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What is the leverage ratio? if the leverage ratio is high how it will affect the creditors?

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Question added by Rajna Cherada
Date Posted: 2014/09/23
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by Deleted user

There are two types of leverage i.e. Operating Leverage and Financial Leverage.

 

In your question, you are probably talking about Financial Leverage which refers to the presence of debt in the firm's capital structure. The introduction of debt in the capital structure increases risk of the equity shareholders. It can be harm for creditors only if the debts are having preferential rights over creditors and the firm is not having sufficient profits. It is more riskier for equity shareholders since ordinary dividends can only be paid after all creditors are paid in full.