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Financial leverage in companies
Financial leverage provides opportunities for companies to grow financially as well as provide support in cash flow however firms shouldn’t keep leveraging especially those companies with high Return on Asset (ROA) because ROA also includes the leverage of the company debt is included in the total assets. One might argue that when there is financial leverage is higher ROA and ROE becomes high, but we must consider other crucial factors such as risk, market volatility, and uncertainty Financial leverage in companies
Financial Leverage is great for companies to use as a support in working capital and cash flow, but it is highly risky to use it as an opportunity to invest in assets to earn because there is no certainty that the invested asset will generate more return, and this can put the company in a very difficult position. Let’s take an example of Lehman Brothers bankruptcies’, there were a lot of factors to make that happen but shouldn’t ignore the fact that “In 2007, Lehman’s high degree of leverage was 31” collapse of Lehman Brothers: A case study. High leverage makes a firm vulnerable to various problems and although there is a saying that “High risk has higher returns”, Financial leverage in companies companies must balance the leverage intake and not get too greedy and use it as a shortcut to make more profits. We must remember, profit is important but there are also various functions such as cash flow, economy, operations, competition, etc. which are also important, and if firms only focus on profit and try using leverage for short-term gain, a business won’t survive for long.Financial leverage in companies
Even if ROA is high, firms shouldn’t use leverage to invest in assets that generate more return as it is risky, uncertain, and can lead to big problems. Leverage is wonderful to use for short-term operations and to increase the cash flow when necessary but using it as an investment on asset isn’t a healthy investment as it is after all borrowed money and uncertainty is high.Financial leverage in companies
2- Facebook which recently changed its main name to Meta has been in news for a lot of scandals such as data theft from Cambridge Analytics and privacy issue for its users, therefore I wasn’t surprised by a lot of the risks they have mentioned in their 10-k. I am surprised however to know that they think of those issues as a risk instead of their lack of proper and needed action. Here are the major risks:
- Financial leverage in companies
Their main risk with product offering is the ability to maintain user engagement as well as get more new users. Reducing is spending by marketers is a big risk for them as a lot of their revenue is generated from ads. They should try to make the user experience smooth and keep making necessary changes to engage the existing customers and attract new customers. Different social media platforms such as Tik-Tok are a big threat to the future of Facebook.
- Risks Related to Business Operations and Financial Results
Major operations and financial risks include COVID-19 and ads revenue, unfavorable media coverage, slow revenue growth, maintenance of tech infrastructure, and litigations. I am surprised about COVID-19 as a risk because due to the pandemic people had a lot of leisure time to use Facebook and Instagram more.
- Financial leverage in companies
Government restrictions, different data privacy policies, and consumer policy are major risks related to government regulation and enforcement. This is a necessary risk to protect the privacy of users and to make sure they are held liable in case they are careless about the sensitivity of privacy.
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