Financial leverage a definition…

Following my previous post about leverage I thought it might be interesting for some people to have a concise definition. This is from the Oxford Dictionary of Business...

Financial leverage See gearing.

Gearing (capital gearing; equity gearing; financial gearing; leverage) The ratio of the long-term funds with a fixed interest charge, such as *debentures and *preference shares, making up a company’s capital to its *ordinary share capital. A company is said to be high geared when its fixed interest capital is dominant and low geared when its capital is predominantly in ordinary shares, especially in relation to other similar companies. A high-geared company is considered to be a speculative investment for the ordinary shareholder and will be expected to show good returns when the company is doing well. The US word leverage is increasingly used in the UK.

Gearing adjustment In *current cost accounting, an adjustment that reduces the charge to the owners for the effect of price changes on *depreciation, *stock, and *working capital. It is justified on the grounds that a proportion of the extra financing is supplied by the *loan capital of the business.

Gearing ratios (leverage ratios) Ratios that express a company’s capital *gearing. There are a number of different ratios that can be calculated from either the *balance sheet or the *profit and loss account. Ratios based on the balance sheet usually express *debt as a percentage of *equity, or as a percentage of debt plus equity. Income gearing is normally calculated by dividing the *profit before interest and tax by the gross interest payable to give the *interest cover.

Leverage 1. The US word for *gearing. 2. The use by a company of its limited assets to guarantee substantial loans to finance its business.

Leveraged buy-out (LBO) The acquisition of one company by another through the use of borrowed funds. Usually the acquiring company or individuals use their own assets as security for the funds. The intention is that the loans will be repaid from the cash flow of the acquired company.

…and these are from the Collins Concise Dictionary…

Lever 1 a rigid bar pivoted about a fulcrum, used to transfer a force to a load and usually to provide a mechanical advantage. 2 any of a number of mechanical devices employing this principle. 3 a means of exerting pressure in order to accomplish something. 4 to prise or move (an object) with a lever

Leverage 1 the action of a lever. 2 the mechanical advantage gained by employing a lever. 3 strategic advantage. 4 power or influence 5 the US word for gearing (sense 3). 6 the use made by a company of its limited assets to guarantee the substantial loans required to finance its business.