Financial leverage is just a multiplication symbol. With this tool, the result of investment can be amplified, and whether the final result is profit or loss, it will increase in a fixed proportion. Therefore, before using this tool, we must carefully analyze the income expectation and possible risks in investment projects.

In addition, it must be noted that when using financial leverage tools, cash flow expenditure may increase, otherwise once the capital chain breaks, even if the final result may be huge gains, investors must be out early.

Leverage ratio is the ratio of risk to assets on a company's balance sheet. Leverage ratio is an index to measure the debt risk of a company, which reflects the repayment ability of the company from the side. Generally speaking, the leverage ratio of investment banks is relatively high. In 2007, the leverage ratio of Merrill Lynch was 28 times and that of Morgan Stanley was 33 times.

Extended data

financial leverage effect

The leverage effect in finance, that is, the financial leverage effect, refers to the phenomenon caused by the existence of fixed fees. When a financial variable changes in a small range, another related variable will change in a large range. That is to say, when enterprises adopt debt financing methods (such as bank loans, issuing bonds and preferred shares), the change rate of earnings per share of common stock is greater than that of earnings before interest and tax.

Because the financial expenses such as interest expense and preferred stock dividend are fixed, when the income before interest and tax increases, the fixed financial expenses per common stock will decrease relatively, thus bringing additional income to investors.

The leverage effect in finance includes operating leverage, financial leverage and compound leverage.

1, operating leverage refers to the leverage effect that the change of earnings before interest and tax is greater than the change of production and sales due to the existence of fixed costs.

2. Financial leverage refers to the leverage effect that the change of earnings per share of common stock is greater than the change of earnings before interest and tax due to the existence of debt.

3. Composite leverage refers to the leverage effect that the change of earnings per share of common stock is greater than the change of production and sales due to the existence of fixed production and operation costs and fixed financial expenses.

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