A highly leveraged company has more debt than equity. Using debt to finance business operations is a common practice, but it is not without risk.
When a company buys assets with borrowed money, the expectation is that the assets appreciate or generate income that offsets the cost of borrowing. Leverage can increase profit, but it may also magnify loss. A company’s risk exposure occurs when the projected income does not materialize or the value of the assets falls. A company that is highly leveraged may not survive a change in market conditions, and it may be forced into bankruptcy. A company that carries less debt withstands market fluctuations.