Columbia Select Global Corporate Bonds and Leverage Analysis
| IGLGX Fund | USD 20.22 0.08 0.40% |
Columbia Select's financial leverage is the degree to which the firm utilizes its fixed-income securities and uses equity to finance projects. Companies with high leverage are usually considered to be at financial risk. Columbia Select's financial risk is the risk to Columbia Select stockholders that is caused by an increase in debt. In other words, with a high degree of financial leverage come high-interest payments, which usually reduce Earnings Per Share (EPS).
Columbia |
Given the importance of Columbia Select's capital structure, the first step in the capital decision process is for the management of Columbia Select to decide how much external capital it will need to raise to operate in a sustainable way. Once the amount of financing is determined, management needs to examine the financial markets to determine the terms in which the company can boost capital. This move is crucial to the process because the market environment may reduce the ability of Columbia Select Global to issue bonds at a reasonable cost.
Columbia Select Assets Financed by Debt
Typically, companies with high debt-to-asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the Columbia Select's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Columbia Select, which in turn will lower the firm's financial flexibility.Columbia Select Corporate Bonds Issued
Understaning Columbia Select Use of Financial Leverage
Understanding the structure of Columbia Select's debt obligations provides insight if it is worth investing in it. Financial leverage can amplify the potential profits to Columbia Select's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if the firm cannot cover its cost of debt.
The fund will invest at least 80 percent of the funds net assets in equity securities, including securities of companies located in developed and emerging countries. It generally invests at least 40 percent of its net assets in companies that maintain their principal place of business or conduct their principal business activities outside the U.S., have their securities traded on non-U.S. exchanges or have been formed under the laws of non-U.S. countries. Please read more on our technical analysis page.
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Columbia Select financial ratios help investors to determine whether Columbia Mutual Fund is cheap or expensive when compared to a particular measure, such as profits or enterprise value. In other words, they help investors to determine the cost of investment in Columbia with respect to the benefits of owning Columbia Select security.
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What is Financial Leverage?
Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing. In most cases, the debt provider will limit how much risk it is ready to take and indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending, the financial provider uses the assets as collateral until the borrower repays the loan. In the case of a cash flow loan, the general creditworthiness of the company is used to back the loan. The concept of leverage is common in the business world. It is mostly used to boost the returns on equity capital of a company, especially when the business is unable to increase its operating efficiency and returns on total investment. Because earnings on borrowing are higher than the interest payable on debt, the company's total earnings will increase, ultimately boosting stockholders' profits.Leverage and Capital Costs
The debt to equity ratio plays a role in the working average cost of capital (WACC). The overall interest on debt represents the break-even point that must be obtained to profitability in a given venture. Thus, WACC is essentially the average interest an organization owes on the capital it has borrowed for leverage. Let's say equity represents 60% of borrowed capital, and debt is 40%. This results in a financial leverage calculation of 40/60, or 0.6667. The organization owes 10% on all equity and 5% on all debt. That means that the weighted average cost of capital is (.4)(5) + (.6)(10) - or 8%. For every $10,000 borrowed, this organization will owe $800 in interest. Profit must be higher than 8% on the project to offset the cost of interest and justify this leverage.Benefits of Financial Leverage
Leverage provides the following benefits for companies:- Leverage is an essential tool a company's management can use to make the best financing and investment decisions.
- It provides a variety of financing sources by which the firm can achieve its target earnings.
- Leverage is also an essential technique in investing as it helps companies set a threshold for the expansion of business operations. For example, it can be used to recommend restrictions on business expansion once the projected return on additional investment is lower than the cost of debt.