A levered vs an unlevered company of similar value - if the firm does well and there is a great amount of growth in terms of FCF, and similar amounts of dividend are paid, you will have lesser shareholders to split the dividends with in a levered company vs an unlevered company financed 100% by equity. This means that a levered firm shareholder is better able to have bigger gains in dividend payouts when the firm does well and the economy is up, which is the reason why the debt level in China is rising so dramatically - firms are aggressively borrowing in order to chase rising investor optimism and capitalize on the bull market, expanding their production to meet potential rising demands.
However, the converse is true when the economy is bad and firms aren't doing well - interest payments are a fixed "cost" which doesn't change according to economy performance, meaning your lower EBIT will have a larger percentage taken away for payment of interest payments, though interest tax shield will cushion this effect. However, in the end you are looking at a much more dissappointing FCF after all expenditures are accounted for as compared to a unlevered firm which doesn't have to pay interest, so as shareholders you lose more because of the leverage effect of debt in the firm.
Hence, if the economy is picking up, perhaps a levered firm is a better investment so you can capitalize on the growth and boosted returns by leverage. In downturns, leverage is your enemy, so perhaps rotation into a lower debt firm of equal financial standing is a viable option to reduce the effect of leverage on losses.
A levered vs an unlevered company of similar value - if the firm does well and there is a great amount of growth in terms of FCF, and similar amounts of dividend are paid, you will have lesser shareholders to split the dividends with in a levered company vs an unlevered company financed 100% by equity. This means that a levered firm shareholder is better able to have bigger gains in dividend payouts when the firm does well and the economy is up, which is the reason why the debt level in China is rising so dramatically - firms are aggressively borrowing in order to chase rising investor optimism and capitalize on the bull market, expanding their production to meet potential rising demands.
However, the converse is true when the economy is bad and firms aren't doing well - interest payments are a fixed "cost" which doesn't change according to economy performance, meaning your lower EBIT will have a larger percentage taken away for payment of interest payments, though interest tax shield will cushion this effect. However, in the end you are looking at a much more dissappointing FCF after all expenditures are accounted for as compared to a unlevered firm which doesn't have to pay interest, so as shareholders you lose more because of the leverage effect of debt in the firm.
Hence, if the economy is picking up, perhaps a levered firm is a better investment so you can capitalize on the growth and boosted returns by leverage. In downturns, leverage is your enemy, so perhaps rotation into a lower debt firm of equal financial standing is a viable option to reduce the effect of leverage on losses.