At the request of operating financial the leverage it be that relationship between equity and credit has been invested in it .
Method used in finance that consists of borrowing to manage an operation to which an equity capital plus will be added
In other words, leverage in this context is taking on debt, using debt as a financial tool for an operation, in order precisely to carry it out, which is supposed to bring better and more dividends in the future.
For example, own resources will be used but also others will be used that will come from a credit, from a loan that will be requested from some entity.
Advantages and disadvantages: large profitability versus bad debt
This type of procedure has a positive and advantageous side but also another that is not, since if everything goes well the profitability will multiply , but if everything goes wrong it will end in serious insolvency problems to be able to face the debt carried.
It should be noted that by reducing the initial capital that must be contributed, there will be an increase in the profitability obtained .
On the other hand, the increase in leverage also tends to increase the risks of the operation since it causes less flexibility, or what is the same, a greater exposure to insolvency, that is, the future inability to meet the demand for Payments.
Put in simpler words, financial leverage involves using debt to finance a certain operation .
That is, instead of carrying out this or that operation with own funds only, it will be done with these but also with a credit
So, as we pointed out above, the main advantage of this type of operation is that it allows us to multiply profitability , while the main disadvantage is that the operation fails and one ends up being insolvent , with all that that situation entails for a company. company.
But certainly what a strange word in an economic context, right? Since it is more familiar to us in other types of situations and not in the fields of finance, economics .
Meanwhile, its use will be installed as a consequence that comes from the verb leverage that according to its formal definition tells us that it implies lifting or moving something with the assistance of a lever.
For example, financial leverage uses methodologies that function as levers to increase the investment in question.
In this precise case, the lever will be the debt that will allow us to invest more money in an operation or business, that is, more than we have available, and thanks to what is requested as a loan, but of course, in exchange of interest that must be paid in the stipulated time.
But we must emphasize that the lever is not the only resource but that this action is also possible through many other instruments, being necessary to leave a guarantee of the total that is being invested that this allows to leverage the operation.
Now, we must say that the more debt that is requested and used, the greater the financial leverage and also the higher the interest to pay on the corresponding debt, a fact that of course we have to take into account because it will negatively affect our profits. future.
On the other hand, operating type leverage results from the existence in the company of fixed operating costs, which do not depend on the activity, in this situation, an increase in sales will mean an increase in variable costs and other expenses that also they are operative for the growth of a company, whereas the same does not happen with fixed costs, for which the growth of total costs will be less than income , a fact that will substantially increase profit; operating leverage implies the tools that the company uses when producing, such is the case of machines, employees, technology .
If the aforementioned leverage does not exist, it will be said that the company has immobilized capital, assets incapable of producing money.