Leverage

Leverage allows a buyer to acquire an asset with less upfront equity, while committing future business cash to lenders. It can increase the sensitivity of shareholder outcomes to operating performance. Debt has contractual demands even when profits disappoint. That makes leverage an allocation of risk over time, not merely a technique for increasing the size of a purchase.

Be precise about the ratio. In the collection’s £2m debt and £1m earnings example, debt-to-earnings is two times. If the equity contribution is £0.5m, debt-to-equity is four times. Those ratios answer different questions. The source initially confuses the labels and then corrects them; a reader should preserve the distinction when comparing transactions. Watch source

A debt multiple alone does not measure repayment comfort. Interest rate, amortization, seller obligations, capital expenditure and working capital all affect cash demands. The collection compares £7m debt at 10% with £1m debt at the same rate against £1m earnings: interest consumes £700k versus £100k before principal or other costs. Even low leverage needs dependable cash and acceptable terms. Conversely, a high purchase valuation may be financeable if enough equity is supplied. Test price and borrowing separately, then join them in a cash-flow model. Watch source Watch source

Follow the connections

Debt service · Capital stack · Valuation multiples.

Continue in the course: Building the capital stack.