Diamond Hill Debt

DHLYX Fund  USD 36.98  0.39  1.04%   
Diamond Hill'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. Diamond Hill's financial risk is the risk to Diamond Hill 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).
Given that Diamond Hill's 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 Diamond Hill 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 Diamond Hill to its assets or equity, showing how much of the company assets belong to shareholders vs. creditors. If shareholders own more assets, Diamond Hill is said to be less leveraged. If creditors hold a majority of Diamond Hill's assets, the Mutual Fund is said to be highly leveraged.
  
Check out the analysis of Diamond Hill Fundamentals Over Time.

Diamond Hill 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 Diamond Hill's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Diamond Hill, which in turn will lower the firm's financial flexibility.

Diamond Hill Corporate Bonds Issued

Understaning Diamond Hill Use of Financial Leverage

Understanding the structure of Diamond Hill's debt obligations provides insight if it is worth investing in it. Financial leverage can amplify the potential profits to Diamond Hill'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 normally invests at least 80 percent of its net assets in U.S. equity securities with large market capitalizations that the Adviser believes are undervalued. Large cap companies are defined as companies with market capitalizations at the time of purchase of 5 billion or greater, or in the range of those market capitalizations of companies included in the Russell 1000 Index at the time of purchase. The Adviser focuses on estimating a companys value independent of its current stock price.
Please read more on our technical analysis page.

Also Currently Popular

Analyzing currently trending equities could be an opportunity to develop a better portfolio based on different market momentums that they can trigger. Utilizing the top trending stocks is also useful when creating a market-neutral strategy or pair trading technique involving a short or a long position in a currently trending equity.

Other Information on Investing in Diamond Mutual Fund

Diamond Hill financial ratios help investors to determine whether Diamond 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 Diamond with respect to the benefits of owning Diamond Hill security.
Portfolio Manager
State of the art Portfolio Manager to monitor and improve performance of your invested capital
Top Crypto Exchanges
Search and analyze digital assets across top global cryptocurrency exchanges
Pattern Recognition
Use different Pattern Recognition models to time the market across multiple global exchanges
Money Flow Index
Determine momentum by analyzing Money Flow Index and other technical indicators

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.