Overleveraged

Glossary

Banking

Overleveraged

Leverage refers to how much debt a company has borrowed to finance growth (rather than investing equity). Having a reasonable level of debt that doesn’t eat up too much revenue to service it is a tried and tested growth formula and invariably a successful one for many companies – provided the returns on the capital invested over an appropriate time horizon are greater than the recurring interest. The problem comes when interest rates rise or when revenues fall and debt service starts to become onerous and companies come up against the limits of various debt ratios put in place by lenders. Companies struggling to meet debt service are clearly over-leveraged and potentially one step away from insolvency.

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