Leverage

[TrueTears]

What is leverage (gearing?)

I also don't get this sentence containing the word leverage.

"Hobby Galore (a sports company) has made effective use of leverage, Hobby Galore earns more on its borrowed funds used in the business than it has to pay in the form of interest. Thus, the return to owners exceeded the return on the assets and owners benefit from leveraging."

What does that mean at all? I don't get any of it =S

[Fyrefly]

Leveraging is using someone else's money in order to make money (using liabilities to finance your business activity, rather than equity).
The goal is to make a better margin on the borrowed funds than what they charge you in interest to borrow it.

Say I get a $10,000 loan @ 10% interest (interest expense = $1000).
However, I wisely invest that money into my activities, and I get a 20% return on that money (revenue = $2000).
So I've made $2000 with that funding, and only been charged $1000 in interest.
I'm $1000 better off overall.
And, thanks to leveraging, I risked someone else's money instead of the money of the owners.


If my explanation is shit, please forgive me... I'm going to bed... now.

[TrueTears]

Ohhh right I'm starting to get it, cool thanks