Definition of leverage
The US word for gearing. Usually the ratio of debt to debt plus equity. Leverage is a measure of balance sheet risk - the higher the proportion of debt in the funding mix, the higher profits will be in good times and the lower they will be in bad times. Leverage is associated with risk because it increases the volatility of profits - and because the lenders have first call on profits. The leverage ratio shows the amount of money borrowed in relation to the equity (or the shareholders' funds). Leverage can also be calculated as the ratio of debt to equity or the ratio of equity to total assets or debt to EBITDA.
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