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Financial Leverage

The use of borrowed money to increase the potential return of an investment.

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Financial leverage is employed by companies to finance their assets through debt alongside equity. It is the ratio of total debt to total equity. By utilizing debt, companies can invest in more assets than with equity alone, with the aim to earn a return that exceeds the cost of the debt (interest rate). This can lead to amplified gains but also to magnified losses if the investments underperform, hence it's a strategy that entails higher risk. It's akin to how an individual might use a mortgage to finance the purchase of a home.
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