A company may become leveraged to:

Improve business performance

For many people, a mortgage is the catalyst that makes it possible to move from renting a home to owning one. Similarly, for businesses, debt is like a catalyst that can accelerate changes at a company, allowing it to grow more rapidly.

Improve return on equity for shareholders

Debt can have a variety of effects on a company's cash flow and earnings. The equity of companies that use debt successfully to grow operations can appreciate quickly, which is ultimately what matters to equity investors.

Leverage can increase return potential

  1. Interest payments that come with debt add to a company's operating expenses and thereby reduce profits ($50 minus $10 of interest).
  2. Because future income accrues to the same equity base, leveraged companies can offer attractive returns. As long as a company's cash flow can cover its interest payments, even a smaller profit margin can result in a higher return on shareholders' equity.

    Return on equity is a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.
  3. For illustrative purposes only. Individual companies may experience different effects of leverage, including negative performance results.

« What is a leveraged company? Why might leveraged-company investing be a good idea? »

Consider these risks before investing: Investments in small and/or midsize companies increase the risk of greater price fluctuations. Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. Our focus on leveraged companies and the funds' "non-diversified" status can increase the funds' vulnerability to these factors. The use of short selling may increase these risks. Stock prices may fall or fail to rise over time for several reasons, including general financial market conditions and factors related to a specific issuer company or industry. You can lose money by investing in the funds. For Capital Spectrum, these risks also apply: Lower-rated bonds may offer higher yields in return for more risk. Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. Bond investments are subject to interest-rate risk (the risk of bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments). Interest-rate risk is greater for longer-term bonds, and credit risk is greater for below-investment-grade bonds. Unlike bonds, funds that invest in bonds have fees and expenses. Our use of short selling may increase these risks. Mortgage-backed securities are subject to prepayment risk and the risk that they may increase in value less when interest rates decline and decline in value more when interest rates rise. Stock and bond prices may fall or fail to rise over time for several reasons, including general financial market conditions and factors related to a specific issuer or industry.