Leverage

The extent to which a company is using borrowed money to finance its operations. It is measured as the total amount of debt to the total amount of assets. Highly leveraged companies can face significant cash flow problems if their sales do not generate enough to cover their debt obligations and can even end up bankrupt. Hedge funds and private equity firms also use derivatives for leverage. These can significantly multiply profits; however, it can also lead to heavy losses. Leverage is also known as financial gearing.

This definition is for general information purposes only