Leverage

Types

Financial leverage, Operating leverage, Combined leverage.

Definition

A strategy using borrowed capital or debt to increase assets, cash flows, and returns, or to amplify potential returns on an investment or project.

Associated Risk

Magnifies losses, can lead to market shocks, forced liquidations through margin calls, contributes to global financial system fragility.

Primary Purpose

Enhancing potential returns on equity, increasing purchasing power and investment capacity, optimizing capital structure, facilitating business expansion.

Application Contexts

Global financial markets, corporate finance, investment strategies, market dominance/antitrust.

Mechanism in Finance

Borrowing capital through fixed-income securities or direct loans from lenders.

Impact on Company Strength

Measured by financial leverage ratios like debt-to-assets and debt-to-equity; a highly leveraged company has more debt than equity.

In finance, leverage is a strategy that companies use to increase assets, cash flows, and returns, though it can also magnify losses. There are two main types of leverage: financial and operating. To increase financial leverage, a firm may borrow capital through issuing fixed-income securities or by borrowing money directly from a lender.

### Featured ## Consulting ### Consulting services Consulting services ### Tailored advice Tailored advice ## Resources ### Challenges Challenges ### Toolkit Toolkit ### Featured Illustration of a paper document in bright colors Illustration of a toolkit in bright colors # Leverage Leverage is the amount of debt a company has in its mix of debt and equity (its capital structure). A company with more debt than average for its industry is said to be highly leveraged.

Leverage refers to using debt or borrowed funds to amplify returns from an investment or project. Companies can use leverage to invest in growth strategies. Some investors use leverage to multiply their buying power in the market. A range of financial leverage ratios gauge a company's financial strength with the most common being debt-to-assets and debt-to-equity. [...] Financial leverage is the practice of borrowing money, investing the funds, and planning for future returns to be greater than debt servicing costs. In this way, a company can use debt to generate more revenue, though at a risk. Leverage is often used when businesses invest in themselves for expansions, acquisitions, or other growth methods. It's also an investment strategy that uses various financial instruments or borrowed capital to increase the potential return on an investment. [...] Image 4: Financial Leverage:max_bytes(150000):strip_icc():format(webp)/What_Is_Financial_Leverage-2e972f832d4749c9aa5302353cdec52f.jpg) Investopedia / Lara Antal How Financial Leverage Works ---------------------------- Leverage involves using debt or borrowed capital to undertake an investment or project. It's commonly used to boost an entity's equity base. The concept of leverage is used by both investors and companies:

Leverage in financial management refers to the strategic use of borrowed funds (debt) to finance investments or business activities with the aim of enhancing potential returns on equity. By utilizing leverage, companies or individuals can increase their purchasing power and investment capacity without relying entirely on their own resources. [...] The technical financial leverage definition can be stated as a company’s approach of leveraging debt to optimise capital structure, maximise profitability, and facilitate business expansion without having to dilute the control and ownership of the existing shareholders. [...] Operating leverage measures how a company’s fixed costs (meaning costs that are independent of the level of production) impact its profitability. If a company has a high operating leverage, it means that it has higher fixed costs. A change in the amount of sales can lead to big changes in operating income.