Different types of leverages in financial analysis

Question

Write down the different types of leverages which are computed for financial analysis?

Answer 1

Various kinds of leverage computed for financial analysis which is illustrated below:-

1) Operating Leverage : - it is a leverage that refers to the improvement of profits since there is a fixed operating cost that is involved with each component. When the sales raises fixed cost doesn’t raise and it results in better profits. Higher fixed expenditures result in higher operating leverage that leads to higher business risk.

2.) Financial Leverage : - It is a leverage that refers to elevated level of profitability since of high fixed financial expenditures. It consists of interest on loan and preference dividend. Higher financial leverage points to higher financial risk and higher break points. In this type the managers have flexibility in option of capital structure.

3.) Combined Leverage : - it is a leverage that refers to high profits because of fixed costs. It consists of fixed operating expenditures with fixed financial expenditures. It indicates leverage profit and risks that are in fixed quantity. Competitive firms select high level of degree of combined leverage while cooperative firms select lower level of degree of combined leverage.