Leveraged

Leveraged is an adjective describing something that uses leverage—borrowed funds or other fixed resources—to magnify potential gains or losses. In finance, an entity is leveraged when it finances part of its operations or investments with debt rather than equity. The term can also describe a strategy, a capital structure, or an instrument designed to raise exposure with relatively little upfront capital.

Financial leverage: Borrowed capital can magnify returns but also losses. The degree of leverage is typically expressed by ratios such as debt-to-equity or debt-to-assets, and by interest coverage. If an investment earns a return above its cost of debt, equity holders benefit; if not, losses are amplified and insolvency risk grows. Highly leveraged firms face greater risk of distress and margin calls, and may rely on refinancing or sale of assets. Leveraged buyouts and leveraged ETFs are common examples; in an LBO, a firm is acquired using substantial debt secured against the target's assets and cash flows.

Operational leverage: This refers to a business's fixed-cost structure. With high fixed costs, a rise in revenue yields a larger rise in operating income, while a drop in revenue can more quickly erode profits. Operational leverage interacts with financial leverage to determine overall risk and return profile.

Other uses: The term is common in leveraged investment products such as leveraged exchange-traded funds and in corporate actions like leveraged recapitalizations or leveraged buyouts. Regulators and lenders assess leverage to gauge risk, and investors should weigh costs, funding terms, and potential losses.