Leverage works by using debt to increase the potential return on investment. When a company borrows money, it can invest in new projects, expand operations, or acquire other businesses. The key is that the return on these investments should be higher than the cost of the borrowed funds for leverage to be beneficial.
For example, if a company borrows $1 million at an interest rate of 5%, it needs to ensure that the return on the investment made with this borrowed money is higher than 5% to make a profit.