Leverage, also known as financial leverage, refers to the practice of a company using borrowed money to invest in assets with the goal of increasing returns.
By taking on debt, a business can afford to acquire resources or expand operations that might otherwise be unattainable.
The expectation is that the income or value generated by the new asset will exceed the cost of the borrowed funds, resulting in a net gain. While leverage can amplify profits, it also increases risk.
If the investment doesn’t perform as expected, the company must still repay the debt, potentially harming its financial stability.