financial leverage

(redirected from Capital Leverage)

Financial leverage

Use of debt to increase the expected return on equity. Financial leverage is measured by the ratio of debt to debt plus equity.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Financial Leverage

1. To use debt to finance an activity. For example, one usually borrows money in the form of a mortgage to buy a house. One commonly refers to this as leveraging the house. Likewise, one leverages when one uses a margin in order to purchase securities.

2. The amount of debt that has been used to finance activities. A company with much more debt than equity is generally called "highly leveraged." Too much leverage is often thought to be unhealthy, but many firms use leverage in order to expand operations.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

financial leverage

The extent to which interest on debt magnifies changes in operating income into even greater proportionate changes in earnings after taxes. Financial leverage magnifies increases in earnings per share during periods of rising operating income but adds significant risks for stockholders and creditors because of added interest obligations. Compare operating leverage. See also debt management ratio, debt-to-equity ratio.
Case Study Financial leverage results from utilizing debt to finance assets. The greater the ratio of funds contributed by creditors compared to funds contributed by stockholders, the greater a firm's financial leverage. Financial leverage magnifies changes in net income compared to changes in operating income. For example, financial leverage might cause a firm's reported net income to increase by 30% when operating income increases by 20%. Without financial leverage the 20% increase in operating income would produce an equal percentage increase in net income. The magnification operates both upward and downward, which means stockholders benefit from financial leverage when times are good and operating income is increasing but their investment in the firm can be at substantial risk when times are bad and operating income is falling. In late 2001 Italian automaker Fiat announced a restructuring intended to reduce financial leverage by halving the firm's debt of nearly €7.5 billion. As part of the restructuring Fiat said it would sell €2 billion of assets, undertake a €1 billion rights offering to sell new stock, and issue $2.2 billion in bonds exchangeable for the firm's holding of General Motors Corporation common stock. The restructuring package was intended to increase equity at the same time it reduced the firm's debt, both of which would decrease financial leverage and dampen fluctuations in net income. At the time, Fiat was struggling as Europe's fifth-largest automaker.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Figure 2 US Minimum Capital Requirement Ratios Before Basel III % Immediately Basel I and Pre-Basel Basel II CET1/RWA 4 Tier 1/RWA 8 Total Capital/RWA 3 or 4 Tier 1 Leverage Ratio Total Capital Leverage Ratio 6 Notes: * In 1985, the Federal Reserve adopted a 6 percent minimum Total Capital Leverage Ratio, meaning the ratio of total capital to total assets, for all banks and BHCs it supervised (Alfriend 1988, p.
Additionally, in April 2015, FDIC Vice Chairman Tom Hoenig proposed a similar off-ramp concept and also established a 10 percent Tier 1 capital leverage ratio as a good working number for his proposal.
As a result, our Group can fully expand to the market in the PRC, and enjoy capital leverage of 10x.
Furthermore, a bank strategy panel also assessed the impacts of oil price volatility on the banking sector in the Kingdom in the first day session and analyzed if capital leverage and regulatory structures properly balance risk with growth.
The newly-merged Alloya will have a total NCUA capital leverage of 9.16, projected to reach 9.28 later this year, Vrigian said.
For example, US systemically important banks are subject to a Tier 1 capital leverage buffer of at least 2% of total leverage exposure above the 3% minimum.
Recipients must achieve a 10:1 private capital leverage ratio by 2017, and applicants need to demonstrate that a $1 investment from 49SAF will lead to $10 of new private lending or equity investment.
So how does an operator with an existing HFC infrastructure, limited bandwidth, smaller subscriber base and capital leverage its existing HFC or telecom system and provide services that match up with the biggest companies in the country?
Michael Sell, vice president of the research group at GARP, said risk managers are still concerned about capital leverage ratios, which include bank strategies for residential and commercial mortgages.
So it includes traditional risk management combined with investment risk, a look at capital leverage and risk, and a consideration of the corporate big picture--pure and speculative risks.
Because it lacks capital leverage in component development, Mack had trailed others in offering cutting edge technology.