From the course: Financial Accounting Foundations
Join today to access over 22,600 courses taught by industry experts or purchase this course individually.
Debt ratio
- The benefit of financial leverage is that using borrowed money allows a company to be larger with the same level of shareholder investment. More borrowed money means more assets. More assets means more sales. More sales means more profits. Again, all with the same initial shareholder investment. So more leverage can mean a higher return on equity. This is great for the owners of the company. But too much leverage means that the possibility of loan default and possible bankruptcy is uncomfortably close. This is not great for the company's banks. Imagine three different scenarios involving a company with $100 in assets. Scenario one, low leverage. $99 in owner investment and $1 in borrowed money. Scenario two, middle leverage. $50 in owner investment and $50 in borrowed money. Scenario three, high leverage. $1 in owner investment and $99 in borrowed money. Now, let's say that something bad happens to the assets and they…
Practice while you learn with exercise files
Download the files the instructor uses to teach the course. Follow along and learn by watching, listening and practicing.
Download courses and learn on the go
Watch courses on your mobile device without an internet connection. Download courses using your iOS or Android LinkedIn Learning app.