Investment BankingIntermediate

Leverage

Using borrowed money to increase the potential return on your own capital.

Detailed explanation

Leverage magnifies gains when things go well and losses when they do not. In deals it is often measured as Debt ÷ EBITDA.

Formula

Leverage = Total debt ÷ EBITDA

Why it matters

Too much leverage is the most common reason deals fail.

Key points

  • Amplifies both ways.
  • Lenders cap it through covenants.
  • Also seen in F&O trading.

Related terms

Leveraged BuyoutDebt-to-Equity Ratio

More in Investment Banking

Investment BankingMergers & AcquisitionsEquity Capital MarketsDebt Capital MarketsPitch BookDiscounted Cash Flow

Educational content only. Definitions and examples are illustrative and are not investment, tax or legal advice.