Leverage

Leverage means using borrowed money to increase the size of an investment or a company's operations beyond what its own cash alone would allow. A company that carries a lot of debt relative to its equity is described as highly leveraged.

Leverage magnifies outcomes in both directions. It increases potential returns when things go well, since gains apply to a larger investment than the investor's own capital alone would have funded, but it also increases potential losses, and can turn a manageable downturn into a serious problem if debt payments cannot be covered. Ratios like debt-to-equity are used to measure how leveraged a company is.