Financial Leverage Concept
Financial Leverage corresponds to a financial growth effect of Profitability of Equity Capitals (also designated as ROE or “Return on Equity”) that is produced through the rising of the debt level. This effect is verified every time the financial costs on funding are lower than the profitability of a determined investment operation or the company’s investment in its overall-
Since it gives an improvement of the profitability of equity capitals, the existence of financial leverage naturally results in benefits for the owners of the company´s capital. Thus, the financial lever can also be designated as multiplier factor on the equity capital.
Considering the referred, the existence or not of the financial leverage depends, not only on the profitability of the investments made, but also of the conditions and funding achieved in the market, such as the financial costs. In a funding decision is necessary to take into account the influence that the increase of debt causes in the company´s financial structure.
