Leverage Analysis

                                                             Leverage Analysis Made Easy 

Leverage - employment of different sources of capital (debt+equity) with the objective of optimising fixed operating and financial costs, so that the firm can control the cost and maximise profit. 

                                                                  Types of Leverages 

Aspect	Operating Leverage	Financial Leverage	Combined Leverage
Meaning	Refers to the use of fixed operating costs to control costs and maximize profit.	Refers to the use of funds with financial costs (like interest on debt) to increase returns to shareholders.	Combination of operating leverage and financial leverage.
Focus	Focuses on operating costs (fixed costs in production).	Focuses on financial costs (interest on debt).	Focuses on the overall effect of sales on EPS.
Risk Indicated	Indicates Operating Risk.	Indicates Financial Risk.	Indicates Total Risk (Operating + Financial).
Formula	Operating Leverage = Contribution / EBIT	Financial Leverage = EBIT / EBT	Combined Leverage = Contribution / EBT
Relationship	—	—	Operating Leverage × Financial Leverage

                                                          Implications of Leverage

	Operating Leverage	Financial Leverage	Implication
i.	High	High	Very Risky
ii.	High	Low	Risky
iii.	Low	High	Ideal (for profit maximisation)
iv.	Low	Low	Over Cautious