LEVERAGE ANALYSISMeaning Leverage refers to a relationship
between two interrelated variables.It may be defined as the %
change in one variable divided by the % change in the other
variable.Leverage = %change in dependent variable/ % change in
independent variableTypes of LeveragesOperating leverageFinancial
leverageCombined leverageOperating leverageIt measures the
relationship between the sales revenue and the EBIT. It measures
the effect og change in sales revenue on the level of EBITOperating
leverage = %change in EBIT/ %change sales =
contribution/EBITFinancial LeverageIt measures the relationship
between the EBIT and the EPS and it reflects the effect of change
in EBIT on the level of EPSFinancial Leverage = %change in
EPS/%change in EBIT=EBIT/PBTEBIT is the linking point in the
leverage studyFinancial bryeak eeven level of EBIT The level of
EBIT which is just sufficient o cover to cover the fixed financial
charges only and no earnings are available and hence there will not
be earning per share(EPS)Combined leverageA firm has to look into
the overall risk or the total risk of the firm, i.e. business risk
plus the financial risk. Therefore, a financial manager should
consider both the OL and the FL simultaneouslyThe OL is a product
of both the OL and the FLCL = OL * FL
=%change in EBIT/%change in sales * %change in EPS/%change in
EBIT
