> In fact, what most businesses do is borrow money at, say, 5%, and then invest the money so it earns, say, 20%, and therefore make 15% overall.
Getting more of your capital as debt is a microoptimisation (unless there are special circumstances like different tax treatment, and usually even then) - that's the classic Modigliani-Miller result. Holding more cash makes your nominal return on equity lower, but improves your cash position, and unless you push it to the point where you're taking a real risk of actually going bankrupt the two effects balance and your risk-adjusted return is the same.
> I borrow money and buy investments with the borrowed money.
Exactly. So it really doesn't make a lot of difference how levered a given company is, because an investor can always make a more or less levered investment in the company - if a company has a lot of cash then an investor can lever up a lot, if a company has a lot of debt that same investor levers less or not at all, and ultimately either way the investor gets the same level of risk and the same return.
> It's similar to borrowing money to buy a house, and then selling the house at an appreciated price to make many multiples of your down payment.
Not really - there are all sorts of special treatments for home mortgages (in particular the mortgage interest tax deduction, the most horribly regressive piece of the tax code) that mean you're genuinely disproportionately better off to do one. But it's rare for something like that to apply to corporate borrowing.
Getting more of your capital as debt is a microoptimisation (unless there are special circumstances like different tax treatment, and usually even then) - that's the classic Modigliani-Miller result. Holding more cash makes your nominal return on equity lower, but improves your cash position, and unless you push it to the point where you're taking a real risk of actually going bankrupt the two effects balance and your risk-adjusted return is the same.
> I borrow money and buy investments with the borrowed money.
Exactly. So it really doesn't make a lot of difference how levered a given company is, because an investor can always make a more or less levered investment in the company - if a company has a lot of cash then an investor can lever up a lot, if a company has a lot of debt that same investor levers less or not at all, and ultimately either way the investor gets the same level of risk and the same return.
> It's similar to borrowing money to buy a house, and then selling the house at an appreciated price to make many multiples of your down payment.
Not really - there are all sorts of special treatments for home mortgages (in particular the mortgage interest tax deduction, the most horribly regressive piece of the tax code) that mean you're genuinely disproportionately better off to do one. But it's rare for something like that to apply to corporate borrowing.