Final answer:
A highly 'geared' or 'leveraged' company has a large amount of debt compared to equity, which can lead to magnified profits or losses depending on economic conditions. It is akin to investors using margin to purchase more stock, which can be risky during market downturns.
Step-by-step explanation:
When a company is described as being highly 'geared' or 'leveraged', it means that the company has a high ratio of debt to equity. This situation indicates that the company has borrowed a significant amount of money to finance its growth, operations, or investments. High leverage can amplify profits when economic conditions are favorable but can also increase the risk of significant losses or even bankruptcy if the company's revenues decline or if interest rates rise, making the cost of debt unsustainable.
An example of high leverage can be seen when investors use margin to buy more stock than they could with their own capital by using existing stocks as collateral. When the market value of these stocks increases, the returns can be substantial. However, if the market declines significantly, both the investor and the bank lending the money can face serious financial difficulties, as seen during the 1920s. Similarly, companies with high leverage can face similar risks in adverse economic conditions.