What does it mean if a company has high financial leverage?

High financial leverage refers to a company's use of debt to finance its operations and growth, indicating that it has a high amount of debt relative to its equity. This means that the company relies more on borrowed funds rather than owner equity to fund its assets. When a company has high financial leverage, it often seeks to optimize its capital structure to enhance returns on equity; however, it also carries increased risk. Should the company encounter financial difficulties, or if revenues decline, having a high level of debt can lead to significant challenges in meeting interest payments and repaying the principal, potentially resulting in financial distress or bankruptcy.

In financial analysis, leverage is typically assessed through ratios such as the debt-to-equity ratio, which directly illustrates the proportion of debt used in relation to equity. Thus, a company that is leveraged demonstrates a balance sheet that may exhibit potential high returns in favorable conditions but poses risks in less favorable economic climates.

The other options do not directly relate to the concept of financial leverage. Having low fixed costs pertains more to operational costs rather than financing structure. Consistent revenue streams discuss income stability rather than debt levels, and strong cash reserves indicate liquidity rather than leverage.