Financial leverage refers to the use of borrowed funds to increase the potential return on investment. By using debt, a company can invest more capital than it currently has, which can amplify profits if the investment performs well. However, this also increases the risk, as losses can be magnified if the investment does not yield the expected returns. Companies often use financial leverage to finance growth or expansion, taking advantage of lower interest rates to borrow money. The key is to balance the potential benefits against the risks, as excessive leverage can lead to financial distress or bankruptcy if not managed properly.