Financial leverage is the use of borrowed capital to expand a company's asset base, generate returns on risk capital, or finance assets. It can also be used indirectly by investing in companies that use leverage in their normal course of business.
The formula for calculating leverage is Debt/Equity = Leverage
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Using financial leverage can help a company increase its return on investment, reduce its overall cost of capital, and increase its potential for growth.
The primary risk associated with using financial leverage is that the company can be left with a high level of debt if the investments do not generate the expected returns. This can lead to financial instability and even insolvency.