Financial leverage
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
The use of debt to amplify returns to equity.
Financial leverage in plain English
Financial leverage means using borrowed money to try to make your own money work harder — like using a lever to lift something heavier than you could bare-handed. If you buy something with a mix of your cash and a loan and it gains value, the profit is spread over your smaller slice of real money, so YOUR percentage return gets magnified. The catch: leverage cuts both ways — if the investment drops, your losses are magnified too, and you still owe the loan. That's why debt can supercharge returns to owners (the "equity") in good times but is genuinely dangerous in bad ones.
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