In financial terms, what is meant by 'leverage'?

Leverage in financial terms primarily refers to the practice of using debt to bolster investment returns. This strategy allows a company or individual to increase their potential return on investment by borrowing funds. When an entity uses leverage, it aims to amplify its investment returns more than it could achieve using only its own equity capital. The use of debt can magnify both gains and losses; thus, while it can lead to significant profits during good economic times, it can also result in substantial losses in unfavorable conditions.

The other concepts presented lend insight into leverage as well but focus on different aspects of debt usage. The ratio of debt to equity is a measure indicative of financial leverage but does not encapsulate the essence of leverage itself. The proportion of assets funded by liabilities relates to the financial structure of a company but does not directly address the strategy of using debt for investment returns. Lastly, using cash to pay off long-term debts describes a debt management strategy rather than the leveraging concept. Overall, the core notion of leverage is fundamentally tied to the relationship between debt and investment returns, clearly aligning with the first choice.