Memo on Financial Leverage
Memorandum Date: April 22nd, 2004 To: Len Brown From: Barbara Trainor Subject: Financial Leverage Financial leverage is the mix and utilization of capital (debt and equity). If a business relies more on debt than equity when they raise capital, it has a higher debt-equity ratio As the ratio increases, the financial leverage of the business also increases. ... When a business evaluates financial leverage for opportunity, the determining factor should be its ability to generate cash flow from the financed opportunity. ... Generally, whenever the return on assets exceeds the cost of debt, leverage is favorable. But leverage can also be bad. ... The business will go into a loss position more rapidly if leverage is high.