Our topic is about Financial Leverage of companies of Pakistan, we have conducted research to findout the reasons that why the companies go for debt financing. We analyzed companies’ solvencyratios. We have analyzed final report of selected companies of different sectors, and looked at their balance sheet and tried to find out the effects of financial leverage on companies business operations.
is a business term that refers to borrowing. If a business is "leveraged," it means that the business has borrowed money. If the company has too much borrowing, it may not be able to pay back all of its debts.
Types of leverage
The degree to which aninvestor or businessis utilizing borrowedmoney.The ability of a company to
earn more on its assets by taking on debt that allows it to buy or invest more in order to grow its business.
It is more risky for a company to have a high ratio of financial leverage.Companies that are highly
leveraged may be at risk of bankruptcyif they are unable to make paymentson their debt; they may
also be unable to find newlendersin the future.
It is less risky for a company to have a low ratio of financial leverage. With a low leverage companiescan meet its debt obligations and there is an opportunity for it to find new lenders in the future.
Effects of Financial Leverage
One of the best ways in which company increases its profit is through financial leverage. Financialleverage uses debt instruments so that the anticipated level return on the company's equity wouldincrease. The level of financial leverage of a certain company is determined by getting the total valueof debt and the equity and the ratio of debt.There are four positions which show a relationship with the level of financial leverage. First, is therelation of equity and debt, for instance, the rate of capital. Another is the influences on business production and cycle of financial leverage. Then the company's industry and branch whole financialLeverage level. And also the correlation between the current financial leverage ratio of the companyand the middle leverage level. Lastly, the conformity of company's mission and philosophy with thesituation connected to the relation of financial leverage.The outcome of the financial leverage can also be utilized to boost income and growth however, it ismuch common for business industries in the phase of the young and teens. Financial leverage ratio isrelative to variability of profit and contrary to stability. Company's profits with high rate leverage leveldiffer with the same condition as with the company's profits with lesser leverage level.