While leverage can provide benefits, it also comes with significant risks:
Increased Volatility: Leverage can amplify both gains and losses, leading to greater volatility in a company's earnings and stock price. Debt Obligations: Companies must meet their debt obligations regardless of their financial performance. Failure to do so can lead to default and potentially bankruptcy. Higher Interest Costs: If a company takes on too much debt, the interest costs can become burdensome, eating into profits and reducing overall financial flexibility. Credit Risk: High levels of leverage can negatively impact a company's credit rating, making it more expensive or difficult to raise additional capital in the future.