1

leverage

play
noun le·ver·age \ˈle-və-rij, ˈlē-; ˈlev-rij, ˈlēv-\
Updated on: 26 Jul 2017

Definition of leverage

  1. 1 :  the action of a lever or the mechanical advantage gained by it

  2. 2 :  power, effectiveness trying to gain more political leverage

  3. 3 :  the use of credit to enhance one's speculative capacity

Examples of leverage in a Sentence

  1. The union's size gave it leverage in the labor contract negotiations.

  2. The player's popularity has given him a great deal of leverage with the owners of the team.

  3. I used the leverage of the bar and a wooden block to pry the rock out of the hole.

Recent Examples of leverage from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'leverage.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of leverage

1830


2

leverage

verb le·ver·age

Definition of leverage

leveraged

;

leveraging

  1. transitive verb
  2. 1 :  to provide (something, such as a corporation) or supplement (something, such as money) with leverage; also :  to enhance as if by supplying with financial leverage

  3. 2 :  to use for gain :  exploit shamelessly leverage the system to their advantage — Alexander Wolff

Examples of leverage in a Sentence

  1. The company wants to leverage its brands more effectively.

  2. a reality show contestant who's trying to leverage her 15 minutes of fame

Recent Examples of leverage from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'leverage.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of leverage

1957


Financial Definition of LEVERAGE

leverage

What It Is

Leverage is any technique that amplifies investor profits or losses. It's most commonly used to describe the use of borrowed money to magnify profit potential (financial leverage), but it can also describe the use of fixed assets to achieve the same goal (operating leverage).

How It Works

{u}Financial Leverage{/u}

Let's look at selected balance sheet and income statement information for Company XYZ.


Company XYZ has invented a new product that will revolutionize the widget market, but it needs to build a new $1,000,000 factory. It must choose between using equity or long-term debt to build the factory. We can see the impact on profits of both decisions.

Scenario A: Raise $1,000,000 by issuing new stock

XYZ is able to raise $1,000,000 by issuing 500,000 new shares at $2 per share. It builds its new factory and immediately sees revenues double and operating expenses increase by $300,000 (about 43%). Let's look at the impact on its financial statements:


Profit per share has almost tripled. That's pretty good.

Scenario B: Use financial leverage, raise $1,000,000 in debt

Let's see what happens if XYZ chooses to use $1,000,000 in debt to finance its new factory. Assume it can borrow at 5% per year.


By using leverage, Company XYZ increases the profit available to shareholders.

{u}Operating Leverage{/u}
If we go back to Company XYZ, we can examine the effects of operating leverage on profits. Let's say the company is trying to choose between building their factory or outsourcing production to a third-party manufacturer. If they outsource production, they will pay $0.75 for each $1 widget they sell.

Scenario C: Outsource production instead of investing in additional fixed assets (the new factory)

As in the previous example, assume the company is able to double revenues when the new widget hits the market.


Comparing the results side-by-side, we can see the effects of leverage on profit potential:


Leverage it is not without risk. It requires a commitment to keep up with the principal and interest payments on the debt. If it's unable to do so, it will be forced into bankruptcy and shareholders will lose everything.

Why It Matters

Too much leverage can be bad, but there's no hard and fast rule as to how much is too much. No matter what its use, leverage can be a powerful tool when used responsibly. Savvy investors and companies use leverage to expand, hedge and speculate, but the overly aggressive can easily get in over their heads by losing money or going into bankruptcy.

For investors considering companies with debt, one of the most popular evaluations of a company's leverage is the debt-to-equity ratio (D/E). The interest coverage ratio, also known as times interest earned, is also a measure of how well a company can meet its interest-payment obligations. In general, these ratios suggest whether a company is "too safe" and is neglecting opportunities to magnify earnings through leverage or is overleveraged and at serious risk of default or bankruptcy.


LEVERAGE Defined for English Language Learners

leverage

play
noun

Definition of leverage for English Language Learners

  • : influence or power used to achieve a desired result

  • : the increase in force gained by using a lever

leverage

verb

Definition of leverage for English Language Learners

  • : to use (something valuable) to achieve a desired result


Law Dictionary

1

leverage

play
noun le·ver·age \ˈle-vrij, -və-rij\

Legal Definition of leverage

  1. :  the use of credit to enhance one's speculative capacity


2

leverage

transitive verb le·ver·age

Legal Definition of leverage

leveraged

leveraging

  1. :  to provide (as a corporation) or supplement (as money) with leverage





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