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What Is Financial Leverage And What Is It For?

Sometimes in economics the concept of financial leverage is discussed, but what is financial leverage? What are its uses? In the following article we will analyze all those aspects related to this terminology. We will see the types of existing leverage and the advantages and disadvantages that it presents within the economy. At the same time, we will analyze a practical assumption to obtain a better understanding of the term that happens to us.

Financial Leverage

Before delving a little deeper into the concept of financial leverage, it is necessary to know what we mean by such a concept. On many occasions when we mention this concept we usually refer to companies. However, we can also appreciate their existence in other areas such as family or private.

Basically, leverage consists of the use of debt to have more capital for the execution of investments. In other words, it consists of making investments, not only using our savings, but also starting a debt process. This capital is obtained through credit money or through leveraged products. This ratio is defined as the connection between equity capital and borrowed capital.

Leverage is applicable in any field, provided that a loan or indebtedness is required through a credit institution. This debt is usually granted by credit institutions considering different aspects such as:

  • Employment situation
  • Income generation
  • Objective of the Concession

Suppose we are going to invest in a certain asset, and the leverage offered to us is 1:3 . Estro will indicate that for each euro that is worth assets, I invest three euros of the total. In this regard, the higher the debt, the higher the level of financial leverage.

This debt helps increase the possibility of obtaining a higher return, since we are investing more capital. Therefore, if there is greater profitability, the benefit will be greater.

Also Read: How To Measure The Productivity Of Your Business

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