What does it mean when a company has high leverage?

When a company has high leverage, it indicates that the company has a significant amount of debt compared to equity. This financial structure can amplify a company's returns on equity during periods of strong performance, as borrowed funds are used to finance projects or investments. However, it also means that the company is more exposed to risk during downturns or periods of lower cash flow, as it must meet its debt obligations regardless of its financial situation.

A company with high leverage uses debt as a tool to potentially increase returns, but this comes with the added responsibility of managing interest payments and principal repayment. High leverage can signify aggressive growth strategies, but it also raises concerns about solvency and financial stability since higher debt levels can increase the likelihood that a company may experience financial distress if it cannot generate sufficient cash flow to cover its obligations.

In contrast, options related to reliance on equity financing, low-risk investments, and consistent cash flow reflect different financial strategies or conditions that do not directly relate to what high leverage signifies.