Leverage: concept, operating leverage, financial leverage, total leverage

Meaning of Leverage:

  • The word ‘leverage’, borrowed from physics, is frequently used in financial management.
  • The object of application of which is made to gain higher financial benefits compared to the fixed charges payable, as it happens in physics i.e., gaining larger benefits by using lesser amount of force.
  • Leverage results from using borrowed capital as a funding source when investing to expand the firm's asset base and generate returns on risk capital.
  • Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment.
  • Leverage can also refer to the amount of debt a firm uses to finance assets. When one refers to a company, property or investment as "highly leveraged," it means that item has more debt than equity.