Leverage is an investment technique that allows investors to control a large investment with only a small amount of their own money, giving them significant financial power. There are three main types of leverage: operating leverage, which arises from fixed operating expenses; financial leverage, which is the disproportionate variation in taxable income from changes in operating profit; and combined leverage, which is the ratio of contribution to pre-tax profits and considers both operating and financial leverage. Leverage magnifies both profits and losses, so understanding its types and significance is important for investors.

1. Leverages

2. Meaning Leverage is an investment technique in which you use a small amount of your own money to make an investment of much larger value. In that way, leverage gives you significant financial power.

3. Types of Leverages Operating leverage Financial leverage Combined leverage

4. Operating leverage Operating leverage arises from the existence of fixed operating expenses Operating leverage = Contribution/Operating Profit

5. Financial leverage Financial leverage may b defined as the tendency of the residual net income to vary disproportionately with the operating profit. It indicates the change that takes place in the taxable income as the result of the change in the operating profit. FL = OP(EBIT)/ PBT

6. Combined leverage Combined leverage = Contribution/PBT

7. Significance of leverages

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