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.

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

7. EPS
Operating
leverage
Morethen
1%
EBITSales
1%
Sensitivity of operating profit to change in
quantity sold.
Impact of Operating Leverage on Operating Profit

8. EPS
Financial
leverage
EBITSales
Sensitivity of EPS to change in EBIT.
Impact of Financial Leverage on Shareholder
Earning
1%
Morethen
1%

9. EPS
Financial
leverage
Operating
Profit
Sales
Operating
leverage
1%
Morethen
1%
Impact of Combined Leverage on
Shareholder Earning

10. Particuler Old New Chnage % Change
Sales 2,00,000 2,20,000 20,000
10%
(-) Vriable Cost = 10% of Sales 20,000 22,000 2,000 10%
Contribution 1,80,000 1,98,000 18,000 10%
(-) Fixed Cost Operating 1,20,000 1,20,000 - 0%
EBIT 60,000 78,000 1,80,000
30%
(-) Interest 45,000 45,000
- 0%
EBT 15,000 33,000 1,80,000
120%
(-) Tax (30%) 4,500 9,900 5,400 120%
EAT 10,500 23,100 12,600 120%
(-) Peferance Share Dividend 2,000 2,000 -
0%
Earning Availbale For Equity Shareholders 8,500 21,100 12,600 148%
EPS (No. Of equity share = 100 ) 85 211 126
148%
OperatingLeverageFinancialLeverage
CombinedLeverage
Effect of Earnings per Share of a 10 Percent Increase in Sales

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