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When is financial leverage considered favorable?

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Question ajoutée par Sanjish Aryal , Senior-Audit and Accounts , Baker Tilly, Dev Associates
Date de publication: 2016/10/16
Zargham Haider
par Zargham Haider , Joint Director , Securities and Exchange Commission of Pakistan

Financial leverage is favorable when the uses to which debt can be put generate returns greater than the interest expense associated with the debt.

MOHAMED ELREWINY
par MOHAMED ELREWINY , Financial Accounting Manager , SAUDI MADAD GROUP

The financial leverage formula is measured as the ratio of total debt to total assets. As the proportion of debt to assets increases, so too does the amount of financial leverage. Financial leverage is favorable when the uses to which debt can be put generate returns greater than the interest expense associated with the debt. Many companies use financial leverage rather than acquiring more equity capital, which could reduce the earnings per share of existing shareholders.

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