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Leverages: by Razwin T M P

Leverage refers to the mechanical advantage gained by a lever or the influence of one financial variable over another. There are three types of leverage used in financial analysis: operating leverage, financial leverage, and composite leverage. Financial leverage is measured as the percentage return on equity to the percentage return on capitalization. Composite leverage combines operating and financial leverage to express the effect of a change in sales on the change in taxable profit. It is calculated as the product of operating leverage and financial leverage.

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Mohammed Jashid
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41 views9 pages

Leverages: by Razwin T M P

Leverage refers to the mechanical advantage gained by a lever or the influence of one financial variable over another. There are three types of leverage used in financial analysis: operating leverage, financial leverage, and composite leverage. Financial leverage is measured as the percentage return on equity to the percentage return on capitalization. Composite leverage combines operating and financial leverage to express the effect of a change in sales on the change in taxable profit. It is calculated as the product of operating leverage and financial leverage.

Uploaded by

Mohammed Jashid
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Leverages

By RAZWIN T M P

Meaning

In technical sense, the term Leverage refers to action of a lever and the mechanical advantage gained by it. In financial management, the term Leverage "means the influence of one financial variable over some other related financial variable.

Types of leverage
There are three measures of leverage commonly used in financial analysis. In other words there are three types of leverages they are Operating leverage Financial leverage Composite, combined or total leverage

1. 2. 3.

financial leverage

Financial leverage may be defined as percentage return on equity to the percentage return on capitalization.

Financial leverage =

operating profit (EBIT) ------------------------------Profit before tax (PBT)

Composite, combined or total leverage

Composite, combined or total leverage is the combination of operating leverage and financial leverage. The combined leverage expresses the effect of a change in sales over change in the taxable profit of the company.

Combined leverage = Operating leverage * Financial leverage

Combined leverage

Contribution --------------------------------------------------Profit before taxes (or taxable profit )

Thank you

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