Overleveraged

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DEFINITION of 'Overleveraged'

Occurs when a business is carrying too much debt, and is unable to pay interest payments from loans. Overleveraged companies are unable to pay their expenses because of over excessive costs. This is the formula for financial leverage:


Financial Leverage = Operating Income / Net Income

BREAKING DOWN 'Overleveraged'

Occurs when a business has borrowed too much debt, and is unable to pay interest payments on the debts. Companies that borrow too much and are overleveraged are at the risk of becoming bankrupt if their business does poorly. A company not overly leveraged is better able to sustain drops in their business profits. Businesses that borrow money to add to a product line, expand internationally or upgrade their facilities are often better able to offset the risk they take on when leveraging.

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