Leverage & Return on Equity

See how borrowing against an asset amplifies — or worsens — the return earned on your own cash (equity).

This is the mechanics of leverage in isolation: it ignores taxes, fees, loan amortization, and the risk of a margin call or forced sale. Leverage magnifies losses exactly as it magnifies gains — it is not a source of extra return by itself.

Asset value

Debt (borrowed amount)

Expected asset return

Cost of debt (interest rate)

Return on equity (leveraged)

14.00%

Unleveraged asset return

8.00%

Equity (your cash)

$125,000

Debt-to-equity ratio

3.00x

Leverage effect (boost)

+6.00%

Positive leverage: the asset's return exceeds the cost of debt, so borrowing amplifies your equity return.

How it works: ROE = ROA + (Debt ÷ Equity) × (ROA − cost of debt). The more debt relative to equity, the more the gap between the asset return and the cost of debt gets amplified — in either direction.

Limitations: a real loan amortizes (the balance and interest change over time), and real assets can be sold at a loss or trigger a margin call if leveraged too heavily. This calculator shows the mechanism for one period, not a full loan schedule.

Sources & further reading

AccountingTools: Financial Leverage