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Financial leverage refers to the practice of using borrowed funds to increase the potential return on investment. By taking on debt, a company can invest in assets or projects that may yield higher returns than the cost of the borrowed funds. When the returns from the investments exceed the interest expenses on the debt, this can lead to greater profitability and growth for the business.

This concept is important because while leveraging can amplify gains, it also increases the risk; if the investment does not perform as expected and yields lower returns, the debt obligations remain, which can lead to significant financial strain. Thus, the strategic use of financial leverage can impact a company’s capital structure and overall financial health.

The other options describe different concepts that are not directly related to the definition of financial leverage. Using cash reserves for investments does not involve borrowing, and reducing debt is the opposite of leveraging up. Evaluating investment risk based solely on equity ignores the effects of leverage and does not capture the full risk profile of an investment that includes debt.