Financial leverage

Description

In finance, leverage is a general term for any technique to multiply gains and losses. Most often it involves buying more of an asset by using borrowed funds, with the belief that the income from the asset will be more than the cost of borrowing. Almost always this involves the risk that borrowing costs will be larger than the income from the asset leading to incur losses. Financial leverage tries to estimate the percentage change in net income for a one-percent change in operating income.

Related formulas

Variables

FLFinancial leverage (dimensionless)
ROEReturn on equity (dimensionless)
ROAReturn on assets (dimensionless)