Widely read:
A lever is something that we use as an external force to lift something. Similarly, financial leverage means the use of borrowed money as a source of capital for commencement, expansion, or mere running of the business. Since the cost of debt is relatively low compared to the cost of equity, companies prefer to borrow instead of raising share capital as it has the twin benefits of not only preventing dilution of ownership but also amplifying the returns that shareholders get. The degree of leverage that a business takes on also matters a lot. We can take leverage of 2:1 where debt is two times the amount of equity, or 1:1 where debt and equity are equal, or even 4:1 where debt is four times compared to equity.
This article was originally published on June 09, 2022.
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