oriental insurance Policy Status

sravan rao said...

Know the complete information about gold rate/price in Mumbai. For more click here
todays gold rate in mumbai

sravan rao said...

Best Exercise to Get Zero Size Figure. For more information click on below link
size zero exercise

sravan rao said...

View all the detail of Tata Docomo Cdma Karnataka plans and recharge online
tata docomo online recharge

Sana Ur Rehman said...

I’m usually to blogging and i actually appreciate your content. The article has genuinely peaks my interest. I’m going to bookmark your web page and maintain checking for new details. I am looking for some good blog sites for studying. I was searching over search engines and found your blog site. Well i like your high quality blog site design plus your posting abilities. Keep doing it. such a nice information about my search thanks for sharing . Crackedtool

sravan rao said...

There are excellent home remedies which can remove stains naturally. click here to Know how to use Banana Peel to Whiten Teeth.
banana peel to whiten teeth

sravan rao said...

Here you can get the complete information about united india insurance plans . For more click here
United india insurance

sravan rao said...

LIC Online Term Insurance Plan Premium Calculator Provide Premium details chart & Feature Benefits of LIC Term Insurance Policy.
LIC term plan

Jessica said...

Thank you very much for writing such an interesting article on this topic. This has really made me think and I hope to read more. Check my latest blog: Increasing Traffic On Your Website

jono kerasta said...

Thank's for your article on this topic.
Please !!! visit my page Goverment Education

sonia mehata said...

virtual accountant is the best way to opt for an assistant without any issues. The virtual accounting services helps in keeping a track of the accounts. Visit our website to know more about us. marhabareception.com

sravan rao said...

Click here to Buy Bosch Washing Machines, Check Bosch Washing Machines price and reviews in India.
CLICK HERE

sravan rao said...

List of latest, upcoming Triple Doors Refrigerator price list in India, click here to know Triple Doors Refrigerator models, specifications and features.
triple door refrigerator price

sravan rao said...

Price list of all LED televisions in India with all features, review & specifications. For more click here
LED TV

James Franco said...

Good Post, For Latest Indian Railway Jobs information

RRB Railway Recruitment Updates

radhika raturi said...

CAT 2018 Result
very nice post

jup chandra said...

Daftar POKER DOMINO QQ Online Terbaik dan Terpercaya Indonesia 2017
pialaqq
sahamdomino
jupiterqq
mutiarapoker
18dewa

Anonymous said...

I like it.All the best to you for more blogs.
for MBBS in abroad

Fakta Aktual said...

Daftar Agen Judi Poker Online Terpercaya Di Indonesia Sekarang Juga...
Tingkat kemenangan 80% Ayo Buruan Tunggu Apa Lagi Daftarkan Diri anda sekarang juga...
Pokerace99
Pokerace99
Poker88
RumusQQ

sravan rao said...

check ISRO Results 2017 for the post of Scientist. Candidates can download ISRO Scientist Result 2017 through the below link.
ISRO Result for Scientist Engineer 2017


MUKESH KUMAR KUMAWAT said...

Thank you for providing such good and relevant information. Quality of content is excellent. How can i check the latest inofmration about Maharashtra HSC Result 2018 online. i am unable to find out the main web site, So, Please help me to provide the exam time table and other important details here .

James said...

uidcards
check aadhar status
update aadhar card

Nidhi3 sharma said...

GSEB Results 2018, Gujarat Board HSC/SSC Results 2018 Check Online Here,
GSEB HSC Commerce Result 2018, GSEB HSC Result, Gujarat Board SSC Result

GSEB Result 2018

Nidhi3 sharma said...

rajresults.nic.in - RBSE 10th 12th Result 2018, Rajasthan Board Arts Commerce Science Results,
Check RBSE 12th Result 2018, RBSE 10th Result 2018, RBSE Results
rajresults.nic.in 2018

Nidhi3 sharma said...

HBSE Results 2018, Haryana Board Bhiwani 10th 12th Result Check Online Here,
HBSE 12th Result 2018, HBSE 12th Exam Result, Bhiwani Board 12th Results
HBSE Result 2018

Satvisha sharma said...


nice blog for us..

Railway