Leverage is the use of borrowed money to finance a business or transaction.
Definition
For a civil engineering firm, leverage generally means using debt alongside owner or investor equity to fund operations, an acquisition, or a recapitalization. The debt creates scheduled interest and repayment obligations, and loan documents may also impose covenants or limits on business decisions. Owners may assess leverage by comparing debt with cash flow, earnings, assets, or equity, but the chosen measure and definition can differ across lenders and transaction documents. Leverage can magnify gains to equity when the business performs well, and losses or cash pressure when it does not. It is not the same as revenue growth or available cash. When reviewing a buyer or financing proposal, owners can examine the debt burden and downside assumptions within valuation and succession planning and the firm's financial metrics.
How owners use it
- Review scheduled principal and interest payments against the firm's expected cash generation.
- Compare debt measures using the same definitions and period before evaluating proposals.
- Example: A firm with $4 million of debt and $1 million of cash has net debt of $4 million - $1 million = $3 million.
- Consider how a drop in project receipts could affect covenant compliance and repayment capacity.
