What is meant by financial leverage?

Financial leverage refers to the strategy of using borrowed funds to amplify potential investment returns. This concept is central to many business and investment strategies because it allows individuals or companies to increase their investment capacity beyond their personal equity. By borrowing money, a business can invest in larger projects or assets than it could solely with its own capital.

When financial leverage is employed effectively, the returns on investments can exceed the cost of borrowing, thereby creating greater profit margins. For instance, if a company takes out a loan to expand its operations and the revenue generated meets or exceeds the interest payments, the company benefits from increased profits and an improved financial position.

In contrast, the other options do not accurately describe financial leverage. Investing personal savings involves using one’s own capital instead of borrowed funds, which doesn’t embody the leverage concept. Pursuing high-risk investments without loans reflects a willingness to take risks, but it does not involve leveraging debt. Finally, maximizing cash flow from operations relates to the efficient management of a company's day-to-day finances, not the use of debt to enhance investment returns.