What does it mean if a company has a high level of leverage?

A high level of leverage in a company indicates that it is using a significant amount of borrowed funds to finance its operations. Leverage is a financial strategy that involves using debt to increase the potential return on investment. When a company takes on debt, it can invest that money in various opportunities to generate higher returns than the cost of the debt itself.

This strategy can amplify profits if things go well, but it can also increase risk because higher levels of debt lead to increased obligations for the company to meet interest and principal repayments. If the company does not generate enough income to cover these repayments, it could face financial difficulties, including bankruptcy.

Understanding leverage is crucial for evaluating the company's financial health and risk profile. High leverage can be beneficial in a growing economy where returns on investments exceed the cost of borrowing but can be detrimental in times of economic downturns when revenues may decrease.