What is meant by the term 'financial leverage'?

The term 'financial leverage' refers to the strategy of using debt to increase the potential return on investment. When a company takes on debt, it can invest that borrowed money into projects or assets that are expected to yield returns higher than the cost of the debt. This approach can magnify profits when the investments perform well, thus enhancing overall financial performance.

However, it's important to balance the use of leverage because while it can lead to higher returns, it also increases risk. If the investments do not yield sufficient returns to cover the debt payments, the company could face financial distress. This concept is fundamental in finance, as it illustrates how leveraging debt can affect a company's profitability and risk profile.

The other choices focus on different aspects of financial management, such as income and expenses, cash reserves, and asset comparisons, which do not directly relate to the concept of leveraging debt to improve financial outcomes.