SlideShare a Scribd company logo
1 of 8
Download to read offline
LEVERAGE
ANALYSIS
FINANCIAL MANAGEMENT
INTRODUCTION
• Leverage refer to the amount of debt a firm uses to finance
assets
• It arises from the existence of fixed costs
• It is an investment strategy to use borrowed money
• If a business is leveraged , it means that the firm has
borrowed money to finance the purchase of assets
CONTINUED
• With larger presence of fixed cost profit margins can really
get squeezed when the business scenario is not favorable
and the sales fall. This adds risk to the stocks of such
companies
• Conversely, with the same larger presence of fixed cost
company would experience magnified profits with increase
in sales as the cost level remaining constant
MAGNIFICATION EFFECT WITH THE
PRESENCE OF FIXED COST
Case 1 Case2 Case 3
Revenue 15 lacs 21 lacs 12 lacs
- Fixed Cost -10 lacs -10 lacs -10 lacs
= Profit =5 lacs =11 lacs =2 lacs
% Change in Revenue =
Case2 (21-15)/15 * 100 = 40% Case3 (12-15)/15*100 = -20%
% Change in Profit =
Case2 (11-5)/5 * 100 = 120% Case3 (2-5)/5* 100 = -60%
TYPES OF LEVERAGE
1. Operating Leverage- It arises with the presence of firm’s fixed
operating costs such as salaries, rent, depreciation, utility expense
etc.
2. Financial Leverage- It arises with the presence of firm’s fixed
financing costs such as interest expenses on debt and preference
shares
3. Combined Leverage- Product of operating and financial leverage
FORMULAS
Sales – Variable cost = Contribution
Contribution – Fixed cost = Earning before interest and tax
Earning before Interest and tax – Interest = Earning before Tax
Earning before tax – Tax = Earning after Tax
Earning per share = Earning after Tax / No. of Shares
FORMULA
• Degree of Operating Leverage = Contribution / EBIT
• Degree of Operating Leverage = % change in EBIT/ % change in sales
• Degree of Financial Leverage = EBIT/ EBT
• Degree of Financial Leverage = % change in EPS / % change in EBIT
• Degree of Combined Leverage = OL * FL
• Degree of Combined Leverage = % change in EPS / % change in Sales
THANK YOU FOR WATCHING
DevTech
Finance

More Related Content

What's hot

Fundamental analysis
Fundamental analysisFundamental analysis
Fundamental analysiseshabhatia
 
Financial Statements
Financial StatementsFinancial Statements
Financial StatementsAmina Naveed
 
cash flow and fund flow ppt
 cash flow and fund flow ppt cash flow and fund flow ppt
cash flow and fund flow pptArhaam Ansari
 
Financial Management - Objectives
Financial Management - ObjectivesFinancial Management - Objectives
Financial Management - Objectivesuma reur
 
Dividend decision theories
Dividend decision theoriesDividend decision theories
Dividend decision theoriesAyush Jain
 
Effects of operating and financial Leverages
Effects of operating and financial Leverages  Effects of operating and financial Leverages
Effects of operating and financial Leverages sangamdesai
 
Financial statement analysis types & techniques
Financial statement analysis types & techniquesFinancial statement analysis types & techniques
Financial statement analysis types & techniquesDr. Abzal Basha
 
Ratio Analysis Ppt
Ratio Analysis PptRatio Analysis Ppt
Ratio Analysis PptMobasher Ali
 
Different models of dividend policy
Different models of dividend policyDifferent models of dividend policy
Different models of dividend policySunny Mervyne Baa
 
Operating and financial leverage
Operating and financial leverageOperating and financial leverage
Operating and financial leverageNoman Ahmed Khan
 
Economic value added
Economic value addedEconomic value added
Economic value addedsamarpita27
 
Financial management
Financial managementFinancial management
Financial managementAiswarya B
 
Leverage
LeverageLeverage
LeverageMickey
 

What's hot (20)

Fundamental analysis
Fundamental analysisFundamental analysis
Fundamental analysis
 
Financial Statements
Financial StatementsFinancial Statements
Financial Statements
 
cash flow and fund flow ppt
 cash flow and fund flow ppt cash flow and fund flow ppt
cash flow and fund flow ppt
 
Financial Management - Objectives
Financial Management - ObjectivesFinancial Management - Objectives
Financial Management - Objectives
 
Dividend decision theories
Dividend decision theoriesDividend decision theories
Dividend decision theories
 
Internal financing
Internal financingInternal financing
Internal financing
 
Effects of operating and financial Leverages
Effects of operating and financial Leverages  Effects of operating and financial Leverages
Effects of operating and financial Leverages
 
Capital structure
Capital structureCapital structure
Capital structure
 
technical analysis
technical analysistechnical analysis
technical analysis
 
Fund flow statement
Fund flow statementFund flow statement
Fund flow statement
 
Financial statement analysis types & techniques
Financial statement analysis types & techniquesFinancial statement analysis types & techniques
Financial statement analysis types & techniques
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysis
 
Ratio Analysis Ppt
Ratio Analysis PptRatio Analysis Ppt
Ratio Analysis Ppt
 
Different models of dividend policy
Different models of dividend policyDifferent models of dividend policy
Different models of dividend policy
 
Operating and financial leverage
Operating and financial leverageOperating and financial leverage
Operating and financial leverage
 
Economic value added
Economic value addedEconomic value added
Economic value added
 
Valuation of shares
Valuation of sharesValuation of shares
Valuation of shares
 
Financial management
Financial managementFinancial management
Financial management
 
Investment decisions
Investment decisionsInvestment decisions
Investment decisions
 
Leverage
LeverageLeverage
Leverage
 

Similar to Leverage analysis

Leverage
LeverageLeverage
Leverageishago
 
About Leverage
About LeverageAbout Leverage
About LeverageLokesh
 
Sources of capital on the basis of ownership & Cost Of Borrowed Capital & Lev...
Sources of capital on the basis of ownership & Cost Of Borrowed Capital & Lev...Sources of capital on the basis of ownership & Cost Of Borrowed Capital & Lev...
Sources of capital on the basis of ownership & Cost Of Borrowed Capital & Lev...RahulBisen13
 
Leverage - Financial, Operating and Combined
Leverage - Financial, Operating and CombinedLeverage - Financial, Operating and Combined
Leverage - Financial, Operating and CombinedJithin Thomas
 
1b.leverage decision
1b.leverage decision1b.leverage decision
1b.leverage decisionNupur Bajoria
 
Unit 8 leverage -fin & oprt
Unit 8   leverage -fin & oprtUnit 8   leverage -fin & oprt
Unit 8 leverage -fin & oprtAshish Gupta
 
Meeting 4 - Valuation Market Ratios (Financial Reporting and Analysis)
Meeting 4 -  Valuation Market Ratios (Financial Reporting and Analysis)Meeting 4 -  Valuation Market Ratios (Financial Reporting and Analysis)
Meeting 4 - Valuation Market Ratios (Financial Reporting and Analysis)Albina Gaisina
 
fi2-finfffrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrranal.ppt
fi2-finfffrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrranal.pptfi2-finfffrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrranal.ppt
fi2-finfffrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrranal.pptNeelisettySatyaSai1
 
Financial reports and ratios
Financial reports and ratiosFinancial reports and ratios
Financial reports and ratiosCollege
 

Similar to Leverage analysis (20)

Leverage
LeverageLeverage
Leverage
 
Leverage
Leverage Leverage
Leverage
 
Ba7202 financial management (unit3) notes
Ba7202 financial management (unit3) notesBa7202 financial management (unit3) notes
Ba7202 financial management (unit3) notes
 
Leverage
LeverageLeverage
Leverage
 
About Leverage
About LeverageAbout Leverage
About Leverage
 
Unit 3 leverages
Unit 3 leveragesUnit 3 leverages
Unit 3 leverages
 
Leverage
LeverageLeverage
Leverage
 
Sources of capital on the basis of ownership & Cost Of Borrowed Capital & Lev...
Sources of capital on the basis of ownership & Cost Of Borrowed Capital & Lev...Sources of capital on the basis of ownership & Cost Of Borrowed Capital & Lev...
Sources of capital on the basis of ownership & Cost Of Borrowed Capital & Lev...
 
Leverage - Financial, Operating and Combined
Leverage - Financial, Operating and CombinedLeverage - Financial, Operating and Combined
Leverage - Financial, Operating and Combined
 
Ch 5
Ch 5Ch 5
Ch 5
 
StockValuation_lecture.pdf
StockValuation_lecture.pdfStockValuation_lecture.pdf
StockValuation_lecture.pdf
 
1b.leverage decision
1b.leverage decision1b.leverage decision
1b.leverage decision
 
Capital structure
Capital structureCapital structure
Capital structure
 
Unit 8 leverage -fin & oprt
Unit 8   leverage -fin & oprtUnit 8   leverage -fin & oprt
Unit 8 leverage -fin & oprt
 
Demo leverage.pdf
Demo leverage.pdfDemo leverage.pdf
Demo leverage.pdf
 
Leverage 25027 Vishal.pptx
Leverage 25027 Vishal.pptxLeverage 25027 Vishal.pptx
Leverage 25027 Vishal.pptx
 
Meeting 4 - Valuation Market Ratios (Financial Reporting and Analysis)
Meeting 4 -  Valuation Market Ratios (Financial Reporting and Analysis)Meeting 4 -  Valuation Market Ratios (Financial Reporting and Analysis)
Meeting 4 - Valuation Market Ratios (Financial Reporting and Analysis)
 
fi2-finfffrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrranal.ppt
fi2-finfffrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrranal.pptfi2-finfffrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrranal.ppt
fi2-finfffrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrranal.ppt
 
Fin Mgmt-3.pptx
Fin Mgmt-3.pptxFin Mgmt-3.pptx
Fin Mgmt-3.pptx
 
Financial reports and ratios
Financial reports and ratiosFinancial reports and ratios
Financial reports and ratios
 

More from DevTech Finance (20)

Bitcoin - The CryptoCurrency
Bitcoin - The CryptoCurrencyBitcoin - The CryptoCurrency
Bitcoin - The CryptoCurrency
 
Cash Management
Cash ManagementCash Management
Cash Management
 
Portfolio Management
Portfolio ManagementPortfolio Management
Portfolio Management
 
No Cost EMI - 0% Interest Loan
No Cost EMI - 0% Interest LoanNo Cost EMI - 0% Interest Loan
No Cost EMI - 0% Interest Loan
 
Health Insurance
Health InsuranceHealth Insurance
Health Insurance
 
Face Value, Book Value & Market Value
Face Value, Book Value & Market ValueFace Value, Book Value & Market Value
Face Value, Book Value & Market Value
 
Loan Moratorium Period.
Loan Moratorium Period.Loan Moratorium Period.
Loan Moratorium Period.
 
Hire Purchase
Hire PurchaseHire Purchase
Hire Purchase
 
Infrastructure Financing
Infrastructure FinancingInfrastructure Financing
Infrastructure Financing
 
Recovery Management In Banking
Recovery Management In BankingRecovery Management In Banking
Recovery Management In Banking
 
Board of Directors
Board of DirectorsBoard of Directors
Board of Directors
 
Inventory Management
Inventory ManagementInventory Management
Inventory Management
 
Money Market
Money MarketMoney Market
Money Market
 
Consortium Finance
Consortium FinanceConsortium Finance
Consortium Finance
 
Indian Banking System
Indian Banking SystemIndian Banking System
Indian Banking System
 
CRM Models
CRM ModelsCRM Models
CRM Models
 
Accounting Concepts & Conventions
Accounting Concepts & ConventionsAccounting Concepts & Conventions
Accounting Concepts & Conventions
 
NBFC
NBFCNBFC
NBFC
 
NPCI
NPCINPCI
NPCI
 
Credit Monitoring
Credit MonitoringCredit Monitoring
Credit Monitoring
 

Recently uploaded

M-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptxM-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptxDr. Santhosh Kumar. N
 
Practical Research 1 Lesson 9 Scope and delimitation.pptx
Practical Research 1 Lesson 9 Scope and delimitation.pptxPractical Research 1 Lesson 9 Scope and delimitation.pptx
Practical Research 1 Lesson 9 Scope and delimitation.pptxKatherine Villaluna
 
Drug Information Services- DIC and Sources.
Drug Information Services- DIC and Sources.Drug Information Services- DIC and Sources.
Drug Information Services- DIC and Sources.raviapr7
 
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptx
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptxPractical Research 1: Lesson 8 Writing the Thesis Statement.pptx
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptxKatherine Villaluna
 
Human-AI Co-Creation of Worked Examples for Programming Classes
Human-AI Co-Creation of Worked Examples for Programming ClassesHuman-AI Co-Creation of Worked Examples for Programming Classes
Human-AI Co-Creation of Worked Examples for Programming ClassesMohammad Hassany
 
The Singapore Teaching Practice document
The Singapore Teaching Practice documentThe Singapore Teaching Practice document
The Singapore Teaching Practice documentXsasf Sfdfasd
 
DUST OF SNOW_BY ROBERT FROST_EDITED BY_ TANMOY MISHRA
DUST OF SNOW_BY ROBERT FROST_EDITED BY_ TANMOY MISHRADUST OF SNOW_BY ROBERT FROST_EDITED BY_ TANMOY MISHRA
DUST OF SNOW_BY ROBERT FROST_EDITED BY_ TANMOY MISHRATanmoy Mishra
 
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptxSandy Millin
 
Patterns of Written Texts Across Disciplines.pptx
Patterns of Written Texts Across Disciplines.pptxPatterns of Written Texts Across Disciplines.pptx
Patterns of Written Texts Across Disciplines.pptxMYDA ANGELICA SUAN
 
Diploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdfDiploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdfMohonDas
 
Quality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICEQuality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICESayali Powar
 
How to Add a New Field in Existing Kanban View in Odoo 17
How to Add a New Field in Existing Kanban View in Odoo 17How to Add a New Field in Existing Kanban View in Odoo 17
How to Add a New Field in Existing Kanban View in Odoo 17Celine George
 
Ultra structure and life cycle of Plasmodium.pptx
Ultra structure and life cycle of Plasmodium.pptxUltra structure and life cycle of Plasmodium.pptx
Ultra structure and life cycle of Plasmodium.pptxDr. Asif Anas
 
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdfMaximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdfTechSoup
 
Benefits & Challenges of Inclusive Education
Benefits & Challenges of Inclusive EducationBenefits & Challenges of Inclusive Education
Benefits & Challenges of Inclusive EducationMJDuyan
 
How to Add Existing Field in One2Many Tree View in Odoo 17
How to Add Existing Field in One2Many Tree View in Odoo 17How to Add Existing Field in One2Many Tree View in Odoo 17
How to Add Existing Field in One2Many Tree View in Odoo 17Celine George
 
In - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptxIn - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptxAditiChauhan701637
 
CAULIFLOWER BREEDING 1 Parmar pptx
CAULIFLOWER BREEDING 1 Parmar pptxCAULIFLOWER BREEDING 1 Parmar pptx
CAULIFLOWER BREEDING 1 Parmar pptxSaurabhParmar42
 
Patient Counselling. Definition of patient counseling; steps involved in pati...
Patient Counselling. Definition of patient counseling; steps involved in pati...Patient Counselling. Definition of patient counseling; steps involved in pati...
Patient Counselling. Definition of patient counseling; steps involved in pati...raviapr7
 
How to Show Error_Warning Messages in Odoo 17
How to Show Error_Warning Messages in Odoo 17How to Show Error_Warning Messages in Odoo 17
How to Show Error_Warning Messages in Odoo 17Celine George
 

Recently uploaded (20)

M-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptxM-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptx
 
Practical Research 1 Lesson 9 Scope and delimitation.pptx
Practical Research 1 Lesson 9 Scope and delimitation.pptxPractical Research 1 Lesson 9 Scope and delimitation.pptx
Practical Research 1 Lesson 9 Scope and delimitation.pptx
 
Drug Information Services- DIC and Sources.
Drug Information Services- DIC and Sources.Drug Information Services- DIC and Sources.
Drug Information Services- DIC and Sources.
 
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptx
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptxPractical Research 1: Lesson 8 Writing the Thesis Statement.pptx
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptx
 
Human-AI Co-Creation of Worked Examples for Programming Classes
Human-AI Co-Creation of Worked Examples for Programming ClassesHuman-AI Co-Creation of Worked Examples for Programming Classes
Human-AI Co-Creation of Worked Examples for Programming Classes
 
The Singapore Teaching Practice document
The Singapore Teaching Practice documentThe Singapore Teaching Practice document
The Singapore Teaching Practice document
 
DUST OF SNOW_BY ROBERT FROST_EDITED BY_ TANMOY MISHRA
DUST OF SNOW_BY ROBERT FROST_EDITED BY_ TANMOY MISHRADUST OF SNOW_BY ROBERT FROST_EDITED BY_ TANMOY MISHRA
DUST OF SNOW_BY ROBERT FROST_EDITED BY_ TANMOY MISHRA
 
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
 
Patterns of Written Texts Across Disciplines.pptx
Patterns of Written Texts Across Disciplines.pptxPatterns of Written Texts Across Disciplines.pptx
Patterns of Written Texts Across Disciplines.pptx
 
Diploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdfDiploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdf
 
Quality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICEQuality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICE
 
How to Add a New Field in Existing Kanban View in Odoo 17
How to Add a New Field in Existing Kanban View in Odoo 17How to Add a New Field in Existing Kanban View in Odoo 17
How to Add a New Field in Existing Kanban View in Odoo 17
 
Ultra structure and life cycle of Plasmodium.pptx
Ultra structure and life cycle of Plasmodium.pptxUltra structure and life cycle of Plasmodium.pptx
Ultra structure and life cycle of Plasmodium.pptx
 
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdfMaximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
 
Benefits & Challenges of Inclusive Education
Benefits & Challenges of Inclusive EducationBenefits & Challenges of Inclusive Education
Benefits & Challenges of Inclusive Education
 
How to Add Existing Field in One2Many Tree View in Odoo 17
How to Add Existing Field in One2Many Tree View in Odoo 17How to Add Existing Field in One2Many Tree View in Odoo 17
How to Add Existing Field in One2Many Tree View in Odoo 17
 
In - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptxIn - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptx
 
CAULIFLOWER BREEDING 1 Parmar pptx
CAULIFLOWER BREEDING 1 Parmar pptxCAULIFLOWER BREEDING 1 Parmar pptx
CAULIFLOWER BREEDING 1 Parmar pptx
 
Patient Counselling. Definition of patient counseling; steps involved in pati...
Patient Counselling. Definition of patient counseling; steps involved in pati...Patient Counselling. Definition of patient counseling; steps involved in pati...
Patient Counselling. Definition of patient counseling; steps involved in pati...
 
How to Show Error_Warning Messages in Odoo 17
How to Show Error_Warning Messages in Odoo 17How to Show Error_Warning Messages in Odoo 17
How to Show Error_Warning Messages in Odoo 17
 

Leverage analysis

  • 2. INTRODUCTION • Leverage refer to the amount of debt a firm uses to finance assets • It arises from the existence of fixed costs • It is an investment strategy to use borrowed money • If a business is leveraged , it means that the firm has borrowed money to finance the purchase of assets
  • 3. CONTINUED • With larger presence of fixed cost profit margins can really get squeezed when the business scenario is not favorable and the sales fall. This adds risk to the stocks of such companies • Conversely, with the same larger presence of fixed cost company would experience magnified profits with increase in sales as the cost level remaining constant
  • 4. MAGNIFICATION EFFECT WITH THE PRESENCE OF FIXED COST Case 1 Case2 Case 3 Revenue 15 lacs 21 lacs 12 lacs - Fixed Cost -10 lacs -10 lacs -10 lacs = Profit =5 lacs =11 lacs =2 lacs % Change in Revenue = Case2 (21-15)/15 * 100 = 40% Case3 (12-15)/15*100 = -20% % Change in Profit = Case2 (11-5)/5 * 100 = 120% Case3 (2-5)/5* 100 = -60%
  • 5. TYPES OF LEVERAGE 1. Operating Leverage- It arises with the presence of firm’s fixed operating costs such as salaries, rent, depreciation, utility expense etc. 2. Financial Leverage- It arises with the presence of firm’s fixed financing costs such as interest expenses on debt and preference shares 3. Combined Leverage- Product of operating and financial leverage
  • 6. FORMULAS Sales – Variable cost = Contribution Contribution – Fixed cost = Earning before interest and tax Earning before Interest and tax – Interest = Earning before Tax Earning before tax – Tax = Earning after Tax Earning per share = Earning after Tax / No. of Shares
  • 7. FORMULA • Degree of Operating Leverage = Contribution / EBIT • Degree of Operating Leverage = % change in EBIT/ % change in sales • Degree of Financial Leverage = EBIT/ EBT • Degree of Financial Leverage = % change in EPS / % change in EBIT • Degree of Combined Leverage = OL * FL • Degree of Combined Leverage = % change in EPS / % change in Sales
  • 8. THANK YOU FOR WATCHING DevTech Finance