What does financial leverage specify

Question

What does financial leverage specify? And also states its limitations?

Answer 1

Financial leverage specifies borrow of funds to increase the capital through issuing shares in the market to meet their business requirements. This as well indicates the profitability and return on equity of the company that has taken important amounts of debt. The financial leverage has numerous benefits but it possesses some limitations additionally which has been illustrated below:-

1) If a company borrows funds employing financial leverage then this money develops an environment which can either creates lots of profits or a little amount of it.

2) Borrowing continuously creates an image that the company may be on high risk. Which in turn raises the interest rates and some restrictions might be handed over to the borrowing organization.

3) Value of stock as well gets influenced as it can drop substantially if the stockholders intrude in between.