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The use of borrowed money to complete an investment purchase.


Example: The effects of financial leverage on return on equity are shown in Table 23.


Note: If debt service required is high compared to income, effect of leverage may be to reduce return to equity.

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Portion of a firm's assets financed with debt instead of equity. It involves contractual interest and principal obligations.
Financial leverage benefits common stockholders as long as the borrowed funds generate a return in excess of the cost of borrowing, although the increased risk can offset the general cost of capital. For this reason, financial leverage is popularly called trading on equity.
Financial leverage is measured by the debt - equity ratio.

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A fundamental analysis ratio of a company's level of long-term debt compared to its equity capital. Gearing is expressed in percentage form.

Companies with high gearing - more long-term liabilities than shareholder equity - are considered speculative.

Also known as "financial leverage".

Investopedia Says:
In simpler terms, gearing explains how a company finances its operations - either through outside lenders or through shareholders.

Related Links:
Borrowed funds can mean a leg up for companies, or the boot for investors. Find out how to tell the difference. Will Corporate Debt Drag Your Stock Down?
Learn what it means to do your homework on a company's performance and reporting practices before investing. Advanced Financial Statement Analysis

Ratio of debt to equity.

See words rhyming with "gearing."