Debt & Leverage Cheat Sheet

The core ideas of Debt & Leverage distilled into a single, scannable reference — perfect for review or quick lookup.

PiqCue — piqcue.com/debt-leverage/cheatsheet

Quick Reference

Financial Leverage

Using borrowed money to amplify potential returns on investment. Leverage magnifies both gains and losses, making outcomes more extreme than if only personal capital were used.

Debt-to-Equity Ratio

A measure of how much a company relies on borrowed money versus owner's capital, calculated by dividing total debt by total equity. Higher ratios indicate more leverage and risk.

Good Debt vs Bad Debt

Good debt finances assets that appreciate or generate income exceeding the borrowing cost. Bad debt finances depreciating assets or consumption without generating returns.

Cost of Debt

The effective interest rate a company or individual pays on borrowed funds, often reduced by the tax deductibility of interest payments.

Leverage Risk (Amplification Effect)

The principle that leverage amplifies outcomes in both directions -- gains become larger gains, but losses also become larger losses, potentially exceeding the original investment.

Interest Coverage Ratio

A financial metric that measures how easily a company can pay interest on its outstanding debt, calculated by dividing earnings before interest and taxes (EBIT) by interest expense. A ratio below 1.5 is generally considered a warning sign that the company may struggle to meet its debt obligations.

Amortization

The process of gradually paying off a debt through a series of scheduled payments that cover both principal and interest over a set period. In the early stages of an amortizing loan, a larger portion of each payment goes toward interest, with the principal portion increasing over time as the outstanding balance decreases.

Overleveraging

A situation in which a borrower has taken on so much debt that they can no longer comfortably make interest and principal payments, increasing the risk of default or bankruptcy. Overleveraged entities become extremely vulnerable to economic downturns, rising interest rates, or unexpected expenses.

Key Terms at a Glance

Leverage:The use of borrowed capital to increase the potential return of an investment, amplifying both gains and losses.

Debt-to-Equity Ratio:Total debt divided by total equity; measures the proportion of a company's financing that comes from creditors versus owners.

Secured Debt:A loan backed by collateral that the lender can seize if the borrower defaults, such as a mortgage or auto loan.

Unsecured Debt:A loan with no collateral backing, relying solely on the borrower's creditworthiness. Typically carries higher interest rates.

Amortization:The process of paying off debt through scheduled periodic payments that cover both interest and principal over a set term.

Interest Coverage Ratio:EBIT divided by interest expense; indicates how easily a company can meet its interest obligations from earnings.

Cost of Debt:The effective rate a company pays on borrowed funds. The after-tax cost accounts for the tax deductibility of interest.

Tax Shield:The reduction in taxable income resulting from tax-deductible expenses such as interest payments, effectively lowering the cost of debt.

Overleveraging:A state in which a borrower has taken on more debt than they can comfortably service, increasing the risk of default or bankruptcy.

Principal:The original amount of money borrowed in a loan, excluding interest. Loan payments reduce the principal over time.

Capital Structure:The specific mix of debt and equity a company uses to finance its operations, affecting both risk and return.

Margin Call:A demand by a broker for an investor to deposit additional funds when the equity in a leveraged account falls below the required minimum.

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