American Fds Current Financial Leverage

RAJTX
 Fund
  

USD 10.76  0.06  0.55%   

American Fds' 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. American Fds' financial risk is the risk to American Fds 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).
Additionally, take a look at the analysis of American Fds Fundamentals Over Time.
  
Given that American Fds' debt-to-equity ratio measures a Mutual Fund's obligations relative to the value of its net assets, it is usually used by traders to estimate the extent to which American Fds is acquiring new debt as a mechanism of leveraging its assets. A high debt-to-equity ratio is generally associated with increased risk, implying that it has been aggressive in financing its growth with debt. Another way to look at debt-to-equity ratios is to compare the overall debt load of American Fds to its assets or equity, showing how much of the company assets belong to shareholders vs. creditors. If shareholders own more assets, American Fds is said to be less leveraged. If creditors hold a majority of American Fds' assets, the Mutual Fund is said to be highly leveraged.
Given the importance of American Fds' capital structure, the first step in the capital decision process is for the management of American Fds 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 American Fds 2015 to issue bonds at a reasonable cost.

American Fds Financial Leverage Rating

American Fds 2015 bond ratings play a critical role in determining how much American Fds have to pay to access credit markets, i.e., the amount of interest on their issued debt. The threshold between investment-grade and speculative-grade ratings has important market implications for American Fds' borrowing costs.

American Fds 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 American Fds' operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of American Fds, which in turn will lower the firm's financial flexibility. Like all other financial ratios, a an American Fds debt ratio should be compared their industry average or other competing firms.

Understaning American Fds Use of Financial Leverage

American Fds financial leverage ratio helps in determining the effect of debt on the overall profitability of the company. It measures American Fds's total debt position, including all of outstanding debt obligations, and compares it with the equity. In simple terms, the high financial leverage means the cost of production, together with running the business day-to-day, is high, whereas, lower financial leverage implies lower fixed cost investment in the business and generally considered by investors to be a good sign. So if creditors own a majority of American Fds assets, the company is considered highly leveraged. Understanding the composition and structure of overall American Fds debt and outstanding corporate bonds gives a good idea of how risky the capital structure of a business and if it is worth investing in it.
The fund normally invests a greater portion of its assets in fixed income, equity-income and balanced funds as it continues past its target date. American Fds is traded on NASDAQ Exchange in the United States. Please read more on our technical analysis page.

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Additionally, take a look at the analysis of American Fds Fundamentals Over Time. You can also try Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.

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When running American Fds 2015 price analysis, check to measure American Fds' market volatility, profitability, liquidity, solvency, efficiency, growth potential, financial leverage, and other vital indicators. We have many different tools that can be utilized to determine how healthy American Fds is operating at the current time. Most of American Fds' value examination focuses on studying past and present price action to predict the probability of American Fds' future price movements. You can analyze the entity against its peers and financial market as a whole to determine factors that move American Fds' price. Additionally, you may evaluate how the addition of American Fds to your portfolios can decrease your overall portfolio volatility.
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Please note, there is a significant difference between American Fds' value and its price as these two are different measures arrived at by different means. Investors typically determine American Fds value by looking at such factors as earnings, sales, fundamental and technical indicators, competition as well as analyst projections. However, American Fds' price is the amount at which it trades on the open market and represents the number that a seller and buyer find agreeable to each party.

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.
By borrowing funds, the firm incurs a debt that must be paid. But, this debt is paid in small installments over a relatively long period of time. This frees funds for more immediate use in the stock market. For example, suppose a company can afford a new factory but will be left with negligible free cash. In that case, it may be better to finance the factory and spend the cash on hand on inputs, labor, or even hold a significant portion as a reserve against unforeseen circumstances.

The Risk of Financial Leverage

The most obvious and apparent risk of leverage is that if price changes unexpectedly, the leveraged position can lead to severe losses. For example, imagine a hedge fund seeded by $50 worth of investor money. The hedge fund borrows another $50 and buys an asset worth $100, leading to a leverage ratio of 2:1. For the investor, this is neither good nor bad -- until the asset price changes. If the asset price goes up 10 percent, the investor earns $10 on $50 of capital, a net gain of 20 percent, and is very pleased with the increased gains from the leverage. However, if the asset price crashes unexpectedly, say by 30 percent, the investor loses $30 on $50 of capital, suffering a 60 percent loss. In other words, the effect of leverage is to increase the volatility of returns and increase the effects of a price change on the asset to the bottom line while increasing the chance for profit as well.