How leverage affects firms profitability?

Leverage refers to the use of borrowed capital to increase the potential return on investment. When a firm employs leverage, it can amplify its profits if the returns on its investments exceed the cost of debt; this can enhance profitability significantly. However, excessive leverage also increases financial risk, as fixed interest payments must be met regardless of business performance. Therefore, while leverage can boost profitability, it also exposes firms to higher volatility and potential losses in adverse conditions.