Impact of Operating Leverage on Operating Profit and Earning Per Shareholders
1. Operating Leverage
2. Financial Leverage
if sales change 1% , Then profits will be change more then 1%.
because fixed cost existent in cost and capital stature.
Types of Leverages
Operating leverage arises from the existence of fixed operating costs such as salary, rent, utilities etc.
A company with high fixed cost and low variable cost has high operating leverage whereas, a company with low fixed cost and high variable cost has low operating leverage.
Operating leverage magnifies both profit as well as loss .
When the sales increases profit will be magnified, when the sales decreases loss also will be magnified.
Financial leverage is the degree to which a company uses fixed interest expense securities such as debt and preference shares
The more debt financing a company is in higher financial leverage.
A high degree of financial leverage means high interest payments which negatively affect the company's bottom line earnings per share
Degree of operating leverage will tell how much is the risk related to the operating activities
Degree of financial leverage will tell how much is the risk related to the financial activities
Combined leverage takes into consideration the overall leverage including operating and financial leverage
Formulas-
Degree of Operating Leverage = Contribution / EBIT
Degree of Operating Leverage = % change in EBIT/ % change in sales
Degree of Financial Leverage = EBIT/ EBT
Degree of Financial Leverage = % change in EPS / % change in EBIT
Degree of Combined Leverage = OL * FL
Degree of Combined Leverage = % change in EPS / % change in Sales
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Leverage refers to using fixed costs to increase returns for owners. In finance, leverage allows firms to use fixed-cost funds like debt and preferred shares to increase earnings for equity shareholders. There are three types of leverage: operating, financial, and combined. Operating leverage measures how fixed costs affect operating income with sales changes. Financial leverage measures how interest expenses affect EPS. Combined leverage multiplies operating and financial leverage to measure total leverage.
This document discusses the different types of leverage used in financial management. It defines leverage as a firm's ability to use fixed assets or funds to increase returns for owners. The three main types of leverage discussed are operating leverage, financial leverage, and combined leverage. Operating leverage refers to using fixed costs to earn more revenue. Financial leverage means using debt funds that have fixed interest charges. Combined leverage is the multiplier effect of using both operating and financial leverage, where a small sales change can greatly impact earnings per share. An example is provided to illustrate the calculations of degree of operating leverage, financial leverage, and combined leverage.
DEFINITION of 'Operating Leverage'
A measurement of the degree to which a firm or project incurs a combination of fixed and variable costs.
1. A business that makes few sales, with each sale providing a very high gross margin, is said to be highly leveraged. A business that makes many sales, with each sale contributing a very slight margin, is said to be less leveraged. As the volume of sales in a business increases, each new sale contributes less to fixed costs and more to profitability.
2. A business that has a higher proportion of fixed costs and a lower proportion of variable costs is said to have used more operating leverage. Those businesses with lower fixed costs and higher variable costs are said to employ less operating leverage.
Financial Leverage:
Financial leverage is the degree to which a company uses fixed-income securities such as debt and preferred equity. The more debt financing a company uses, the higher its financial leverage. A high degree of financial leverage means high interest payments, which negatively affect the company's bottom-line earnings per share.
Financial risk is the risk to the stockholders that is caused by an increase in debt and preferred equities in a company's capital structure. As a company increases debt and preferred equities, interest payments increase, reducing EPS. As a result, risk to stockholder return is increased. A company should keep its optimal capital structure in mind when making financing decisions to ensure any increases in debt and preferred equity increase the value of the company.
This document discusses different types of leverage used in financial analysis:
1. Operating leverage measures how fixed costs magnify changes in sales on earnings before interest and taxes (EBIT). It is calculated as the percentage change in EBIT divided by the percentage change in sales.
2. Financial leverage measures how fixed financial charges magnify the effect of changes in EBIT on earnings per share (EPS). It is calculated as the percentage change in EPS divided by the percentage change in EBIT.
3. Combined leverage measures the combined effect of operating and financial leverage on EPS. It is calculated as the percentage change in EPS divided by the percentage change in sales.
The document provides examples and explanations of how to calculate
This document discusses two types of leverage: operating leverage and financial leverage. Operating leverage is concerned with how fixed costs affect operating profits with changes in sales. It can be calculated using break-even analysis. Financial leverage refers to how the use of fixed financial charges, like interest and dividends, can magnify the effects of changes in earnings before interest and taxes (EBIT) on earnings per share. An example shows how to calculate financial leverage given information about a company's capital structure, EBIT, interest expenses, and preferred dividends.
This document discusses the concepts of leverage, including operating leverage and financial leverage. It provides formulas to calculate the degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of combined leverage (DCL). An example is given of a levered company where a 10% increase in sales would result in a 17.14% increase in operating income due to an DOL of 1.714, and a 10% increase in operating income would lead to a 15.56% increase in EPS due to a DFL of 1.556. The combined DCL is calculated as 2.667.
Leverage n finance, gearing is borrowing money to supplement existing funds f...akhilesh1234
Leverage refers to the use of fixed costs by a firm to magnify the effects of changes in sales on profits. There are three types of leverage:
1) Operating leverage measures how changes in sales affect operating income (EBIT) due to fixed operating costs. A high degree of operating leverage means small sales changes have large effects on profits.
2) Financial leverage measures how changes in operating income (EBIT) affect earnings per share (EPS) due to fixed financing costs. A high degree of financial leverage means small profit changes significantly impact EPS.
3) Combined leverage considers how operating and financial leverage together magnify the effects of sales changes on EPS. The degree of combined leverage is the
Types of Leverages
Operating leverage arises from the existence of fixed operating costs such as salary, rent, utilities etc.
A company with high fixed cost and low variable cost has high operating leverage whereas, a company with low fixed cost and high variable cost has low operating leverage.
Operating leverage magnifies both profit as well as loss .
When the sales increases profit will be magnified, when the sales decreases loss also will be magnified.
Financial leverage is the degree to which a company uses fixed interest expense securities such as debt and preference shares
The more debt financing a company is in higher financial leverage.
A high degree of financial leverage means high interest payments which negatively affect the company's bottom line earnings per share
Degree of operating leverage will tell how much is the risk related to the operating activities
Degree of financial leverage will tell how much is the risk related to the financial activities
Combined leverage takes into consideration the overall leverage including operating and financial leverage
Formulas-
Degree of Operating Leverage = Contribution / EBIT
Degree of Operating Leverage = % change in EBIT/ % change in sales
Degree of Financial Leverage = EBIT/ EBT
Degree of Financial Leverage = % change in EPS / % change in EBIT
Degree of Combined Leverage = OL * FL
Degree of Combined Leverage = % change in EPS / % change in Sales
Thank you for watching
Subscribe to DevTech Finance for more videos.
Leverage refers to using fixed costs to increase returns for owners. In finance, leverage allows firms to use fixed-cost funds like debt and preferred shares to increase earnings for equity shareholders. There are three types of leverage: operating, financial, and combined. Operating leverage measures how fixed costs affect operating income with sales changes. Financial leverage measures how interest expenses affect EPS. Combined leverage multiplies operating and financial leverage to measure total leverage.
This document discusses the different types of leverage used in financial management. It defines leverage as a firm's ability to use fixed assets or funds to increase returns for owners. The three main types of leverage discussed are operating leverage, financial leverage, and combined leverage. Operating leverage refers to using fixed costs to earn more revenue. Financial leverage means using debt funds that have fixed interest charges. Combined leverage is the multiplier effect of using both operating and financial leverage, where a small sales change can greatly impact earnings per share. An example is provided to illustrate the calculations of degree of operating leverage, financial leverage, and combined leverage.
DEFINITION of 'Operating Leverage'
A measurement of the degree to which a firm or project incurs a combination of fixed and variable costs.
1. A business that makes few sales, with each sale providing a very high gross margin, is said to be highly leveraged. A business that makes many sales, with each sale contributing a very slight margin, is said to be less leveraged. As the volume of sales in a business increases, each new sale contributes less to fixed costs and more to profitability.
2. A business that has a higher proportion of fixed costs and a lower proportion of variable costs is said to have used more operating leverage. Those businesses with lower fixed costs and higher variable costs are said to employ less operating leverage.
Financial Leverage:
Financial leverage is the degree to which a company uses fixed-income securities such as debt and preferred equity. The more debt financing a company uses, the higher its financial leverage. A high degree of financial leverage means high interest payments, which negatively affect the company's bottom-line earnings per share.
Financial risk is the risk to the stockholders that is caused by an increase in debt and preferred equities in a company's capital structure. As a company increases debt and preferred equities, interest payments increase, reducing EPS. As a result, risk to stockholder return is increased. A company should keep its optimal capital structure in mind when making financing decisions to ensure any increases in debt and preferred equity increase the value of the company.
This document discusses different types of leverage used in financial analysis:
1. Operating leverage measures how fixed costs magnify changes in sales on earnings before interest and taxes (EBIT). It is calculated as the percentage change in EBIT divided by the percentage change in sales.
2. Financial leverage measures how fixed financial charges magnify the effect of changes in EBIT on earnings per share (EPS). It is calculated as the percentage change in EPS divided by the percentage change in EBIT.
3. Combined leverage measures the combined effect of operating and financial leverage on EPS. It is calculated as the percentage change in EPS divided by the percentage change in sales.
The document provides examples and explanations of how to calculate
This document discusses two types of leverage: operating leverage and financial leverage. Operating leverage is concerned with how fixed costs affect operating profits with changes in sales. It can be calculated using break-even analysis. Financial leverage refers to how the use of fixed financial charges, like interest and dividends, can magnify the effects of changes in earnings before interest and taxes (EBIT) on earnings per share. An example shows how to calculate financial leverage given information about a company's capital structure, EBIT, interest expenses, and preferred dividends.
This document discusses the concepts of leverage, including operating leverage and financial leverage. It provides formulas to calculate the degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of combined leverage (DCL). An example is given of a levered company where a 10% increase in sales would result in a 17.14% increase in operating income due to an DOL of 1.714, and a 10% increase in operating income would lead to a 15.56% increase in EPS due to a DFL of 1.556. The combined DCL is calculated as 2.667.
Leverage n finance, gearing is borrowing money to supplement existing funds f...akhilesh1234
Leverage refers to the use of fixed costs by a firm to magnify the effects of changes in sales on profits. There are three types of leverage:
1) Operating leverage measures how changes in sales affect operating income (EBIT) due to fixed operating costs. A high degree of operating leverage means small sales changes have large effects on profits.
2) Financial leverage measures how changes in operating income (EBIT) affect earnings per share (EPS) due to fixed financing costs. A high degree of financial leverage means small profit changes significantly impact EPS.
3) Combined leverage considers how operating and financial leverage together magnify the effects of sales changes on EPS. The degree of combined leverage is the
1. Leverage is an investment technique where a small amount of capital is used to control a larger investment through the use of borrowed funds. This gives an investor significant financial influence.
2. There are three types of leverage: operating, financial, and composite. Operating leverage measures how operating profits change with sales. Financial leverage shows how taxable income changes with operating profits. Composite leverage considers the overall impact of changes in sales on taxable income.
3. Operating leverage exists when a firm has fixed costs that do not vary with output. It depends on fixed costs, contribution margin, and sales volume. Financial leverage is caused by the use of fixed interest debt. Composite leverage combines the effects of operating and financial leverage
This document discusses key concepts related to costs, profitability, and financial management. It defines different types of costs such as fixed costs, variable costs, direct costs, and indirect costs. It also explains concepts like break-even analysis, which is used to determine the sales volume needed for a firm to reach zero profits. Contribution margin and margin of safety are introduced as important metrics. Leverage and its impact on firm value through the mixture of debt versus equity is also summarized.
This document discusses different types of leverage used in business. There are three main types: operating leverage, financial leverage, and combined leverage. Operating leverage measures how fixed costs affect operating profit with changes in sales. Financial leverage shows how interest expenses affect net income. Combined leverage considers both operating and financial leverage and their combined impact on earnings per share with sales changes. The degree of each type of leverage can be calculated to understand the risk involved at different levels.
Leverage provides a framework for a firm's financing decisions and can take three forms: operating, financial, and combined. Operating leverage is associated with asset investments and is determined by the relationship between sales revenue and earnings before interest and taxes (EBIT). Financial leverage results from fixed financial charges and examines the effect of changes in EBIT on earnings per share (EPS). Combined leverage is the product of operating and financial leverage and indicates the effect that sales changes will have on EPS.
Leverage refers to using borrowed capital to increase the potential return of an investment. It is calculated as the debt-to-equity ratio. There are different types of leverage including operating leverage and financial leverage. Operating leverage measures how fixed costs affect earnings, while financial leverage measures how interest expenses affect earnings. The degree of combined leverage summarizes how operating and financial leverage together impact earnings per share given a change in sales. It can help determine the optimal levels of operating and financial leverage for a firm.
This document discusses operating and financial leverage. It defines operating leverage as the use of fixed operating costs, which can increase sensitivity to sales changes. Financial leverage refers to the use of fixed financing costs. The document explains how to calculate break-even points, degree of operating leverage, and degree of financial leverage. It also shows how financing choices like debt, equity or preferred stock affect earnings per share through an EBIT-EPS analysis.
This document discusses different types of leverage used in corporate finance including operating, financial, and combined leverage. It provides definitions and formulas for calculating each type. Examples are given to demonstrate how to calculate the leverages for companies based on information provided about sales, costs, debt, and other financial details. The document suggests that companies with higher leverage may have greater financial risk but also greater potential profits if sales increase as projected.
This document discusses different types of leverage used in finance including operating leverage, financial leverage, and composite leverage. It defines operating leverage as a firm's ability to use fixed costs to magnify returns, which is determined by the cost structure. Financial leverage is defined as using fixed financing charges to magnify earnings effects, determined by capital structure. Composite leverage expresses the relationship between sales, operating profits, and taxable income. It combines the effects of operating and financial leverage.
Leverage refers to using debt, borrowed money, or derivative instruments to amplify gains and losses from investments or business operations. There are two types of leverage: operating leverage, which is the use of fixed operating costs, and financial leverage, which is the use of fixed financing costs. The document defines various leverage metrics such as degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of combined leverage (DCL) which measure how changes in sales, operating income, and earnings per share are amplified through the use of leverage.
Mba 2 fm u 4 operating and financial leverage,management of working capitalRai University
This document discusses financial and operating leverage. It defines financial leverage as using debt and preference shares in addition to equity in a company's capital structure. This allows earnings from fixed-cost funds like debt to be leveraged to increase returns to shareholders if the cost of debt is lower than returns on assets. However, it also increases risk. The document also defines operating leverage as how much a company's operating profits (EBIT) change with sales. It discusses how financial and operating leverage combine to impact earnings per share and risk.
Leverage Analysis In Financial Management
Leverage is the burden which arises with the presence of fixed cost in business
If a business is leveraged , it means that the firm has borrowed money to finance the purchase of assets
With larger presence of fixed cost profit margins can really get squeezed when the business scenario is not favorable and the sales fall. This adds risk to the stocks of such companies
Conversely, with the same larger presence of fixed cost company would experience magnified profits with increase in sales as the cost level remaining constant
Operating Leverage- It arises with the presence of firm’s fixed operating costs such as salaries, rent, depreciation, utility expense etc.
Financial Leverage- It arises with the presence of firm’s fixed financing costs such as interest expenses on debt and preference shares
Combined Leverage- Product of operating and financial leverage
Formulas for calculation of leverages-
Operating Leverage = Contribution / EBIT
Operating Leverage = % change in EBIT/ % change in sales
Financial Leverage = EBIT/ EBT
Financial Leverage = % change in EPS / % change in EBIT
Combined Leverage = OL * FL
Degree of Combined Leverage = % change in EPS / % change in Sales
Thank you for watching
Subscribe to my channel DevTech Finance
Leverage - Financial, Operating and CombinedJithin Thomas
Leverage refers to assets or sources of finance that a firm uses which require fixed payments. There are three types of leverage: operating, financial, and combined. Operating leverage is caused by fixed operating expenses and measures how changes in sales impact earnings before interest and taxes. Financial leverage is caused by fixed financial costs like interest and measures how changes in earnings before interest and taxes affect earnings per share. Combined leverage multiplies the effects of operating and financial leverage and represents the total risk faced by a firm.
The document defines and discusses different types of leverage:
- Operating leverage refers to using fixed operating costs to magnify the effects of sales changes on profits. It is measured as the percentage change in profits from a percentage change in sales.
- Financial leverage uses fixed financing costs to magnify the effects of changes in operating profits on earnings. It is measured as the percentage change in taxable income from a percentage change in operating profits.
- Combined leverage represents the combined effects of operating and financial leverage in magnifying the effects of sales changes on earnings per share. It is calculated as the product of operating and financial leverage.
The concept of leverage has its origin in science. It means influence of one force over
another. Since financial items are inter-related, change in one, causes change in profit. In the
context of financial management, the term ‘leverage’ means sensitiveness of one financial variable
to change in another. The measure of this sensitiveness is expressed as a ratio and is called degree
of leverage.
This document discusses financial and operating leverage. It defines key terms like capital structure, financial leverage, and operating leverage. It explains how financial leverage can increase return on equity but also increases financial risk for shareholders. The document also discusses how operating leverage and financial leverage work together to impact earnings per share, and shows the tradeoff between risk and return that companies face when determining their optimal capital structure.
The document discusses different types of leverage used by firms, including operating leverage, financial leverage, and total leverage. It defines operating leverage as using fixed operating costs, which can magnify the impact of sales fluctuations on operating profits. Financial leverage refers to using fixed financing costs, like interest expenses, which can magnify the impact of earnings fluctuations on earnings per share. Total leverage is the combination of operating and financial leverage, resulting in sales changes having an even greater impact on EPS. The document also discusses factors that influence business risk, such as variability in demand, prices, products, and fixed costs.
Operating, financial and combined leverageSimran Kaur
This document discusses different types of leverage used in business - operating, financial, and combined leverage. Operating leverage is related to fixed operating costs and how they magnify changes in sales on earnings. Financial leverage uses fixed financing costs to magnify the effect on earnings per share. Combined leverage is the product of operating and financial leverage. Degrees of leverage are defined to quantify the effects. Indifference points are discussed as the earnings level where leveraged vs unleveraged financing plans yield equal shareholder returns. Analysis of earnings-per-share for different financing options is based on expected earnings levels relative to the indifference point.
This document discusses the concept of leverage and its types - operating leverage and financial leverage. It explains how operating leverage is determined by the fixed costs in a company's operations and how it magnifies the effect of changes in sales on operating profits. Financial leverage is determined by the fixed financial costs and how it magnifies the effect of changes in earnings on shareholder returns. The document also discusses factors influencing a company's capital structure and various capital structure theories.
Definition of leverage, Types of Leverages, meaning of operating leverage, financial leverage, combined leverage, Formulas for Operating and financial leverage, variable cost, fixed cost, EBIT, Contribution, EPS-EBIT Analysis, Income statement, practical problems on leverages, etc.
Leverage refers to using fixed costs to magnify a firm's profits but also increases risk. Operating leverage is the use of fixed operating costs and impacts how volume affects profits. Financial leverage is the use of debt financing and impacts how changes in operating profits affect earnings per share. Firms must consider the appropriate level of operating and financial leverage to balance higher potential profits with increased risk of losses or bankruptcy.
This document summarizes a lecture on leverage given by Dr. Mahmoud Otaify. It defines leverage and differentiates between operating and financial leverage. It provides examples to calculate the degree of operating leverage and degree of financial leverage. The document discusses how leverage increases both business risk and financial risk for a company. It also examines how leverage impacts earnings per share and the relationship between earnings before interest and taxes and earnings per share under different capital structures.
1. Leverage is an investment technique where a small amount of capital is used to control a larger investment through the use of borrowed funds. This gives an investor significant financial influence.
2. There are three types of leverage: operating, financial, and composite. Operating leverage measures how operating profits change with sales. Financial leverage shows how taxable income changes with operating profits. Composite leverage considers the overall impact of changes in sales on taxable income.
3. Operating leverage exists when a firm has fixed costs that do not vary with output. It depends on fixed costs, contribution margin, and sales volume. Financial leverage is caused by the use of fixed interest debt. Composite leverage combines the effects of operating and financial leverage
This document discusses key concepts related to costs, profitability, and financial management. It defines different types of costs such as fixed costs, variable costs, direct costs, and indirect costs. It also explains concepts like break-even analysis, which is used to determine the sales volume needed for a firm to reach zero profits. Contribution margin and margin of safety are introduced as important metrics. Leverage and its impact on firm value through the mixture of debt versus equity is also summarized.
This document discusses different types of leverage used in business. There are three main types: operating leverage, financial leverage, and combined leverage. Operating leverage measures how fixed costs affect operating profit with changes in sales. Financial leverage shows how interest expenses affect net income. Combined leverage considers both operating and financial leverage and their combined impact on earnings per share with sales changes. The degree of each type of leverage can be calculated to understand the risk involved at different levels.
Leverage provides a framework for a firm's financing decisions and can take three forms: operating, financial, and combined. Operating leverage is associated with asset investments and is determined by the relationship between sales revenue and earnings before interest and taxes (EBIT). Financial leverage results from fixed financial charges and examines the effect of changes in EBIT on earnings per share (EPS). Combined leverage is the product of operating and financial leverage and indicates the effect that sales changes will have on EPS.
Leverage refers to using borrowed capital to increase the potential return of an investment. It is calculated as the debt-to-equity ratio. There are different types of leverage including operating leverage and financial leverage. Operating leverage measures how fixed costs affect earnings, while financial leverage measures how interest expenses affect earnings. The degree of combined leverage summarizes how operating and financial leverage together impact earnings per share given a change in sales. It can help determine the optimal levels of operating and financial leverage for a firm.
This document discusses operating and financial leverage. It defines operating leverage as the use of fixed operating costs, which can increase sensitivity to sales changes. Financial leverage refers to the use of fixed financing costs. The document explains how to calculate break-even points, degree of operating leverage, and degree of financial leverage. It also shows how financing choices like debt, equity or preferred stock affect earnings per share through an EBIT-EPS analysis.
This document discusses different types of leverage used in corporate finance including operating, financial, and combined leverage. It provides definitions and formulas for calculating each type. Examples are given to demonstrate how to calculate the leverages for companies based on information provided about sales, costs, debt, and other financial details. The document suggests that companies with higher leverage may have greater financial risk but also greater potential profits if sales increase as projected.
This document discusses different types of leverage used in finance including operating leverage, financial leverage, and composite leverage. It defines operating leverage as a firm's ability to use fixed costs to magnify returns, which is determined by the cost structure. Financial leverage is defined as using fixed financing charges to magnify earnings effects, determined by capital structure. Composite leverage expresses the relationship between sales, operating profits, and taxable income. It combines the effects of operating and financial leverage.
Leverage refers to using debt, borrowed money, or derivative instruments to amplify gains and losses from investments or business operations. There are two types of leverage: operating leverage, which is the use of fixed operating costs, and financial leverage, which is the use of fixed financing costs. The document defines various leverage metrics such as degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of combined leverage (DCL) which measure how changes in sales, operating income, and earnings per share are amplified through the use of leverage.
Mba 2 fm u 4 operating and financial leverage,management of working capitalRai University
This document discusses financial and operating leverage. It defines financial leverage as using debt and preference shares in addition to equity in a company's capital structure. This allows earnings from fixed-cost funds like debt to be leveraged to increase returns to shareholders if the cost of debt is lower than returns on assets. However, it also increases risk. The document also defines operating leverage as how much a company's operating profits (EBIT) change with sales. It discusses how financial and operating leverage combine to impact earnings per share and risk.
Leverage Analysis In Financial Management
Leverage is the burden which arises with the presence of fixed cost in business
If a business is leveraged , it means that the firm has borrowed money to finance the purchase of assets
With larger presence of fixed cost profit margins can really get squeezed when the business scenario is not favorable and the sales fall. This adds risk to the stocks of such companies
Conversely, with the same larger presence of fixed cost company would experience magnified profits with increase in sales as the cost level remaining constant
Operating Leverage- It arises with the presence of firm’s fixed operating costs such as salaries, rent, depreciation, utility expense etc.
Financial Leverage- It arises with the presence of firm’s fixed financing costs such as interest expenses on debt and preference shares
Combined Leverage- Product of operating and financial leverage
Formulas for calculation of leverages-
Operating Leverage = Contribution / EBIT
Operating Leverage = % change in EBIT/ % change in sales
Financial Leverage = EBIT/ EBT
Financial Leverage = % change in EPS / % change in EBIT
Combined Leverage = OL * FL
Degree of Combined Leverage = % change in EPS / % change in Sales
Thank you for watching
Subscribe to my channel DevTech Finance
Leverage - Financial, Operating and CombinedJithin Thomas
Leverage refers to assets or sources of finance that a firm uses which require fixed payments. There are three types of leverage: operating, financial, and combined. Operating leverage is caused by fixed operating expenses and measures how changes in sales impact earnings before interest and taxes. Financial leverage is caused by fixed financial costs like interest and measures how changes in earnings before interest and taxes affect earnings per share. Combined leverage multiplies the effects of operating and financial leverage and represents the total risk faced by a firm.
The document defines and discusses different types of leverage:
- Operating leverage refers to using fixed operating costs to magnify the effects of sales changes on profits. It is measured as the percentage change in profits from a percentage change in sales.
- Financial leverage uses fixed financing costs to magnify the effects of changes in operating profits on earnings. It is measured as the percentage change in taxable income from a percentage change in operating profits.
- Combined leverage represents the combined effects of operating and financial leverage in magnifying the effects of sales changes on earnings per share. It is calculated as the product of operating and financial leverage.
The concept of leverage has its origin in science. It means influence of one force over
another. Since financial items are inter-related, change in one, causes change in profit. In the
context of financial management, the term ‘leverage’ means sensitiveness of one financial variable
to change in another. The measure of this sensitiveness is expressed as a ratio and is called degree
of leverage.
This document discusses financial and operating leverage. It defines key terms like capital structure, financial leverage, and operating leverage. It explains how financial leverage can increase return on equity but also increases financial risk for shareholders. The document also discusses how operating leverage and financial leverage work together to impact earnings per share, and shows the tradeoff between risk and return that companies face when determining their optimal capital structure.
The document discusses different types of leverage used by firms, including operating leverage, financial leverage, and total leverage. It defines operating leverage as using fixed operating costs, which can magnify the impact of sales fluctuations on operating profits. Financial leverage refers to using fixed financing costs, like interest expenses, which can magnify the impact of earnings fluctuations on earnings per share. Total leverage is the combination of operating and financial leverage, resulting in sales changes having an even greater impact on EPS. The document also discusses factors that influence business risk, such as variability in demand, prices, products, and fixed costs.
Operating, financial and combined leverageSimran Kaur
This document discusses different types of leverage used in business - operating, financial, and combined leverage. Operating leverage is related to fixed operating costs and how they magnify changes in sales on earnings. Financial leverage uses fixed financing costs to magnify the effect on earnings per share. Combined leverage is the product of operating and financial leverage. Degrees of leverage are defined to quantify the effects. Indifference points are discussed as the earnings level where leveraged vs unleveraged financing plans yield equal shareholder returns. Analysis of earnings-per-share for different financing options is based on expected earnings levels relative to the indifference point.
This document discusses the concept of leverage and its types - operating leverage and financial leverage. It explains how operating leverage is determined by the fixed costs in a company's operations and how it magnifies the effect of changes in sales on operating profits. Financial leverage is determined by the fixed financial costs and how it magnifies the effect of changes in earnings on shareholder returns. The document also discusses factors influencing a company's capital structure and various capital structure theories.
Definition of leverage, Types of Leverages, meaning of operating leverage, financial leverage, combined leverage, Formulas for Operating and financial leverage, variable cost, fixed cost, EBIT, Contribution, EPS-EBIT Analysis, Income statement, practical problems on leverages, etc.
Leverage refers to using fixed costs to magnify a firm's profits but also increases risk. Operating leverage is the use of fixed operating costs and impacts how volume affects profits. Financial leverage is the use of debt financing and impacts how changes in operating profits affect earnings per share. Firms must consider the appropriate level of operating and financial leverage to balance higher potential profits with increased risk of losses or bankruptcy.
This document summarizes a lecture on leverage given by Dr. Mahmoud Otaify. It defines leverage and differentiates between operating and financial leverage. It provides examples to calculate the degree of operating leverage and degree of financial leverage. The document discusses how leverage increases both business risk and financial risk for a company. It also examines how leverage impacts earnings per share and the relationship between earnings before interest and taxes and earnings per share under different capital structures.
This document provides an overview of capital structure decision-making and various approaches to determining the relationship between capital structure and firm value. It discusses the net income approach, which states that capital structure is relevant to firm value, as changing the debt-equity ratio will alter the overall cost of capital and valuation. The net income approach assumes no taxes, cheaper debt than equity, and that debt use does not impact investor risk perception. The document also mentions the traditional and Modigliani-Miller approaches regarding capital structure irrelevance versus relevance to firm value.
Financial Statement Analysis & Projections.
Presented by: Mr. Ashraf Heleka, GOL Trainer
Socialize your Business, Maadi Public Library, Cairo, Egypt.
Organized by IRC, US-Embassy in Cairo
26 March, 2013
This document provides an overview of leverages including operating leverage, financial leverage, and combined leverage. It defines leverage as using assets or funds to pay fixed returns. It discusses the differences between debt and equity financing. It also covers various leverage concepts like trading on equity, break-even analysis, EBIT-EPS analysis, and measures of operating and financial leverage. The document aims to introduce students to important leverage concepts and their applications in financial management.
This presentation is an overview of Leverage.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
- Costs can be classified as either variable or fixed based on how they react to changes in business activity
- Variable costs change in proportion to changes in activity, while fixed costs remain unchanged with activity levels
- Understanding cost behavior and classifications is important for cost-volume-profit (CVP) analysis, which analyzes the relationship between costs, sales volume, and profits
This document discusses operating leverage, financial leverage, and combined leverage. It defines key terms like operating leverage, financial leverage, fixed costs, variable costs, and provides examples and calculations for:
- Degree of operating leverage (DOL)
- Degree of financial leverage (DFL)
- Degree of combined leverage (DCL)
- Breakeven analysis and charts
- An example calculation using financial statements for Webb's Inc. to illustrate the effects of a 10% increase in sales on earnings, operating income, and earnings per share through the application of leverage.
1. Calculate contribution margin per customer as average revenue ($8) minus average variable cost ($3), which is $5.
2. Calculate break-even point in customers as fixed costs ($450,000) divided by contribution margin per customer ($5), which is 90,000 customers.
3. Calculate taxable income as contribution margin ($5 per customer) times number of customers minus fixed costs ($450,000).
4. Calculate income taxes as 30% of taxable income.
5. Calculate net income as taxable income minus income taxes.
This document defines key financial terms like price, profit, return on investment (ROI), and provides examples of how to calculate operational costs, selling price, total sales, profit, and ROI for a tilapia farming business. Specifically, it calculates the expenses, production cost per kilogram, selling price, sales, and profit for a farm that produced 2,000kg of tilapia. The document also provides a formula for calculating ROI and gives another example to calculate various financial metrics for a hypothetical aquaculture business.
This document discusses operating and financial leverage. It defines operating leverage as a firm's ability to magnify changes in sales through the use of fixed operating costs. Financial leverage refers to the relationship between a firm's earnings before interest and taxes (EBIT) and earnings available to shareholders. The document provides examples to illustrate how both operating and financial leverage can amplify the percentage changes in profits resulting from changes in sales or EBIT. It also introduces formulas to calculate the degree of operating leverage (DOL) and degree of financial leverage (DFL).
This document provides an introduction to cost-volume-profit (CVP) analysis and its key concepts and formulas. CVP analysis is used to determine how changes in costs and volume affect a company's operating income and net income. The document defines terms like contribution margin, contribution margin ratio, break-even point, margin of safety, and target profit. It also presents the formulas and assumptions used in CVP analysis and provides an example of its application to a company's financial data.
This document discusses key concepts in financial management including business units, types of business organizations, assets, basic financial problems, the role of financial managers and markets, and goals of financial management. It also covers topics like productivity and profitability as scale increases, the effects of financial leverage based on cost of debt and debt-equity ratios, and how these factors can impact investment profitability.
This document discusses key concepts in financial management including business units, types of business organizations, assets, basic problems financial managers address, the role of financial managers and markets, and goals of financial management. It also examines concepts like productivity, economies of scale, financial leverage, and the effects of debt-equity ratios on profitability. Specifically, it finds that higher productivity and scale can increase profitability, while higher debt can increase or decrease profitability depending on whether the cost of debt is lower or higher than the rate of return.
1.
Prepare and analize the common statement for Anandam Manufacturing Company. Show all
calculations.
2.
Prepare and analize the cash flow statement for Anandam Manufacturing Company. Show all
calculations.
3.
Calculate the ratios based on case Exhibit 3. Show all calculations. Based on financial analysis
of financial statements, would a loan officer grant a loan to Anandam financial company?
EXHIBIT 3: INDUSTRY AVERAGE OF KEY RATIos Sector Average Ratio 2:301 Current
ratio Acid test ratio (quick ratio) 120 Receivable tunover ratioimes turnover 52 days Receivable
days Inventory turmover ratio Inventory days Long-term detttototal debt Debt-to-equity ratio
Gross profit rato Net profit ratio Retun on equity Retum on total assets 4.85 times 75 days 24%
35% 40% 18% 22% 10% Total asset turnover ratio Ti Fixed asset turnover ratio Current asset
tunover ratio3 interest coverage ratio (tmes 10 nterest earned Warking captal smover ratio Retu
on ed sset
Solution
1….Common -size Income statement 2012-13 % to Total sales 2013-14 % to Total sales
2014-15 % to Total sales Analysis of % to Total sales proportion Sales Cash 200 10.00%
480 10.00% 800 10.00% Credit 1800 90.00% 4320 90.00% 7200 90.00% Total Sales 2000
100.00% 4800 100.00% 8000 100.00% COGS 1240 62.00% 2832 59.00% 4800 60.00%
COGS has reduced in the last 2 yrs. Gross profit 760 38.00% 1968 41.00% 3200 40.00% so,
G/P has increased Operating Expenses: Gen.adm.& sell.exp. 80 4.00% 450 9.38% 1000
12.50% % to sales has doubled in 2013-14 & increased by more than 25% in 2014-15
Depreciation 100 5.00% 400 8.33% 660 8.25% Has increased by 3% in the last 2 yrs.
Int.exp.(on borrowings) 60 3.00% 158 3.29% 340 4.25% Has slightly increased in 2014-15
Profit before tax(PBT) 520 26.00% 960 20.00% 1200 15.00% PBT% has reduced gradually in
both the yrs.due to increase in all operating expenses esp.gen admn.& sell exp. Tax at 30% 156
7.80% 288 6.00% 360 4.50% Decrease % due to decrease in profit % Profit after tax(PAT) 364
18.20% 672 14.00% 840 10.50% PAT% has reduced gradually in both the yrs.due to increase in
all operating expenses esp.gen admn.& sell exp. Common-size Balance
Sheet Assets % to Total % to Total % to Total Fixed assets(net of dep) 1900 74.22%
2500 44.64% 4700 51.33% Assets have decreased to the total Current assets Cash & Cash
equivalents 40 1.56% 100 1.79% 106 1.16% Slight variation in ratio to total Accounts
Receivables 300 11.72% 1500 26.79% 2100 22.94% Has increased in 2013-14 & again
decreased in 2014-15 Inventories 320 12.50% 1500 26.79% 2250 24.57% Has increased in
2013-14 & again decreased in 2014-15 Total 2560 100.00% 5600 100.00% 9156 100.00%
Equity & Liabilities Equity share capital($ 10) 1200 46.88% 1600 28.57% 2000 21.84%
Decreased steadily in all the 2 yrs. Reserves & surplus 364 14.22% 1036 18.50% 1876 20.49%
Increased steadily in both 2 yrs.due to increase in $ net income in those yrs. Long-term
borrowings 736 28.75% 1236 22.07% 2500 27.30% Decreased in 2013-14 & again increased i.
This document defines and explains various types of leverage including accounting, notional, economic, operating, and financial leverage. It also discusses degrees of operating leverage, financial leverage, and total leverage. Leverage involves using assets, equity, debt, or derivatives to multiply gains and losses. It allows firms to magnify returns but also increases risk. The document provides examples of calculating break-even points in units and sales. Operating leverage reflects the impact of revenue changes on profits while financial leverage depends on a firm's capital structure.
This presentation is an overview of Capital Structure Theories.
Dr. Soheli Ghose ( Ph.D (University of Calcutta), M.Phil, M.Com, M.B.A., NET (JRF), B. Ed).
Assistant Professor, Department of Commerce,St. Xavier's College, Kolkata.
Guest Faculty, M.B.A. Finance, University of Calcutta, Kolkata
This document discusses methods for estimating the income and expenses of a real estate property to determine its value. It describes how to calculate potential gross income, vacancy and credit losses to determine effective gross income. Operating expenses like management, taxes, insurance and reserves are then subtracted to get net operating income. This income can be capitalized using market rates or discounted in a cash flow analysis to estimate the property's worth. The document provides an example analysis that values the property at $80,000 using direct capitalization and $103,000 using discounted cash flow.
The document discusses capital structure decisions and financial management concepts like operating leverage, financial leverage, and theories of capital structure. It provides examples and solutions to calculate leverage, break-even point, return on equity, debt service coverage ratio, and optimal capital structure for different companies based on their capital structure and financial details.
- Leverage provides the framework for financing decisions and can be defined as using an asset or source of funds that requires paying a fixed cost or return.
- Operating leverage is associated with fixed operating costs and how much they magnify changes in sales on operating profits. Financial leverage measures how debt impacts changes in earnings per share.
- Degree of operating leverage (DOL) and degree of financial leverage (DFL) are used to measure the sensitivity of profits and earnings to changes in sales and operating profits respectively. Higher leverage means greater risk but also greater potential returns.
Similar to Financial leverage Operating Leverage Combined Leverage (20)
[4:55 p.m.] Bryan Oates
OJPs are becoming a critical resource for policy-makers and researchers who study the labour market. LMIC continues to work with Vicinity Jobs’ data on OJPs, which can be explored in our Canadian Job Trends Dashboard. Valuable insights have been gained through our analysis of OJP data, including LMIC research lead
Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
Decoding job postings: Improving accessibility for neurodivergent job seekers
Improving the quality and accessibility of job postings is one way to reduce employment barriers for neurodivergent people.
Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
5 Tips for Creating Standard Financial ReportsEasyReports
Well-crafted financial reports serve as vital tools for decision-making and transparency within an organization. By following the undermentioned tips, you can create standardized financial reports that effectively communicate your company's financial health and performance to stakeholders.
Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
Vicinity Jobs’ data includes more than three million 2023 OJPs and thousands of skills. Most skills appear in less than 0.02% of job postings, so most postings rely on a small subset of commonly used terms, like teamwork.
Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
STREETONOMICS: Exploring the Uncharted Territories of Informal Markets throug...sameer shah
Delve into the world of STREETONOMICS, where a team of 7 enthusiasts embarks on a journey to understand unorganized markets. By engaging with a coffee street vendor and crafting questionnaires, this project uncovers valuable insights into consumer behavior and market dynamics in informal settings."
1. Impact of Leverage on Profitability
Presented By :
Ashwani Kumar
(M.Com., JRF)
2. The Concept of Leverage
You can not easily move a large boulder.
3. The Concept of Leverage
However, with the aid of a lever you can
move an object many times your size.
4. The Concept of Leverage
The longer the lever, the bigger the
rock you can move.
5. Leverage in Physics
Indepndent Variable
Leverage in Finance
Fixed
Cost
This concept of leverage is valid in business also
6. Leverage
Operating Leverage
Financial
Leverage
Combined Leverage
Study the impact of
operating fixed cost
Study the impact of financial
fixed cost
Study the impact of both type
of fixed cost
Affects a firm’s business risk Affects a firm’s
total risk
Affects a firm’s financial risk
% change in EBIT
% change in Sales
% change in EBT
% change in Sales
% change in EBT
% change in EBIT
Contribution
EBT
EBIT
EBT
Contribution
EBIT
11. Financial Leverage is Double-edged Sword
ROI> Kd = Positive /
Favorable
ROI<Kd = Negative /
Unfavorable
Example :-
ROI = 25% Kd = 15%
(ROI-Kd)
10%
Surplus received to
equity shareholder
Example :-
ROI = 10% Kd = 15%
(Kd-ROI)
5%
Deficit born by
equity shareholder
12. Financial Leverage of Companies in India
High Debt Low Debt
Company Debt Ratio Interest
Coverage
Ratio
Company Debt Ratio Interest
Coverage
Ratio
HDFC Ltd. 87% 1.52 Infosys 0% -
ICICIC Bank 69% 1.53 ITC 0% 175.95
SBI 63% 1.44 ONGC 0% 2038.25
Axis Bank 57% 1.56 HUL 0% 209.56
HDFC Bank 48% 1.63 TCS 1% 540.50
The Company Listed in Sensex in India