Talk:Leverage (finance)

Notes

Isn't slippage another word for 'gapping risk' (which is not what is discussed in this article? 210.177.242.221 07:27, 19 August 2005 (UTC)

Moved

Moved from Leverage (business).--Jerryseinfeld 10:33, 9 Jan 2005 (UTC)

Removed slippage

This seemed to be more of a measurement problem than anything to do with the basics of leverage. It probably belongs in a discussion about continuous and discrete compounding. If it were to be explained more clearly ... Smallbones 05:20, 19 December 2005 (UTC)

I believe that the financial theories encouraging the borrowing of funds instead of using the entities own fund for financing its projects and the working capital is becoming to be invalid. Recently the world economy has suffered from its financial theories which one of them is financila liveraging. Some companies have successfuly managed to finance its operations using its own funds (retained earnings) and adding value to its partners equity without getting the financial institutions sharing their growth with very minimum risk. —Preceding unsigned comment added by Turki MSL (talk • contribs) 13:21, 27 April 2008 (UTC)

== Confusion == The section "financial leverage" is confusing because ROE is nothing if debt is the only asset yet there is still a net return as long as the rate on the assets is greater than the interest on the debt.

Means what?

I've taken out the statement "The term leveraged finance was originally coined by David N. Deutsch and its term for a firm's capital composition." Mr. D is a living person and "leveraged finance" seems to be a very old term - maybe he put a different spin on it. In any case it would need explanation

More spice to the leverage section

I'm pl are small in relation to its debt burden.

The debt/equity ratio gives you the math for predicting the resulting returns from leverage. Does your proposed use of EBITDA do that?Retail Investor 19:06, 14 November 2006 (UTC)

The point is, I would like to create a bridge from the debt/equity-view to a today now commonly used view of Debt/EBITDA without smacking what was written before. In a sense, there is justification, because if someone from the business talks "leverage" then it's the debt burden in relation to EBITDA or cash flow. Debt/Equity is only secondary to repayment, which is what a bank utlimately is looking for.

Have you looked at the EBITDA page? Its use by debt holders is only addressed at the very bottom. I think that this is the ONLY proper use of EBITDA (because I come from the accrual accounting POV). If you do the revision suggested, why not try to correct the into there as well and provide a link?Retail Investor 19:06, 14 November 2006 (UTC)

ff

I'm plical point "leverage" clearly is associated with debt/equity calculations, why is it used in banks in a more dynamic sense, namely related to repayment capacity of a borrower? A finance vehicle might have a conservative debt/equity ratio but still be leveraged because the cash flows are small in relation to its debt burden.

The debt/equity ratio gives you the math for predicting the resulting returns from leverage. Does your proposed use of EBITDA do that?Retail Investor 19:06, 14 November 2006 (UTC)

The point is, I would like to create a bridge from the debt/equity-view to a today now commonly used view of Debt/EBITDA without smacking what was written before. In a sense, there is justification, because if someone from the business talks "leverage" then it's the debt burden in relation to EBITDA or cash flow. Debt/Equity is only secondary to repayment, which is what a bank utlimately is looking for.

Have you looked at the EBITDA page? Its use by debt holders is only addressed at the very bottom. I think that this is the ONLY proper use of EBITDA (because I come from the accrual accounting POV). If you do the revision suggested, why not try to correct the into there as well and provide a link?Retail Investor 19:06, 14 November 2006 (UTC)

gg —Preceding unsigned comment added by 190.234.152.215 (talk) 02:44, 27 June 2010 (UTC)

Text moved from Leverage

Leverage is about mechanical leverage. Below is a stray sentence I cut from that article that may belong here. --Una Smith (talk) 05:03, 22 February 2008 (UTC)

Leverage can also refer, in an economic sense, to the use of debt to acquire assets in a market economy.

This article is sketch

Okay, any article that doesn't even mention the title term in its leader needs work. And beyond that, it could use a rewrite in layman's terms, with less reliance on hyperlinks to "explain" concepts. If anyone has time to fix it that would be amazing. I'm adding a straightforwards definition taken from the previous section of this talkpage to the leader now.--Heyitspeter (talk) 17:21, 3 July 2009 (UTC)

In macroeconomics, a key measure of leverage is the debt to GDP ratio.

How so?

This got nothing to do with leverage IMO. Gatorinvancouver (talk) 21:55, 9 May 2010 (UTC)

Use of leverage as a verb

I've removed the blatantly POV statements about "leverage" as a verb being slang and a "misuse" of the English language. If the process of language change is giving this noun a verb form (and a quick Google search confirms that the form is widely used), then it will probably become an uncontroversial verb in due course. Declaring that it can't be conjugated as a verb is pointless, when it clearly can be (and is being) so treated on a daily basis. One individual's distaste for the process and the outcome is not appropriate content for Wikipedia. Karenjc 06:44, 25 May 2010 (UTC)

I generally agree with Karenjc, although I would phrase it more gently. This section is a fine debating point for people who enjoy that sort of thing, but not relevant one way or the other for a finance article. If the objection were to precision of technical usage, it would be different. I don't think it greatly harms the article, but I vote to remove it. However, since LPeacock70 feels strongly enough to keep putting it back in, and I've already imposed more than my fair share of views on this article, I won't do anything myself.AaCBrown (talk) 16:20, 11 July 2010 (UTC)

My vote is in favour of keeping the linguistic remark at the end just as it is, because for some readers it is "nice to know". On the other hand I should like to read a reply of LPeacock70 here on this talk page. Otto (talk) 10:09, 15 July 2010 (UTC)

The argument about levering/leveraging is inappropriate and horribly sourced (the wiktionary cites leverage as both a noun and a verb and you can see the argument reproduced on that talk page, the other source is a blog). The correct usage is leveraging because that is what it is called, it is not the role of encyclopedias to make moral judgements on normal linguistic processes. "Levering" is not only pretentious, it is just wrong: The correct usage is "leveraging".DubhGlass (talk) 01:27, 17 September 2010 (UTC)

I'm considering doing some major revisions

The article seems jumbled, mixing different concepts in random order. I think it could use a top-to-bottom rewrite, defining terms clearly and then using them consistently. It needs more references and less editorializng. The biggest conceptual defect is failing to distinguish between levering (mulitplying gains and losses by some amount) and borrowing money (borrowing money to buy more of an asset is one way to get leverage, but not the only way, and not all borrowing results in leverage). I think the Finance 101 version of leverage, as found in any introductory textbook, is a better model than this article.AaCBrown (talk) 15:22, 28 June 2010 (UTC)

Okay, no one objected, so I did it. Let me know what you think.AaCBrown (talk) 18:08, 9 July 2010 (UTC)

In response to a comment, I added a section on leverage in the financial crisis. I'm not sure it really belongs here, but it does help distinguish different types of leverage.AaCBrown (talk) 17:37, 11 July 2010 (UTC)

Your rewrite improved the article a lot. Thanks. Otto (talk) 10:10, 15 July 2010 (UTC)

Thank you.AaCBrown (talk) 17:00, 15 July 2010 (UTC)

Corrected a bad edit

Revision as of 15:43, September 8, 2010 64.76.147.2 trashed the entry by changing four numbers that destroyed the sense of the investment leverage definition section. They made no sense, they could not have been misunderstandings. I'm just mad it took me three months to notice because there were a lot of other (honest) edits around the same time, and these were small. Just another reminder that you have to be vigilent about Wikipedia entries, even when they're not controversial. Not all vandals make big, obvious changes.AaCBrown (talk) 14:56, 16 December 2010 (UTC)

not a verb?

The article states that 'leverage' is not a verb, yet the word is used as a verb in the third line of the text ("A public corporation may leverage its equity") —Preceding unsigned comment added by 193.109.212.35 (talk) 14:19, 7 January 2011 (UTC)

Explain

"A business entity can leverage its revenue by buying fixed assets. This will increase the proportion of fixed, as opposed to variable, costs, meaning that a change in revenue will result in a larger change in operating income.[4][5]"

Ok, this sentence is not making cohesive sense. The first part before the comma means that a business can use its profit form operation to buy (fixed assets) i.e. property, factory, machinery, etc. This will increase the proportion of fixed to variable costs. i.e. fixed costs involve building maintenance and depreciation (which means the wear and tear of the fixed asset - property/plant and machinery), which can be calculated in accounting at a predetermined rate over the life expectancy of the asset. As it may be expected that a specific machine will only be expected to operate for 7 years before it will break down therefore at the 7 year mark its on paper worth will be zero (as it is expected that a new machine will have to be bought at that time) and its original purchase cost would have been deducted from taxes the company pays to the government in the form of depreciation (wear and tear of the asset over its useful life).

Now here is the question how does the third part of the statement relate to the previous part of the sentence "meaning that a change in revenue will result in a larger change in operating income"? It is a true statement i.e. if the revenue of the company (after tax) increases the operating income (i.e. the income of the company before interest and tax) will have to be proportionally larger as it accounts for revenue AND tax. However I don't see a logical link between the first two parts of the sentence and the last part.

Could someone explain that a little better? 122.107.131.46 (talk) 03:32, 21 April 2012 (UTC)

What is EBIT?

Earnings before taxes and interest? Would it pain someone to at least write that before using EBIT in formulas? — Preceding unsigned comment added by 2602:304:47EB:F9F9:D0B5:99DB:AA28:9B4F (talk) 16:44, 28 August 2012 (UTC)

Technical language tag

When I write this, the article opens thus (first sentence skipped):

Leverage exists when an investor achieves the right to a return on a capital base that exceeds the investment which the investor has personally contributed to the entity or instrument achieving a return.[2] Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives.[3] Important examples are:

• A public corporation may leverage its equity by borrowing money. The more it borrows, the less equity capital it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result.[4]
• A business entity can leverage its revenue by buying fixed assets. This will increase the proportion of fixed, as opposed to variable, costs, meaning that a change in revenue will result in a larger change in operating income.[5][6]
• Hedge funds often leverage their assets by using derivatives. A fund might get any gains or losses on $20 million worth of crude oil by posting $1 million of cash as margin.[7]

A lot of these sentences are very difficult to understand. What does it mean to "leverage equity?" To "achieve the right to a return on a capital base" -- especially when it's the right to a positive or a negative return, a loss. "Entity or instrument" -- this is opaque. What is a "fixed asset?" What does it mean to "leverage revenue" and how is that linked to "operating income?"

I understand that I am not well versed in economics (that is why I tried to look this up), and I also understand that all these terms have clear, specific definitions in economic theory. But the article leader should make it easy to grasp the basic idea, and technical specifics should come later. This leader couches its statement of the basic idea in jargon-y language and then gives examples which are also, quite unnecessarily, in jargon.

Here are some draft improvements. I post this as a draft in the hopes that those who understand the subject better will make it more accurate (but not necessarily more jargonishly precise).

A firm gains leverage when it takes any action that increases the magnitude of expected return on an investment relative to the amount the firm individually invests, whether that return is a gain or a loss. So if a firm is highly leveraged with respect to a certain investment, and that investment performs well, the return will be higher than it would had the firm been less leveraged, all other things being equal. Conversely, if a firm is highly leveraged with respect to an investment and it performs badly, the return will be lower than if the firm had been less leveraged.

Common ways to get leverage include borrowing money, buying fixed assets, and using derivatives. Examples:

• Suppose a firm borrows money to invest. The proportion of equity capital to borrowed money used for the investment becomes lower. So if the investment's return is sufficient to cover the equity, borrowed money, and interest on the borrowed money (the outlay), then the loan and equity are taken care of and any further return is proportionate to the full amount invested, including money that the firm did not individually invest (i.e. the borrowed money). The gain will thus be greater. However, if the investment's return is not large enough to cover the full outlay, then the amount by which the return falls short will likewise be proportional to the amount invested, and since the loan + interest must still be paid back, the loss taken by the firm will be greater.
• Suppose a firm chooses to acquire an asset for a fixed cost (eg. $1000/month) instead of one that varies in cost proportionately to production (eg. $10 per item produced). If revenues increase this cost will still be fixed, and so the firm will be able to keep a larger proportion of the revenues as income than if there were a variable cost, which would go up as revenues increased (assuming production is tied to revenues). However, if revenues decrease, then a variable cost would likewise decrease, whereas a fixed cost would end up absorbing a larger proportion of revenues and the firm would have to retain a smaller proportion as income.

I'm not sure I know how to rewrite the third one, as I don't really understand it. Please discuss and propose improvements to this suggestion. It seems to me that for people who want to understand what is discussed about finance (which is a lot of people, given what happened a few years ago) that this term in particular is very important to know. It's tossed around a lot. That's why I don't think that we can afford to have this article be opaque. Rainspeaker (talk) 21:45, 2 November 2013 (UTC)