Leverage
Using borrowed money to amplify equity returns, in both directions.
Leverage in round numbers
In this hypothetical, enterprise value is 10, funded with debt of 7 and equity of 3. Hold debt at 7 and assume no cash, distributions, fees or other claims. An enterprise value of 12 leaves equity of 5: 1.67x the initial equity, a 66.7% gain. An enterprise value of 8 leaves equity of 1, a 66.7% loss. Debt funds 7 ÷ 10 = 70% of the purchase and equity funds 30%. Total liabilities must not be substituted for interest-bearing debt.
Scroll horizontally to read all columns.
| Measure | Entry | Upside | Downside |
|---|---|---|---|
| Enterprise value | 10 | 12 | 8 |
| Debt | 7 | 7 | 7 |
| Equity value | 3 | 5 | 1 |
Shayne Fitz-Coy’s definition of Leverage
Having debt added a disciplining element. When you have debt to service, it narrows the options.
Terms Related to Leverage
LBO · Debt/EBITDA multiple · Operating leverage · Zero interest rate policy (ZIRP) · All of the glossary