CandleFocus Glossary Editor
Overleveraged is a term used to describe a company that has too much debt and is unable to make principal and interest payments and cover its operating expenses. Many times, this downward spiral leads a company to need to borrow more money to try and pay off the existing debt. When overleveraged, companies have the options of restructuring their debt, or filing for bankruptcy to attempt to alleviate the situation.
A company's debt-to-equity ratio or debt-to-total assets ratio can be used to measure the amount of leverage it has. These ratios can be calculated by dividing the company's total debts by either its total equity or total assets, respectively. For example, if a company has total assets of $10 million and total debts of $3 million, its debt-to-total assets ratio is 30%. If the same company has total equity of $2 million, its debt-to-equity ratio is 150%.
When a company is overleveraged, it can experience a variety of disadvantages. These disadvantages can include constrained growth, loss of assets, and limitations on further borrowing, not to mention being unable to attract new investors. When a company has too much debt, the burden of servicing and repaying the debt squeezes the operational budget and decreases net profits, which can limit further investments opportunities, resulting in sluggish growth. Further, because of the debt burden, companies might have to sell or liquidate certain assets in order to afford debt payments. Overall, being overleveraged is a very dangerous place for a business. There are many risks and clearly defined disadvantages, and companies should be aware of these consequences and avoid becoming overleveraged.
A company's debt-to-equity ratio or debt-to-total assets ratio can be used to measure the amount of leverage it has. These ratios can be calculated by dividing the company's total debts by either its total equity or total assets, respectively. For example, if a company has total assets of $10 million and total debts of $3 million, its debt-to-total assets ratio is 30%. If the same company has total equity of $2 million, its debt-to-equity ratio is 150%.
When a company is overleveraged, it can experience a variety of disadvantages. These disadvantages can include constrained growth, loss of assets, and limitations on further borrowing, not to mention being unable to attract new investors. When a company has too much debt, the burden of servicing and repaying the debt squeezes the operational budget and decreases net profits, which can limit further investments opportunities, resulting in sluggish growth. Further, because of the debt burden, companies might have to sell or liquidate certain assets in order to afford debt payments. Overall, being overleveraged is a very dangerous place for a business. There are many risks and clearly defined disadvantages, and companies should be aware of these consequences and avoid becoming overleveraged.