Generally speaking, the principle of financial leverage means that when investors invest, the funds owned by investors will expand several times or even dozens of times, resulting in their gains and losses will also expand according to this ratio. By using this tool, the results of investment can be amplified. Whether the final result is gain or loss, the relevant amount will increase in a fixed proportion. Therefore, before using this tool, investors must thoroughly study the income expectation and possible risks in investment projects. For the principle of financial leverage, the safer measure is to reduce the income expectation and increase the risk expectation as much as possible. When using financial leverage, investors must consider this issue, because cash flow expenditure may increase.
When leverage is used as a personal capital, it refers to the leverage effect in financial management, which is mainly manifested as follows: due to the existence of specific expenses (such as fixed costs or fixed financial expenses), when one financial variable changes in a small range, another related financial variable will change in a large range. Rational use of leverage principle is helpful for enterprises to avoid risks reasonably and improve the efficiency of capital operation. There are three forms of leverage effect in financial management, namely, operating leverage, financial leverage and compound leverage. Economic lever refers to the economic means that a country or an economic organization uses the law of value and the principle of material interests to influence, regulate and control the economic activities of social production, exchange, distribution and consumption in order to realize the national economic and social development plan. Including price, tax, credit, salary, bonus, exchange rate and so on.
Several important determinants of the success of financial leverage;
1, whether the bond financing cost is cost-effective;
2.3-5 years can take the high speed; 3. Whether the purchase price is reasonable;
4. Whether the operation can be developed and improved.