What might a high degree of financial leverage indicate about a company?

A high degree of financial leverage indicates that a company relies heavily on debt financing. Financial leverage is calculated by comparing a company's total debt to its equity. When a company utilizes more debt relative to equity, it suggests that it is using borrowed funds to increase its potential return on investment. While excessive financial leverage can amplify returns during favorable market conditions, it also increases the company’s risk profile since it must meet debt obligations regardless of its revenue performance.

This reliance on debt means the company may have less equity cushion to absorb losses, making it more vulnerable to economic downturns or fluctuations in revenues. In contrast, if a company were more financially conservative or risk-averse, it would likely maintain lower leverage and rely more on equity financing to fund its operations. Similarly, having a strong cash position or primarily using equity financing would imply a different balance sheet structure than what is indicated by high financial leverage.