Leverage stress test
See exactly what borrowing does to shareholder returns in a good year and in a bad one — the same mechanism, pointing both ways.
Runs entirely in your browserRuns entirely on your device — nothing you type is sent anywhere. Educational only, and not investment advice.
How to use this calculator
Each step names a control you will find on screen above.
- Funded by debt
The share of capital that is borrowed rather than shareholders’. Slide it from zero upwards and watch both outcomes move.
- Return the business earns on capital
What the operations produce before interest. The critical comparison is this figure against the cost of the debt.
- Drop the return below the interest rate
The essential experiment. Above the borrowing cost, leverage adds. Below it, leverage subtracts — fast.
Worked example: Half funded by debt, in a good year and a bad one
₹100 of capital, half borrowed at 9%. Tax 25%. Compare a year earning 15% on capital with one earning 5%.
What to enter
- Funded by debt
- 50%
- Cost of debt
- 9%
- Return the business earns on capital
- 15%, then 5%
What it shows you
- Good year, no debt
- 11.3% ROE
- Good year, 50% debt
- 15.8% ROE
- Bad year, no debt
- 3.8% ROE
- Bad year, 50% debt
- 0.8% ROE
leverage adds 4.5 points
almost everything gone
Where this is taught
A calculator gives you a number. These explain what the number means and when it misleads you.
- Fundamental Analysis11 minThe balance sheetA photograph of what the company owns and owes on one day, and the two ratios that reveal whether it can survive a bad year.
- Fundamental Analysis11 minLeverage, liquidity and efficiency ratiosCan it pay its interest, can it pay its bills, and how hard is it making its assets work? The ratios that catch trouble before the profit line does.
- Fundamental Analysis11 minContingent liabilities and what the balance sheet omitsObligations that exist but are not recognised: guarantees, disputed taxes, litigation and commitments. Disclosed in a note, excluded from every ratio you computed.
- Fundamental Analysis11 minCredit ratings and the debt market's view of your stockRating agencies publish detailed analysis of companies you may own, focused entirely on whether they survive. Equity investors rarely read it, and it moves first.
- Fundamental Analysis11 minCurrency inside the businessA company can look purely domestic and be substantially a currency bet. Where the exposure is disclosed, and why the net figure matters more than revenue.