Corporate FinanceFinancial Glossary
Leverage
Definition
The use of borrowed money to amplify potential returns on investment. In corporate finance, leverage is measured by the debt-to-equity ratio. A company with high leverage has more debt relative to equity, which magnifies both profits and losses.
Why It Matters
Leverage is a double-edged sword. In good times, a highly leveraged company delivers superior ROE. In downturns, the same leverage can push the company toward default. As an investor, avoid companies with debt-to-equity ratios above 1.5 unless they are in capital-intensive sectors like utilities or infrastructure where moderate leverage is normal.