Financial leverage is derived from using debt to finance an investment. This debt creates a financial cost (interest), but if the investment generates a higher income to pay the interest, the surplus increases the profit of the company.
An example of the usefulness of this concept is found on speculation experienced in the property market. Investors buy a home, pay a small part and the rest is financed at low interest (around 4%). Within a few months, the house has appreciated greatly. And this is the cause of the housing bubble suffered by several countries, such as Spain.
For example, you buy a home for 100,000 dollars, and you pay 20,000 deposit and the remaining 80,000 is financed by mortgage. After one year, the Luxury Condo in Singaporeis sold at 150,000 dollars and returns the mortgage interest paid S$3,000.
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