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What is leverage?

Harold Averkamp, CPA, MBA

Definition of Leverage

In accounting and finance, leverage is the use of a significant amount of debt to purchase an asset, operate a company, acquire another company, etc.

Since the cost of debt is normally less than the cost of obtaining additional stockholders’ equity, it is wise for a company to use some debt to control a larger amount of profitable assets. However, too much debt can mean significant risk when business conditions decline.

Leverage is also known as trading on equity.

Examples of Leverage

A company’s leverage can be measured by the following financial ratios:

In these ratios, debt includes the company’s current and noncurrent liabilities such as:

  • Bonds payable
  • Bank loans
  • Other loans
  • Accounts payable
  • Other amounts owed

In a related Q&A we illustrate how leverage can increase or decrease the returns on investments.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on

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