TYPES OF LEVERAGES Operating Leverage Financial Leverage Combined Leverage

1. FINANCIAL MANAGEMENT
TYPES OF LEVERAGES
SNEKA R S
I MBA IT & FINANCE

2. LEVERAGE
 LEVERAGE is the use of borrowed funds (debt) for
funding the acquisition of assets in the hope that the
income of the new asset or capital gain would surpass
the cost of borrowing

3. TYPES OF LEVERAGE
OPERATING LEVERAGE – It is the relationship between sales and
EBIT and indicated business risk
FINANCIAL LEVERAGE – It is the relationship between EBIT and
EPS and indicated financial risk
COMBINED LEVERAGE – It is the relationship between sales and
EPS and indicated total risk

4. OPERATIONAL LEVERAGE
 Operating leverage is the degree to which a firm uses fixed
operating costs to magnify the effects of a change in operating
income from an increase in revenue.
 Internally, this is used to calculate breakeven sales.
Additionally, it can assist in price setting.
 Externally, the operating leverage provides information about
the operational risk of the company.
 The higher the operating leverage, the more the operating
income increases for each sale. However, the higher the
operating leverage, the higher the operational risk.

5. FINANCIAL LEVERAGE
 Financial leverage is defined as the degree to which a firm
uses fixed financial costs to magnify the effects of the firm's
returns.
 It focuses only on one single type of fixed cost, debt financing.
 If a firm has a high financial leverage, that means they are
highly levered and carry more financial risk. However, this also
increases the potential returns of the firm.

6. COMBINED LEVERAGE
 Combined leverage is a company's total risk as it relates to
operating and financial leverage.
 It helps assess a company's total risk as it relates to fixed
costs.
 The higher the combined leverage the higher the risk of the
company, but the higher the profit opportunity.