gen-define-leverage-and-debt-to-equity-and-give-one-short-worked-0d65

Define leverage and debt-to-equity and give one short worked example.

# Leverage and Debt-to-Equity ## Leverage **Leverage** is the use of borrowed money (debt) to finance assets or investments, with the goal of increasing potential returns. It amplifies both gains and losses. ## Debt-to-Equity Ratio **Debt-to-Equity (D/E) Ratio** measures a company's financial leverage by comparing total debt to shareholders' equity. **Formula:** ``` D/E Ratio = Total Debt / Shareholders' Equity ``` ## Worked Example **ABC Company's Balance Sheet:** - Total Debt: $400,000 - Shareholders' Equity: $200,000 **Calculation:** ``` D/E Ratio = $400,000 / $200,000 = 2.0 ``` **Interpretation:** ABC Company has a D/E ratio of 2.0, meaning it has $2 of debt for every $1 of equity. This indicates the company is relatively highly leveraged—it relies more on borrowed funds than owner investment to finance its assets. While this can boost returns in good times, it also increases financial risk.