Overleveraged

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.

RELATED TERMS
  1. Debt/Equity Ratio

    Debt/Equity Ratio is debt ratio used to measure a company's financial ...
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company ...
  3. Degree Of Financial Leverage - ...

    A ratio that measures the sensitivity of a company’s earnings ...
  4. Debt Financing

    When a firm raises money for working capital or capital expenditures ...
  5. Leveraged Buyout - LBO

    The acquisition of another company using a significant amount ...
  6. Leverage

    1. The use of various financial instruments or borrowed capital, ...
Related Articles
  1. Retirement

    Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.
  2. Investing Basics

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  3. Investing Basics

    What Is A Corporate Credit Rating?

    Is the bond you're buying investment grade, or just junk? Find out how to check the score.
  4. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  5. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  6. Investing

    Debt Reckoning

    Learn about debt ratios and how to use them to assess a company's financial health. You could save a lot of money!
  7. Investing

    Spotting Cash Cows

    We show you why some of these companies stand apart from the herd.
  8. Economics

    Understanding Cost-Volume Profit Analysis

    Business managers use cost-volume profit analysis to gauge the profitability of their company’s products or services.
  9. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  10. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
RELATED FAQS
  1. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  2. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  3. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  4. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  5. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  6. What can working capital be used for?

    Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center