Financial Leverage Principle

2010/11/25 13:46:00 39

Financial Leverage Principle Accounting Bank

The principle of financial leverage is due to the fixed nature.

Finance

The existence of the cost makes the earnings per share (EPS) caused by a slight change in the pre tax profit (EBIT) of the enterprise vary greatly.

That is, the size and size of bank loans.

interest rate

Once the level is determined, the interest level will be fixed.

Therefore, the higher the profit level of an enterprise is, the more the investor (shareholder) will get the return after the creditor takes away a fixed interest.

On the contrary, the lower the level of corporate profits, creditors still take a fixed.

Interest

The surplus pays less dividends to shareholders.

When the level of profitability is lower than the level of interest rates, investors can not only get a return, but may even reverse it.

Since interest is fixed, borrowing has a financial leverage effect.

The financial leverage effect is a double-edged sword, which can bring positive and positive effects to enterprises, but also bring negative and negative effects.

The premise is whether the total assets profit rate is greater than the interest rate level.

When total assets profit rate is greater than interest rate, borrowing brings positive positive effects to enterprises. On the contrary, when total assets profit margin is lower than interest rate, borrowing brings negative and negative effects to enterprises.