Leverage

1.

Debt divided by Debt plus Equity = D / ( D + E ).

Example

If the amounts of debt and equity were equal, then leverage under this definition would be calculated as:

1 / ( 1 + 1 ) = 50%.

2.

Gearing.

Leverage is based on the same inputs, but the calculation would be:

1 / 1 = 100%.

3.

To increase the level of gearing in an operational or financial structure.

The intention of leveraging is to improve expected net results.

The consequence of leveraging is normally to increase financial risk.

Many financial disasters have been a consequence of leveraging up excessively in this way in earlier periods.

See also