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Describe High operating leverage

Briefly describe High operating leverage?

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High operating leverage and high financial leverage points out the risky investment made by the company's shareholders. This as well points out that company is making few sales however with high margins. This shows the risk if a firm wrongly forecasts future sales. If the future sales have been scheming forecasted then it makes a differentiation between actual and budgeted cash flow that influences the company's future operating capacity. The financial leverage poses high risk when a company's return on assets does not surpass interest on loan, which lowers down company's profitability and return on equity.

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