Leverage effect

Hello! Do you know what a seesaw is? It's a board that you can play on with a friend. One person sits on one end and the other person sits on the other end. When one person pushes down on their end, the other person goes up! That's how a seesaw works.

Now, let me tell you about the leverage effect. It's kind of like a seesaw but instead of people, we are talking about money. When a company borrows money to do something like invest in new equipment or expand their business, it's kind of like pushing down on the end of the seesaw. The more money they borrow, the more their profits can go up. This is called leverage.

But just like a seesaw, if you push down too hard on one end, it can make things go wrong. If a company borrows too much money and their profits don't increase, then they might not be able to pay back the money they borrowed. This is called being over-leveraged and it can lead to big problems.

So, the leverage effect is when a company borrows money and uses it to make more profits, but they have to be careful not to borrow too much or it can lead to trouble down the road.