In finance, what is indicated by high financial leverage?

High financial leverage refers to the use of debt to acquire additional assets or to fund operations, leading to a capital structure with a higher proportion of debt compared to equity. When a company has high financial leverage, it experiences increased risk due to its obligation to pay interest on the borrowed funds, regardless of its financial performance. This means that if the company faces a downturn or if its sales decline, it may struggle to meet these debt obligations, putting its capital at risk.

Furthermore, while high leverage can amplify returns during periods of strong performance, it can exacerbate losses when business conditions worsen. This creates a risk of capital loss since the company must cover its fixed debt costs even in adverse situations. Hence, high financial leverage signifies an increased risk of losing capital, which is why this option is correct.

In contrast, high leverage does not inherently lead to greater stability in profits, enhanced return on equity with lower risk, or steady cash flows regardless of sales, as those conditions would typically characterize lower financial risk and not high financial leverage.