What is a Leveraged Company?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 30 May 2020
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A leveraged company is a company which includes some debt within the framework of its capital structure, the overall financial structure of the company. Most companies are leveraged to some extent, and some people believe that leveraging is actually an important part of doing business. However, when a company becomes highly leveraged, it can be a cause for concern, as there may be worries that servicing the debt will eat up all of the company's income and energies.

Companies use leveraging to raise capital for their activities. A leveraged company may have taken on debt to buy real estate or other assets, to fund an ongoing project, or for a variety of other purposes. The debt is included in the capital structure of the company along with equity, outstanding shares, and other types of financial instruments. Investors may prefer to seek out companies with a balanced capital structure which indicates that there is room to grow.

Sometimes, the term “leveraged company” is used to mean a highly leveraged company specifically, rather than any company with debt in its capital structure. The definition of “highly leveraged” can vary, but generally indicates that one third or more of the company's capital structure is in the form of debt. The concern with such a high proportion of debt is that the company may never be able to make good on it, unless it can demonstrate that the debt is manageable.

In the case of a publicly traded company, a company must disclose information about its financial situation, including the overall capital structure. This information can be used by investors to determine whether or not investing in the company would be wise, given the conditions, and to track the history of the company over time. If, for example, company debt stays relatively stable over time, it may be an indicator that the company is borrowing and repaying funds at a steady rate and that it is financially healthy. If a company suddenly becomes highly leveraged, it can be a danger sign.

Some companies may engage in creative accounting in an attempt to conceal the amount of debt they carry, and in the case of a highly leveraged company, this strategy may be used to allay investor fears to avoid a panic. While fudging of accounting numbers is forbidden by law, it can sometimes be difficult to identify until after the fact, when numbers disparities can become glaringly obvious. Audits are used to regularly inspect companies, with the goal of identifying such issues at an early stage.

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