Financial Leverage

Financial leverageis connected to the coverage to which a firm relies on debt finance rather than fairness. Measures of financial influence are used in determining the prospect that the firm may defaulting on its debt contracts. The higher a firms Debt level, the more likely it is that the firm could become unable to execute its contractual obligation. Too much debt can lead to a higher likelihood of financial distress.

On the optimistic side, debt is an important form of financing, and gives an important tax advantage because interest expenditure is tax deductible. Dividend and share repurchases are not tax deductible.