Financial Leverage

Assets are fixed at £100m. Decide how much is funded by equity. Watch ROE rise — and risk follow.

Assets = Equity + Debt

Equity 50%

Debt 50%

← EquityTotal assets: £100m (fixed)Debt →

Equity held (% of assets)50%

Slide left to increase debt and lever up returns. Slide right to reduce debt and de-risk.

← More leverageLess leverage →

ROE

8.3%

D/E Ratio

1.0x

Coverage

3.2x

The Leverage Effect

Moderate Risk

Equity arm falls ↓ with more debtRisk climbs ↑ with debt

The Maths

EBIT (fixed, 8% RONA)£8.0m

Interest (£50m × 5%)− £2.5m

Net profit (25% tax)£4.1m

ROE = £4.1m ÷ £50m8.3%

Conservative leverage — a balanced position

A moderate debt level is lifting ROE above what equity alone could achieve. Interest coverage is comfortable and most lenders would view this as responsible. The lever is working for you.