Financial Leverage: When Borrowing Makes Sense and in Which Currency

Debt looks cheap until the exchange rate or revenue moves against you. An SME that funds growth with credit can raise its return, but it can also run out of room to pay interest if the business earns less than planned. What decides the outcome is the comparison between what the investment earns and what the debt costs, in the right currency.

At Soulbit Academy we treat financial leverage as a treasury decision, not a promise of returns. This guide, written for the CFO of a company in Mexico or Colombia, explains the formula, four ratios to measure risk and an assumed numerical example of dollar debt with peso revenue. It is not a credit or investment recommendation.

Financial Leverage: What It Is and How It Works

Financial leverage is the use of debt, instead of equity, to finance a company's assets. Its effect is to amplify the return on equity: when the business earns more than the debt costs, the surplus goes to shareholders. When it earns less, they absorb the gap.

Leverage cuts both ways. If an asset financed with debt yields 12% operating return and the debt costs 8%, the 4% spread improves the return on equity. If the asset yields 6%, the 8% cost subtracts from it.

That is why leverage is neither good nor bad in itself. A business with recurring sales and stable margins can carry more debt than one whose revenue swings with seasons or exchange rates.

ROE vs Operating ROA: When Debt Improves the Return

Here operating ROA means EBIT divided by total assets, measuring the return before interest. ROE means net profit divided by equity. The gap shows the effect of leverage; ROA based on net profit would differ. With debt, equity is smaller than assets, so the same profit is spread over less capital.

A labeled example shows it. Assumption: a company has assets of 5,000,000, earns EBIT of 600,000 a year (12% on assets) and, for simplicity, pays no tax. The amounts are illustrative and do not belong to any real company or to Soulbit prices.

In scenario A the company is funded only by equity of 5,000,000. ROE is 600,000 over 5,000,000, or 12%.

In scenario B the company borrows 2,000,000 at an assumed 8% a year. Interest is 160,000, profit is 440,000 and equity is 3,000,000. ROE rises to 14.7%.

Now the business earns less. Assumption: EBIT falls to 300,000 (6% on assets). In scenario A, ROE drops to 6%. In scenario B, profit is 140,000 over 3,000,000 and ROE falls to 4.7%, below the no-debt case.

Debt improved the return when the asset yielded 12% and worsened it when it yielded 6%. The crossover is the cost of debt: with an assumed 8% rate, it helps only if the operating return exceeds that level, before tax.

Degree of Financial Leverage, Debt to EBITDA and Interest Coverage

Four measures summarize how much risk debt adds: ROE against operating ROA, the degree of financial leverage, debt to EBITDA and interest coverage. The last three come from the income statement and balance sheet, and can be tracked monthly with the other measures in the guide to financial ratios for the CFO with dollar balances. Table 1 gathers them using the example above.

Ratio	Formula	What it measures	Value in the assumed example (EBIT 600,000 / 300,000)
Degree of financial leverage	EBIT / (EBIT minus interest)	Sensitivity of profit to interest	1.36 / 2.14
Debt to EBITDA	Financial debt / EBITDA	Years of EBITDA the debt represents	2.7 times with an assumed EBITDA of 750,000
Interest coverage	EBIT / interest	Times operating profit covers interest	3.75 / 1.88
ROE vs operating ROA	Net profit / equity vs EBIT / assets	Effect of debt on shareholder return	14.7% / 4.7% vs 12% / 6%

The degree of financial leverage rises when EBIT falls: it went from 1.36 to 2.14 in the example. Interest coverage drops from 3.75 to 1.88 times, a thinner margin for meeting payments.

Debt to EBITDA uses EBITDA because it approximates operating cash flow, but it leaves out foreign exchange losses and other charges. The note on EBITDA and FX losses explains what falls outside it. A company with dollar debt should read the ratio with and without that effect.

Lenders often turn these ratios into contract conditions, known as covenants. Breaching one can accelerate maturity even when the company pays on time, so read those clauses before signing.

When Borrowing Makes Sense: Four Questions Before Taking Credit

Borrowing makes sense when the expected return on the investment clearly exceeds the total cost of the debt and the company can still pay under an adverse scenario. Four questions organize the decision.

How much does the financed investment earn, and how stable is it?

Measure the return with the cash flow the investment will actually generate, not the best case. A practical rule is to test the calculation with operating profit 30% below plan.

What is the total cost, not just the nominal rate?

Total cost includes fees, insurance, guarantees, applicable taxes and, if the debt is in another currency, the exchange-rate effect. Two loans with the same rate can cost different amounts. To compare them, bring both to the same currency and term, as the guide to the break-even point with exchange rates shows.

How much room is left to pay if the business weakens?

If interest coverage falls close to 1 time in a downside scenario, the company depends on refinancing. A comfortable margin in the base case can vanish with a moderate drop in sales.

Is the debt in the same currency as the revenue?

Debt and revenue in different currencies add a risk that does not depend on the business. It is the answer that changes the real cost of a loan the most, and the next section covers it.

Dollar Debt With Peso Revenue: The Currency Mismatch

Dollar debt with peso revenue creates a currency mismatch: the liability grows in pesos if the peso depreciates, even though the business has not changed. Dollar rates are usually lower than local ones, and that gap is attractive. But the dollar rate does not include peso depreciation, which is the real cost of that saving.

A labeled example shows it. Assumption 1: a company borrows USD 1,000,000 at 7.5% a year and earns revenue in Mexican pesos. Assumption 2: the starting exchange rate is 17.50 pesos per dollar. Assumption 3: a peso alternative costs 14% a year. None of these figures is a market rate or a Soulbit price.

At the start the debt equals 17.5 million pesos. If after a year the dollar rises to 20.125 pesos (an assumed depreciation of 15%), the principal equals 20.125 million. The company owes 2.625 million more pesos without receiving a single extra peso.

The effective cost in pesos for that year is roughly (1.075 × 1.15) minus 1, or 23.6%. That is more than the 14% peso loan in assumption 3. Dollar debt is cheaper only if peso depreciation stays below 6.0%, which comes from dividing 1.14 by 1.075 and subtracting 1.

If the peso appreciates, the cost falls, but the company does not control that outcome. Dollar debt makes more sense when the company also earns in dollars, because revenue and liability then share a currency.

The international accounting standard IAS 21 requires exchange differences on monetary items, such as a foreign currency loan, to be recognized in profit or loss. That loss lowers profit and can worsen the ratios in Table 1 in the same period. Check with your accountant how your local framework applies it.

There are four options: borrow in the currency of revenue, match part of the liability with dollar income, hedge the risk with instruments or accept it within a defined limit. Instruments and their costs are covered in the guide to FX hedging for companies with dollar revenue and local costs. If you accept the risk, write it into the 2027 budget as an explicit exchange-rate assumption.

Comparing Local Currency Debt With the Current Policy Rate

The policy rate is the starting point for the cost of local currency debt, and as of October 2026 regional references do not move together. On September 30, 2026 the Board of Banco de la República raised its intervention rate by 25 basis points to 12.25%, according to its official statement. The bank's next meeting is scheduled for October 30, 2026.

Our guide to central bank interest rates in Latin America adds that Brazil's Copom cut the Selic to 13.75% on September 16, 2026. For a Mexican company, the reference is Banxico's target rate; check its latest official statement before budgeting, because it changes with each decision.

Those rates are not what a company pays. A bank adds a spread based on risk, term and collateral, and floating-rate debt resets at the next review date.

The useful comparison is between two total costs in the same currency: the peso rate with its spread, against the dollar rate plus the depreciation the company considers plausible, including an adverse scenario. The difference between them, not the list rate, shows which option fits.

What Soulbit V1 Delivers and What It Does Not Against a Debt Decision

Soulbit is a custodial financial platform. It does not lend money, finance working capital, offer currency hedges or pay yield on balances. Its role in a debt strategy is indirect: organizing collections and payments. Table 2 separates what V1 includes from what it leaves out.

Company need	Does Soulbit V1 cover it?	Detail
Collect from customers with a payment link or collection QR	Yes	Link or QR code tied to the payment
Hold a USDC or USDT balance under institutional custody	Yes	Custodial platform: the client does not control the keys
Pay payroll in batches or on a recurring basis	Yes	With KYB verification and AML/KYT monitoring
Convert to local currency through quote-based OTC	Yes, on request	Price by quote, not an order book
Grant credit or finance working capital	No	Outside the scope of V1
Hedge the currency risk of a debt	No	No forwards, options or other hedging instruments
Pay interest or yield on the balance	No	No yield or APY

For a Colombian company, the local leg is the Colombian banking rail. In Mexico, V1 offers no local banking rail. Holding USDC or USDT does not remove peso exchange-rate risk: it moves it to the final conversion and to each quoted price.

Check the app stores to verify whether the mobile apps are available. The platform does not guarantee a better price than any other channel. A debt decision is made with your financial adviser and the institution granting the credit.