Financial leverage

The extent to which a business is funded by debt rather than equity. In the DuPont form it is total assets divided by equity.

With ₹6,200 crore of assets and ₹3,300 crore of equity, a company has an equity multiplier of 1.879.

Leverage magnifies returns in both directions, and the asymmetry that matters is that the downside can end the company. A firm earning 12% on assets that cost 9% in interest makes a wider return on equity the more it borrows, right up until earnings fall below the interest bill, at which point the same arithmetic runs in reverse and the lenders, not the owners, decide what happens next.

Indian non-banking financial companies operate at gearing of three to six times by design, and the ones that failed were at seven or eight with a funding mismatch alongside.

Read leverage next to the maturity schedule, never on its own.