馃攳
Leverage Ratios | Definition | 4 Types of Leverage Ratios - YouTube
Channel: WallStreetMojo
[9]
hello everyone hi welcome to the channel
of WallStreetmojo watch the video
[14]
till the end also if you are new to this
channel then you can subscribe us by
[18]
clicking the bell ican friends doing to
learn a concept which is called as
[22]
leverage ratio so leverage ratio is
basically used to see how much debt a
[30]
company has used it how much debt a
company has used it so in other words
[36]
you can say leverage ratios allows us to
see how much the assets of the company
[41]
are coming from the loans are coming
from the loans of the business entity
[48]
now in this tutorial we'll look at the
top leverage ratio their interpretations
[54]
and how to compute them so let's get
started on the same at the very initial
[59]
end the capital structure of any company
is divided into various firms like you
[65]
know there will be involved there's debt
there's equity there's other components
[71]
too so let's say you know a debt is over
here 32% so the balance keeping
[77]
it as that we have nothing except equity
so our equity is going to be 68% now the
[84]
first thing that we are going to study
is the debt equity ratio this is the
[89]
first and the foremost portion of the
leverage ratios the most common leverage
[93]
this is the most common leverage ratio
true through this ratio we'll get an
[97]
idea about the capital structure of the
company now the debt to the equity
[101]
formula the formula for the leverage
ratio is basically the total debt
[106]
divided by your total equity this is the
formula for your debt to equity ratio
[111]
now let's understand the interpretation
part of this formula see the debt to
[115]
equity ratio helps us to see the
proportion of the debt and the equity
[120]
the proportion of the debt and the
equity in the capital structure the
[125]
company like for example if a company is
too dependent on let's say debt then the
[130]
company is too risky to invest in on the
other hand if the company doesn't
[133]
yet at all it may lose out the leverage
portion and it is highly invested into
[139]
equity let's take a practical example in
the debt equity ratio let's say there's
[144]
a company called zing and and it has a
total equity it has total equity let's
[150]
say of $3,00,000 and total debt
standing at $60,000 so find out the debt
[158]
equity leverage ratio for this company
now this is a very simple example all we
[163]
need to do is just to feed in the
figures into the leverage ratio formula
[166]
so what we can just over here we can
just put the debt number 60,000 and put
[171]
the equity numbers so our answer is
going to be debt
[174]
divided by the equity which is point 2
overhear now this means that the debt is not
[178]
quite high in the company's inc capital
structure and that means it may have a
[182]
solid cash flow or cash inflow after
looking at into the other leverage
[187]
issues in the financial statement an
investor can invest into this company
[190]
now this is the example that I'm showing
you a graph of PepsiCo's financial
[194]
leverage now you're the PepsiCo's
financial leverage is standing I mean
[198]
was at 0.5 close enough to in the in
2009-2010 as you can see in the graph
[203]
however PepsiCo's leverage ratio that is
a debt to equity ratio has increased
[207]
over time over the years and is
currently standing at 3.38 X also you
[212]
know basically you may consider that
this is a highly leveraged company now
[217]
the next sort of ratio that we need to
discuss is the debt capital ratio this
[224]
leverage ratio is an extension to our
first one that is the debt to equity
[228]
ratio now instead of doing a comparison
between the debt and the equity over
[233]
here the ratio would help us to see the
capital structure holistically now the
[238]
debt capital ratio formula is basically
your it's it's it's known as the debt
[244]
capital ratio formula it's equal to your
total debt
[251]
so it's basically it's going to show you
the proportion divided by your total
[255]
debt plus your total equity so that will
show us that what is the level of the
[262]
percentage of the debt involved in this
now this leverage ratio basically helps
[267]
us to understand the exact proportion of
the debt in the capital structure
[270]
through this leverage ratio we'll get to
know whether a company has taken a
[273]
higher risk or a lower risk and we'll
get to know that whether the company has
[279]
taken a higher risk feeding its capital
with more loans and on let's take an
[283]
example on the same on the same let's
say there's a company called company
[286]
tree capital structure consists of both
equity in debt and its equity let's say
[290]
it's standing at 4,00,000 and it's
debt is standing at 1,00,000 so
[299]
find out the debt capital leverage ratio
of the company tree so let's use the
[304]
formula to find out the leverage ratio
over here the debt is 1,00,000 so we'll
[309]
put in the formula over here that our
debt is 1,00,000 and our total equity is
[315]
4,00,000 so we'll add in the denominator
part the equity plus debt so 5,00,000 so
[321]
that's the proportion which is 0.2 right
so this is how you found out the second
[328]
formula that means a debt is just to any
20% of the total capital structure
[332]
that means 80% is equity from the
figure we get that it's high equity
[336]
company and low debt company now this is the graph now this is the graph that we
[342]
need to study see for the second thing
so we know that the ratio has increased
[346]
over here for the most of the oil and
gas companies which are there and right
[350]
in front of us this is primarily due to
the slowdown in the commodity oil prices
[354]
you can see all of them and thereby
resulting in reduces the cash flow
[357]
straining their balance sheet third
ratio that we need to understand is the
[364]
debt asset ratio debt
asset ratio this ratio basically says
[370]
that how much debt a company takes to
source its assets would be known by the
[374]
debt asset ratio this leverage ratio can
be an eye opener for many investors now
[379]
the formula for the same goes as the
total debt divided by the total assets
[383]
so put down numbers
let's say your total debt is standing at
[387]
1,00,000 your assets is standing at 5,00,000 so your total debt to your
[392]
asset ratio is going to be let's say
point 2 over here the interpretation
[397]
for the same goals that this leverage
ratio talks about how much an asset can
[400]
be Source through the debt in other words
if assets are more than debt
[404]
that means it's rightly leveraged but if
the assets are less than debt that means
[410]
that they come me the firm needs to look
out the utilization of the capital that
[415]
over here the company this means point
two means that company has you know more
[421]
assets then the loans which is quite
good signal the next sort of ratio that
[425]
we need to study is the debt to EBITDA
issue now in this case this leverage
[430]
ratio is an ultimate ratio which finds
out how much impact it has in on the
[435]
earnings of the company you may ask why because here we we are talking about the
[440]
EBITDA and EBITDA means your earning
before interest tax depreciation and
[443]
amortization and since the company needs to pay interest as the cost of debt the
[447]
ratio will have a huge impact on the
company's earning the formula for the
[451]
same goes as the total debt divided by
your EBITDA now the interpretation for
[457]
the formula goes as the reason the ratio
is important because if we know how much
[461]
the debt the company has employed
compared to how much the company has
[464]
earned before paying out its interest we
would know how debt can affect the
[468]
earnings of the company like for example
if the debt is more the interest would
[472]
be more well possibly if the cost of
debt is higher as a result the taxes
[476]
would be less and vice versa the case in
the similar fashion we can put the
[479]
numbers let's say your debt is standing
at 3,00,000 and your earnings is 60,000 so
[484]
your ratio will go as 3,00,000/
60,000 it's 5 so if this ratios goes
[491]
higher it means the debt is higher and
higher than the earnings and if the
[496]
ratios goes lower the debt is a
literally lower compared to the earnings
[499]
and it's a grating now I want you to
understand why do you need to look at
[503]
the leverage ratio see as an investor
you need to look at everything leverage
[508]
ratios will help you how a company has
structured its capital so many companies
[513]
don't like to take a loans from outside
so they believe that they should fund
[518]
all their expansions of the new project
through equity but to take the advantage
[522]
of the leverage it's important to
structure the capital with proportion of
[526]
unit in it hence to reduce the cost of
the capital by reducing because the
[530]
equity and it's huge plus it also helps
in paying less you can see you can pay
[536]
say that you pay less taxes and since
the taxes are calculated after paying
[540]
the interest that is the cost of it as
an investor you need to look at the
[543]
companies and compute the above ratios
that we have discussed and you would get
[546]
clarity about the company is able to
take advantage of the leverage or not if
[549]
the company is taken towards that it's
too risky to invest in the company and
[553]
at the same time if the company doesn't
have any debt it may pay off too much in
[557]
the cost of the capital and actually
reduce the earning in the long run but
[560]
only the revelations won't help you you
need to look at all the financial
[564]
statements like CFS you need to look at
the income statements balance sheets
[569]
shield as equity and all of the ratios
to get the concrete idea about how the
[572]
company is doing however you know the
leverage ratio surely to help investors
[577]
in deciding whether a company is taking
advantage of the leverage or not so
[580]
that's it for this particular topic if
you have learned and enjoyed watching
[584]
this video please like and comment on
this video and subscribe to our channel
[589]
for the latest updates thank you very
much Cheers
Most Recent Videos:
You can go back to the homepage right here: Homepage