Financial leverage, or leverage
Financial leverage refers to when a company borrows money (i.e. grows debt) to increase their potential return on investment (ROI). By using debt, a company can invest more in their operations than they could using only their own equity (or cash). Companies use financial leverage aiming for growth. But it can increase their risk, because they have to repay the debt whether they make a profit or a loss.
Positive leverage: If the ROI is higher than the cost of borrowing, the company may increase their profits.
Negative leverage: If the ROI is less than the cost of borrowing, the company has made a loss, which could impact their operations.
Financial leverage is often measured using ratios like the debt/equity ratio or interest coverage ratio.
We acknowledge and thank the FMA, Dr Karena Kelly and Brook Taurua Grant, the RBNZ and the Māori Dictionary for their research which helped us with te Reo Māori kupu for this glossary.
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