Leverage

The degree to which an investor or business is using borrowed money in an attempt to increase the rate of return that is earned on an investment. It is calculated by using the Debt to Equity ratio, which involves taking the total debt of the business and dividing it by the total equity.

Businesses and investors often use leverage to boost their profits, however companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt –they may also be unable to find new lenders in the future. Leverage can increase the shareholders’ ROI and there are some tax advantages associated with borrowing money.