LEVERAGE - FINALS
refers to the use of debt or fixed costs to increase potential returns on investment.
Leverage
Measures how fixed operating costs affect profits
Operating Leverage
The use of debt to finance assets or operations.
Financial Leverage
Measures the impact pf both operating and financial leverage
Combined (Total) Leverage
When returns from investments exceed the cost of borrowing.
Positive Leverage
When borrowing costs exceed the return on investment.
Negative Leverage
Increased profits when the company operated efficiently under leverage.
Impact on Profits
Increases exposure to financial distress if income drops.
Impact on Risk
% Change in EBIT / % Change in Sales
Operating Leverage
EBIT/EBT
Financial Leverage
Operating Leverage x Financial Leverage
Combine Leverage