finantsvõimendus

Finantsvõimendus, often translated as financial leverage, refers to the use of borrowed money to increase the potential return of an investment. By using debt, an investor or company can control a larger asset base than they could with their own capital alone. This amplifies both potential profits and potential losses.

The concept is based on the idea that if the return generated by the borrowed funds exceeds the cost of borrowing (interest payments), the net profit for the equity holders will be greater than if no debt was used. For example, if a company borrows money at 5% interest to invest in a project that yields 10%, the difference of 5% accrues to the owners' equity.

However, financial leverage also magnifies risk. If the investment performs poorly and generates a return lower than the cost of debt, or even incurs a loss, the losses for equity holders are also amplified. High levels of debt can lead to increased financial distress and even bankruptcy if the company is unable to meet its debt obligations. Therefore, managing financial leverage is a critical aspect of financial management and investment strategy. Companies and investors must carefully assess the risks and rewards before employing significant leverage.