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Financial Leverage
The use of borrowed funds to increase the potential return on investment, which also increases the potential risk.
Implications
The use of borrowed funds to increase the potential return on investment, often involving the use of debt to finance assets, with the aim of amplifying profits, but also increasing the risk of loss.
Example
Example: A real estate developer uses financial leverage by taking out loans to finance multiple property acquisitions, expecting that the returns from the properties will exceed the cost of the debt, leading to higher overall profits.
Related Terms
Different from operating leverage, which involves using fixed costs to amplify profits, financial leverage specifically refers to the use of debt to increase investment returns.
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