What does financial leverage refer to?

Financial leverage refers to the use of borrowed funds to amplify potential investment returns. By taking on debt, individuals or companies can invest more capital than they would be able to with just their own resources. This strategy can lead to higher returns if the investments perform well, as the gains are realized on a larger investment base. However, it also comes with increased risk, since if the investments do not perform as expected, the losses can be magnified as well.

Utilizing financial leverage is a common practice in both personal and corporate finance, allowing for the potential for greater profits compared to using only equity or personal savings. This makes it an essential concept for understanding how businesses and investors might seek to maximize their financial outcomes.