Skip to contentSkip to search

Leverage

Financial leverage describes reliance on debt finance and its effect on returns and financial risk. Debt can increase the return to ordinary shareholders when returns on the financed assets exceed borrowing costs. It can also magnify losses and creates contractual interest and repayment obligations. Examine gearing and interest cover together when assessing financial risk. Compare debt obligations with the earnings available to service them, using consistent definitions.

Worked example

Borrowing increases fixed interest commitments even when profit falls.

Common mistake

Gearing can be defined in several ways; specify the numerator and denominator rather than treating all debt ratios as identical.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA FA Supporting September 2026–June 2027
ACCA K1 Supporting July 2027–August 2028
CIMA BA3 Direct Official assessment-window verification pending
FIA FFA Supporting September 2026–June 2027

Related terms