What are the different levels of financial leverage?
various scales of financial lever effect are the total debt to assets, debt to their own capital and interest -coverage conditions. These conditions are used to determine whether the company will be able to fulfill its long -term financial obligations. The debt to asset ratio reveals which percentage of its assets is financed by its debt. The debt ratio to equity is used to determine whether the share of debt and equity used is the sources of financing. The ratio of interest coverage is used to determine whether the company has enough income to cover interest on its debt.
The debt ratio to assets is an important ratio for analyzing the use of the company to finance its assets. It is calculated by taking the total debt of the company and dividing it with an overall asset. The debt includes both short and long -term debt obligations. Total assets include the commitment and capital of the company. The debt to assets ratio therefore shows the percentage of its total assets that are financed by the debt. WBUD results between 0 and 1, whichIt makes it easier to use as a scale of the financial lever effect when compared to or outside the industry.
The debt ratio to its own capital is a measure of a financial leverage that shows the share of debt and capital used to finance its assets. This ratio is calculated by accepting its total debt and dividing it according to the total capital. The total debt includes both long -term and short -term obligations. The downtown value of equity is usually used in the calculation of this ratio, but the market value usually provides more accurate results. Most industries have a standard debt ratio to their own capital for businesses to be used as a scale.
Interest coverage ratio measures the financial lever by measuring its ability to pay interest on debt. This ratio is calculated by distributing income before interest and taxes or operating income. ThisThe ratio can also use the market value instead of the accounting value. The creditors commonly use this ratio to make sure that the company will be able to afford to pay their interest. The limitation of the use of this ratio is that it does not take into account the company's cash flow and does not indicate whether there are potential risks.
The financial leverage should be used with benchmarks to make it most useful. This can be done by comparing the ratio with the historical results of the company, competitors or industry averages. The use of different accounting methods can lead to inaccurate comparison when the company compares its ratio with the conditions of its competitors or industry.