Our online calculator will help you to make the calculation of operating and financial leverage.
The concept of operating and financial leverage, (determination of the force of its impact), determine the level of risk effect of operating and financial leverage and its application in practice.
Leverage is the leverage.
Production (operating) leverage is the ratio of fixed and variable costs of the company and the impact of this relationship on operating profit, i.e. profit before interest and taxes, that is, if the proportion of fixed costs is large, the company has a high level of operational leverage, and thus little change in production volumes can lead to a significant change in operating profit.
The effect of operating (production and economic) leverage is manifested in the fact that any change in revenues from the sale always generates stronger change of profit.
Operating leverage indicates the level of business risk of the enterprise: the more sludge the impact of industrial linkage, the higher the business risk.
Financial (credit) leverage is the ratio between borrowed capital and own capital of the company and the impact of this relationship on net profit, the higher the proportion of borrowed capital, the less net income by increasing costs of interest payments.
Fee for debt capital is usually less than the additional profit that it provides, and this additional income is added to the return on equity that allows you to increase the rate of its profitability.