What does financial leverage have to do with return on assets？

Financial leverage refers to the use of borrowed funds to increase the potential return on investment. It involves using debt to finance assets, which can amplify the returns earned on those assets. Return on assets (ROA) is a profitability ratio that measures how efficiently a company is using its assets to generate profits. Financial leverage affects ROA because it increases the amount of debt a company has, which in turn increases the interest expenses that must be paid out of earnings. This can reduce the net income generated by the assets, which can lead to a lower ROA. However, if the company is able to generate a higher return on the assets than the cost of the debt, financial leverage can increase the ROA. Therefore, financial leverage can have a significant impact on a company's return on assets.