What is leverage?
It is considered Leverage An investment strategy that uses borrowed money to increase the potential return on an investment. Borrowed capital is used as a source of financing when investing to expand a company's asset base and generate returns on investment capital. Leverage can also refer to the amount of debt a company uses to finance assets.[١]
Leverage basically refers to an investment in which borrowed money or debt is used to multiply investment returns or obtain additional funds or raise money for the company, so that individuals or companies borrow money or Capital A lender owes a debt, and promises to repay the debt with interest.[٢]
Leverage can also refer to stock trading. When a company is described as highly leveraged, it means that it has more debt than equity. Knowing this helps investors Decision making Correct before investing in any property or company.[٢]
Uses of leverage
maybe For companies Individuals use leverage for many reasons, but these uses differ between companies and individuals. A company can use leverage for many reasons, such as increasing the value of its assets, obtaining new equipment to increase the value of shares, and others, while the individual investor usually uses leverage to increase the returns on his investments.[٢]
Advantages of Leverage
Leverage is a good strategy in some situations, and here are its main advantages:
- It helps in increasing the liquidity available to the company, as when the company takes a loan or debt, it receives cash that can be used in a variety of activities such as: purchasing new machines, or purchasing a new building that will help increase the efficiency of the company, and the cash can also be used to purchase other companies; which will increase the size of the company's operations.[٣]
- Growing companies' use of debt can double earningsHere, the cost of debt ranges from 8% to 15%, while the profit rate of growing companies ranges from 20% to 100%, so the higher the value of the leverage, the higher the company's profits.[٣]
- Leverage is a good option for companies that do not want to risk their ownership, as the company does not have to give its ownership rights to anyone, but rather pays the original amount when due, along with the agreed interest.[٣]
- Companies or individual businesses that borrow loans through leveraged investments can make a relatively small investment.[١]
Disadvantages of Leverage
Leverage also has some disadvantages, including the following:[١]
- One of the disadvantages of using leverage is the loss that companies may face if the value of assets declines, and the value of Earnings on interest that companies have to pay On her debts.
- Leveraged investing can be fatal to businesses if not used properly, and can cause companies to go out of business, especially those with lower than expected income and less profitability.
- Leverage places an obligation on the company to pay interest regardless of the company's financial position, and in the worst case scenario this can lead to the company's bankruptcy.[٣]
the reviewer
- ^ A for T ADAM HAYES (19/3/2021), “Leverage”, investopedia, Retrieved 11/1/2022. Edited.
- ^ A for T “Leverage”, cleartax, 5/1/2022, Retrieved 11/1/2022. Edited.
- ^ A for T Th Vinish Parikh (18/2/2018), “Advantages and Disadvantages of Leverage”, letslearnfinance, Retrieved 11/1/2022. Edited.
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