What is meant by 'financial leverage'?

Financial leverage refers to the use of borrowed funds to enhance the potential return on investment. When a company employs financial leverage, it borrows capital with the expectation that the income generated from the investment will exceed the cost of borrowing. This strategy can amplify profits when the investments perform well, as the gains are realized on a larger base of assets than the equity alone would allow. Essentially, financial leverage allows a business to invest more resources than it currently has, increasing the potential returns while simultaneously introducing greater risk, as losses can also be magnified if the investments do not perform as expected.

The other options address different concepts: assessing risk and managing cash flows are critical elements of financial management but do not encompass the specific idea of leveraging debt to increase returns. Similarly, the blending of different investment types pertains to diversification rather than leveraging debt for returns. Understanding financial leverage is key for making informed decisions about the use of debt in capital structure and investment strategy.