financial leverage

Examples of financial leverage in the following topics:

• Financial Leverage

  • Financial leverage is a technique used to multiply gains and losses by obtaining funds through debt instead of equity.
  • Financial leverage is a general term for any technique to multiply gains and losses.
  • The concept of financial leverage is much more utilized and understood in the realm of corporate finance.
  • Financial leverage tries to estimate the percentage change in net income for a one percent change in operating income.
  • This is a situation in which a company or individual enters into financial distress and is forced to enter into a higher leveraged position.

• Debt Utilization Ratios

  • Debt utilization ratios provide a comprehensive picture of the company's solvency or long-term financial health.
  • The debt ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt.
  • In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm's financial flexibility.
  • Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.
  • When used to calculate a company's financial leverage, the debt usually includes only the Long Term Debt (LTD).

• Family and Friends

  • Person-to-person lending (also known as peer-to-peer lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is a certain breed of financial transaction (primarily lending and borrowing, though other more complicated transactions can be facilitated) which occurs directly between individuals or "peers" without the intermediation of a traditional financial institution.
  • Lending money and supplies to friends, family, and community members predates formalized financial institutions, but in its modern form, peer-to-peer lending is a by-product of Internet technologies, especially Web 2.0.
  • The development of the market niche was further boosted by the global economic crisis in 2007 to 2010 when person-to-person lending platforms promised to provide credit at the time when banks and other traditional financial institutions were having fiscal difficulties.
  • Many peer-to-peer lending companies leverage existing communities and pre-existing interpersonal relationships with the idea that borrowers are less likely to default to the members of their own communities.

• Activity Ratios

  • Activity ratios provide useful insights regarding an organization's ability to leverage existing assets efficiently.
  • Activity ratios are essentially indicators of how a given organization leverages their existing assets to generate value.
  • Degree of Operating Leverage (DOL) - (Percent Change in Net Operating Income)/(Percent Change in Sales)
  • By tracking these metrics over time, and comparing them to the competition, organizations and stakeholders can gauge their competitiveness and overall capacity to leverage assets in the current industry.
  • Understanding how to use these ratios, and what the implications are, is central to financial and managerial accounting at the strategic level.

• Introduction

  • We discuss some of the software options you may want to consider in Chapter 10, "Leveraging with information technology".

• Debt Finance

  • Unsecured debt comprises financial obligations, where creditors do not have recourse to the assets of the borrower to satisfy their claims.
  • Public debt is a general definition covering all financial instruments that are freely trade-able on a public exchange or over the counter, with few if any restrictions.
  • Lending to stable financial entities such as large companies or governments are often termed "risk free" or "low risk" and made at a so-called "risk-free interest rate".
  • Companies also use debt in many ways to leverage the investment made in their assets, "leveraging" the return on their equity.
  • This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier.

• Information and Risk Trade-Off

  • Risks such as these affect sales, which in turn affect the amount of operating leverage a company should utilize.

• The Impact of Business Owners on Success and Failure Rates

  • Talent is an expensive business asset and the financial impact of good (or poor) hires can have an enormous effect on the quality of the organization.
  • Combining the core importance of the business owner in the creation of the business and the variety of skills business owners can leverage to achieve success, business owners are often enough the primary influence on a small business' potential success (and potential failure).
  • Going into business for yourself can be highly rewarding financially and fulfilling personally.

• Introduction

  • External relationships provide access to additional information and financial resources, which ideally results in increased profitability and success.
  • Leveraging external relationships requires a strategic perspective that ranges from obtaining reliable supplies of raw materials for internal production processes to outsourcing entire business processes.
  • Managers must have business management skills, technical skills, and a thorough knowledge of external relationship management in order to take optimal advantage of opportunities and leverage the skills and knowledge of other organizations to maximize returns on investment.

• Analytical Mindset

  • Predictive analytics – Leveraging statistical models and machine learning, managers can predict future outcomes with varying degrees of statistical confidence.