Over leveraged is an accounting term and in actual it is a financial condition of a business entity or a company where the business is carrying too much debt over it. The amount of debt on the business is intense that the business is unable to pay off interest payments with the help of the loans. The reason behind a company of being over leveraged is that the expenses of the company become greater as compared to the income of the companies as a result the companies are unable to pay their expenses due to the excessive costs and low income. In other words we can say that the concept of being over leveraged comes from the concept of financial leverage where the financial leverage is accumulated in such a way that it is difficult for the company to pay its interest. The formula of financial leverage can be shown as under:-
Financial Leverage = Operating Income/ Net Income
Over leveraged can be explained as a condition where the business has borrowed a large amount of debt to pay expenses and to bear costs however the business is now unable to pay the interest payments of the acquired loan. If the performance of the company remains poor in terms of finance there is a risk for the company to become bankrupt. A company that is not over leveraged can sustain the drops in the performance of their business however an over leveraged company needs to perform better in order to pay interest payments.
Other Related Accounting Articles: