In this article we will discuss about the concept of trading on equity. The use of fixed return bearing securities like preference share capital, debentures, bonds, term loans etc. to increase the earnings available to equity shareholders is termed as 'trading on equity'. It refers to the practice of using borrowed funds and preference capital carrying a fixed charge in [...]
There are three ratios under this head which merit mention:- 1. Operating Leverage 2. Financial Leverage 3. Total Leverage. Ratio # 1. Operating Leverage: Operating leverage is concerned with the operation of any firm. The cost structure of any firm gives rise to operating leverage because of the existence of fixed nature of costs. This leverage relates to the sales [...]
The below mentioned article provides a structural leverage. These ratios express the relationship between owner's capital and outsider's stake in the firm. The structural leverage ratios are also called as 'capital gearing ratios'. The structural leverage ratios are classified as: (i) Debt-equity ratio, (ii) Total debt-equity ratio, and (iii) Debt to Net worth ratio. i. Debt-Equity Ratio: This ratio is [...]