What is leverage in finance?

Leverage in finance refers to the use of borrowed funds or debt to increase a company’s investment capacity and potential returns. Businesses use leverage to fund growth, acquire assets, or expand operations without relying solely on equity. By using borrowed capital, companies can take advantage of opportunities that may not be possible with their own funds. However, leverage also increases financial risk, as borrowed money must be repaid with interest, which can reduce profits or create cash flow challenges if earnings fall. Investors analyze leverage ratios to understand a company’s risk level and financial stability. While leverage can amplify gains, it can also magnify losses, so it must be managed carefully to maintain a healthy balance between debt and equity.