Description
#1
The more debt a firm uses, the greater its financial leverage, which magnifies both risk and return. Discuss the relationship between debt and financial leverage and the ratios used to analyze a firm’s debt. Your responses should include at least two peer-reviewed sources for support of your findings.
#2
Ratio
analysis enables stockholders, lenders, and the firm’s managers to
evaluate the firm’s financial performance. Compare and contrast who uses
financial ratios and for what purposes they use the ratios.

Explanation & Answer

Attached.
Running head: FINANCIAL LEVERAGE ANALYSIS
FINANCIAL LEVERAGE ANALYSIS
Student’s Name:
Institution Affiliation:
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FINANCIAL LEVERAGE ANALYSIS
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Financial Leverage Analysis
#1
Financial leverage refers to the process by which a company uses debts to buy more assets.
According to Balasubramaniam (2020), most firms resort to using economic advantage when they
are unable to raise enough capital for their investment plans. They do this by issuing shares in the
market to meet their various needs. The more debt a company has, the more financial leverage a
company will have. However, tremendous financial advantage can become risky to company
creditors since the company's values can potentially fall below the quantity that a company owes
to its creditors. It, however, cannot bar a firm needing capital from seeking credits, loans, or ought
for other financing options.
Different ratios are used to analyze companies' debts—for instance, the debt ratios.
According to Al-Shubiri (2012), a debt ratio refers to the company's ability to be in a position of
repaying long term debts. This ratio indicates the percentage of a firm's' assets that are provided
through an obligation. The higher the debt ratio, the more significant risks associated with the
company's operations. Besides, higher debts to asset ratios indicate that an organization has a low
obtaining limit, which is probably going to bring down the organization's money related
adaptability.
Another critical ratio in debt management is Times Interest Earned (TIE), defined as a
measure of a firm's ability to honor its debt payments. It is always calculated as EBITDA. This
ratio ignores changes in working in capital expenditures, operating capital, interest, and taxes.
Therefore, when EBITDA is negative, then the company has serious issues. This ratio is very
critical for measuring a firm's ability ...
