To manage leverage risk effectively, companies can take several steps:
Maintain a Balanced Capital Structure: Companies should strive for a balanced mix of debt and equity in their capital structure to avoid over-leveraging. Monitor Financial Metrics: Regularly monitoring key financial metrics such as debt-to-equity ratio, interest coverage ratio, and cash flow can help companies identify potential leverage-related issues early. Use Hedging Strategies: Companies can use hedging strategies to mitigate the risks associated with interest rate fluctuations and other financial uncertainties. Plan for Contingencies: Having a robust contingency plan in place can help companies navigate financial difficulties and avoid defaulting on debt obligations.