There is no single leverage ratio [1]. On an asset basis, this is an 11:1 leverage ratio, i.e. $11 of assets for each dollar of equity. A lot of miscommunication around leverage seems to stem from this ambiguity.
[1] https://corporatefinanceinstitute.com/resources/accounting/l...
However, later he says that a home owner with a down payment of 20% is levered 5:1. Yet, if we do the same math as he did above, then 20% of $100,000 loan is $20k in equity with an $80k loan, giving a leverage ratio of 4:1.
Later he uses the example of purchasing $2000 worth of ($10) stock by paying just $1000 and having the other thousand lent by the brokerage.
As per his definition, $2000 in stocks (assets) minus the $1000 loan (liability) equals $1000 in equity. Then if leverage = equity/liability, in this case it turns out to be 1:1
His explanation doesn't make sense to me. Are those assets borrowed or something? And having $10 million extra in assets means that if suddenly all your liabilities come due, you have $10m left over? How could that possibly wipe you out?
Very confused.
Debt to equity. $10 of debt for every dollar of equity.
Equity (in accounting) is assets minus liabilities. $110mm assets, $100mm liabilities and thus $10mm equity.
You may be thinking of equities (from trading), which is another word for stock. (The link being equities represent ownership of equity, i.e. the value of a company’s assets net of liabilities.)
It seems to me that if bad things happen, you can cover for the value of your liabilities with your assets. You could waste the entire excess equity on banana monkey NFTs and still be solvent, assuming no liquidity issues.
Are the assets by definition illiquid?
so you may have started with 10M - then you borrowed (and promise to repay) 100M more. there's your 1:10 (10:100) ratio.