Financial leverage
The use of debt to amplify the return on invested equity. When economic profitability exceeds the cost of debt, each additional euro of borrowing improves shareholders' returns. Below that threshold, the effect reverses.
In practice
A leveraged buyout is the extreme expression of financial leverage: a company is acquired primarily with debt, repaid from the acquired company’s cash flows. Leverage of 5 times EBITDA is common in mid-market LBOs. Leverage is a multiplier: it amplifies gains in success scenarios and magnifies losses when operational performance disappoints. The 2008 financial crisis illustrated the systemic consequences of excess leverage in real estate and structured finance.