What is Leverage?

Leverage refers to the use of borrowed money (debt) to increase the potential return of an investment. By using financial leverage, a company can control more assets than it could with its own equity capital alone. This can amplify both gains and losses.

For Startups: Early-stage startups typically use very little leverage, as they are primarily funded by equity. However, as they mature, they might use venture debt or other loans to fund growth without diluting founder ownership as much as an equity round would. This use of debt is financial leverage.

For Businesses: While leverage can amplify returns on equity, it also increases risk. A highly leveraged company is more vulnerable to downturns, as it must continue to service its debt regardless of its revenue performance.

Calculation: A common measure is the Debt-to-Equity Ratio.

Example: A company uses ₹10 Lakhs of its own equity and a ₹40 Lakh loan to buy a ₹50 Lakh asset. It is using leverage to control a larger asset base. If the asset appreciates, the return on the company's equity will be magnified.