Enter the total borrowed funds and your own funds into the calculator to determine the leverage percentage.
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Leverage Percentage Formula
The following equation is used to calculate the Leverage Percentage.
LP = ( BF / OF ) * 100
Formula source: Early assessment of the impact of the coronavirus pandemic on the UK’s financial accounts (Office for National Statistics, 3 July 2020)
- Where LP is the leverage percentage (%)
- BF is the borrowed funds ($)
- OF is the own (internal) funds ($)
To calculate the leverage percentage, divide the borrowed funds by your own funds and multiply by 100.
What is a Leverage Percentage?
Definition:
Leverage percentage is a metric used to show the proportion of borrowed funds compared to the borrower’s own capital in an investment or business scenario, typically expressed as a percentage.
How to Calculate Leverage Percentage?
Example Problem:
The following example outlines the steps and information needed to calculate the Leverage Percentage.
First, determine the borrowed funds. In this example, $200,000 was borrowed from a lender.
Next, determine your own funds. In this example, you contributed $100,000 from personal savings to your business.
Finally, calculate the leverage percentage using the formula above:
LP = ( BF / OF ) * 100
LP = ( $200,000 / $100,000 ) * 100
LP = 200%
FAQ
Why is leverage percentage important?
Leverage percentage is important because it indicates how much of a business or investment is financed through debt. A higher leverage percentage can increase potential returns, but it also comes with higher financial risk.
Can leverage percentage be too high?
Yes, a leverage percentage that is too high can be risky. High leverage means greater debt obligations, so if the investment or business doesn’t generate enough revenue, it may be difficult or impossible to repay the borrowed funds.
What is a good leverage percentage in business?
There is no one-size-fits-all answer, as it depends on the industry, the current economic climate, and a business’s risk tolerance. Some businesses operate effectively with higher leverage, while others prefer a more conservative approach to debt.