1/19/2024 0 Comments Financial leverage definitionIf the calculated leverage is positive, it is a sign that the investment is profitable. Therefore, before making an investment, it is essential that the company calculates the leverage effect. This notion is also very useful for the company's financiers since it allows them to measure the extent to which they can accept an increase in debt, while considering the fact that an increase in debt leads to a deterioration in the solvency ratio. However, borrowing is not always a bad plan.įrom an accounting point of view, the concept of leverage represents a tool that measures the impact of the use of capital contributed by third parties of the company in relation to its equity. Thus, leverage refers to the weight of equity and financial debts at the level of financing any entity, hence the importance of this concept and its necessity at the level of any financial policy.Īdmittedly, the method of financing by debt is sometimes essential so that the company can have a complement to the capacity of contribution of the shareholders. The concept of financial leverage mainly refers to the practice that companies or economic actors carry out to increase their investment capacity. Indeed, when a company allows the acquisition of fixed assets for an amount higher than the initial one, the leverage effect can present considerable assets in its investment policy. However, it is important to understand that financial leverage is not always negative. Thus, this notion is an integral part of the diagnosis of the return on equity. Financial leverage is a mechanism that refers to the impact seen when a company chooses to use debt on its financial profitability.
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