What is meant by 'financial leverage'?

Financial leverage refers to the strategy of using borrowed funds to amplify potential returns on an investment. This concept hinges on the idea that by taking on debt, a business can invest more capital than it currently possesses, potentially increasing its overall returns when the investment performs well. The use of leverage can lead to higher profits if the return on the investment exceeds the cost of the borrowed funds.

When a business employs financial leverage, it can enhance its capacity to invest in growth opportunities, which can be especially important for expansion or undertaking large projects that would be difficult to fund solely through equity. However, it's important to understand that while leverage can enhance returns, it also comes with increased risk; if the investments do not perform as expected, the costs of the debt can lead to greater losses.

The other options do not accurately describe financial leverage: using personal savings for investments pertains to equity financing, investing without borrowed capital implies no leverage at all, and increased reliance on cash for transactions does not relate to leveraging finance to enhance returns.