me a lever long enough and a place to stand &

l move the entire earth.

-Archim
Presented by:
Ashutosh Mishra

Leverage
The amount
of debt used
to finance a
firm's assets.
A firm with
significantly
more debt
than equity is
considered to
be highly
leveraged.

Debt is that which is

owed; usually
referencing assets owed,
but the term can cover
other obligations.

Equi
ty

The difference between

the market value of a
property & the claims
held against it .

Financial
Leverage
Financial leverage is the degree to which a
business is utilizing borrowed money rather
then equity to fund its operations.
It reflects the amount of debt used in the
capital structure of the firm.
Return on assets (ROA)
Return on equity (ROE)
Earnings before interest
and taxes(EBIT)
Earnings per share(EPS)

Leverage allows

greater potential
returns to the
investor than
otherwise would
have been available
but the potential for
loss is also greater
because if the
investment
becomes worthless,
the loan principal
and all accrued
interest on the loan
still need to be
repaid.

Consider the rate of interest paid as fulcrum used in

applying forces through leverage.

Then we can arrive at following conclusions:

Lower the interest rate, greater will be the profit.
Less the chance of loss, less the amount borrowed, the
lower will be the profit or loss.

Degree of financial leverage is defined

as % change in EPS that results from
given % change in EBIT.

The calculation is likewise:

FinLev =(%change in EPS):(%change
in EBIT)

Measures of Financial
Leverage
Debt-to-equity ratio = D/E
Debt ratio = D/(D+E)=D/V
Interest Coverage =
EBIT/Interest
Leverage analysis of
L & T Ltd.
It is a multi-product company in pvt. sector.
Gross sales of company = Rs.8078.46cr
Net profit for year ending 31-mar-02 =
Rs.346.80cr

Net worth

2696.22

Borrowings
Profit before interest &
tax(PBIT)

1324.31
1088.78

Interest(paid)
Fixed expenses(excluding
interest)

92.09
1583.30
* Data is Rs. In
Crores

Debt-equity ratio = 1324.31/2696.22=0.49

Debt-to- capital ratio = 1324.31/
(2696.22+1324.31)=0.33
Interest coverage = 1088.78/92.09=11.82
Degree of financial leverage = 1.09 (moderate)

Formulae:
EPS=profit after tax or net income/no.
of shares
ROE=profit after tax/value of equity

Use of the Du Pont Identity requires that leverage be

measured in terms of total assets divided by shareholders'
equity, and this is sometimes referred to as gearing or simply
leverage:

Leverage (gearing) = A / E

Real Time Data for Indian

Companies (04)
Company

Capital gearing

Income gearing

Debt
ratio

Debt
equity
ratio

Interest
coverag
e

Interest
to EBIT
ratio

Indian oil

0.346

0.530

23.6

0.042

Tata motors

0.261

0.353

16.7

0.060

Reliance

0.398

0.660

5.4

0.186

HLL

0.441

0.797

35.1

0.029

ONGC

0.022

0.022

331.00

0.003

Levels of
financial
leverage

There are

4 positions which show a relationship with

the level of financial leverage. First, is the relation of

equity and debt, for instance, the rate of capital.
Second is the influences on business production and

cycle of financial leverage. Thirdly the company's

industry and branch whole financial leverage level.
And also the correlation between the current financial
leverage ratio of the company and the middle
leverage level. Lastly, the conformity of company's
mission and philosophy with the situation connected

Cash flow information is

relevant for companys ability
to meet fixed financial
obligations & not reported
earnings.
Future risk of company isnt
determined.
It is only a measure of short
term liquidity rather than
leverage.

References
Financial Management by I M Pandey,
9th edition.
The Internet.