What is meant by financial leverage?

Financial leverage refers to the strategy of using borrowed funds to amplify the potential return on investment. By taking on debt, a company can increase its capacity to invest in projects, assets, or opportunities without needing to own all the capital outright. This approach allows businesses to pursue growth and expansion, potentially leading to higher profits if the investments perform well.

The essence of financial leverage lies in its ability to increase the returns on equity. If the returns generated from the investment exceed the cost of the debt, the excess profit accrues to the equity holders, enhancing their returns. However, it’s important to manage leverage carefully, as it also increases financial risk, particularly if investments do not perform as expected.

In contrast, the other options address different concepts. Utilizing personal assets pertains to private investment rather than leveraging debt. Reducing debt is about improving financial health rather than leveraging it. Lastly, investing solely in debt securities does not capture the idea of leveraging borrowed funds to invest further; instead, it suggests a different investment strategy focused on fixed-income assets.