Legg Mason Corporate Bonds and Leverage Analysis
Legg Mason holds a debt-to-equity ratio of 0.569. . Legg Mason's financial risk is the risk to Legg Mason stockholders that is caused by an increase in debt.
Asset vs Debt
Equity vs Debt
Legg Mason's liquidity is one of the most fundamental aspects of both its future profitability and its ability to meet different types of ongoing financial obligations. Legg Mason's cash, liquid assets, total liabilities, and shareholder equity can be utilized to evaluate how much leverage the Company is using to sustain its current operations. For traders, higher-leverage indicators usually imply a higher risk to shareholders. In addition, it helps Legg Stock's retail investors understand whether an upcoming fall or rise in the market will negatively affect Legg Mason's stakeholders.
For most companies, including Legg Mason, marketable securities, inventories, and receivables are the most common assets that could be converted to cash. However, for Legg Mason, the most critical issue when managing liquidity is ensuring that current assets are properly aligned with current liabilities. If they are not, Legg Mason's management will need to obtain alternative financing to ensure there are always enough cash equivalents on the balance sheet to meet obligations.
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Legg Mason Debt to Cash Allocation
Many companies such as Legg Mason, eventually find out that there is only so much market out there to be conquered, and adding the next product or service is only half as profitable per unit as their current endeavors. Eventually, the company will reach a point where cash flows are strong, and extra cash is available but not fully utilized. In this case, the company may start buying back its stock from the public or issue more dividends.
Legg Mason reports 2.57 B of total liabilities with total debt to equity ratio (D/E) of 0.57, which is normal for its line of buisiness. Legg Mason has a current ratio of 2.22, indicating that it is in good position to pay out its debt commitments in time. Note however, debt could still be an excellent tool for Legg to invest in growth at high rates of return. Legg Mason 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 Legg Mason's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Legg Mason, which in turn will lower the firm's financial flexibility.Legg Mason Corporate Bonds Issued
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Other Consideration for investing in Legg Stock
If you are still planning to invest in Legg Mason check if it may still be traded through OTC markets such as Pink Sheets or OTC Bulletin Board. You may also purchase it directly from the company, but this is not always possible and may require contacting the company directly. Please note that delisted stocks are often considered to be more risky investments, as they are no longer subject to the same regulatory and reporting requirements as listed stocks. Therefore, it is essential to carefully research the Legg Mason's history and understand the potential risks before investing.
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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.