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Chapter 14. Planning Profits > Analyzing Financial Leverage

Analyzing Financial Leverage

Financial leverage is the extent to which a company finances the acquisition of its assets by means of debt: that is, a company that borrows money to acquire assets engages financial leverage. This type of leverage is a critical component in the measurement of the financial health and value of a company. It helps managers, analysts, stockholders, as well as long and short-term creditors distinguish between a firm's level of business risk and the financial risk that the firm has assumed.

In contrast, financial risk is the additional exposure, above and beyond business risk, that a firm incurs by using financial leverage: that is, the debt that the firm assumes by financing the acquisition of its assets.


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