Leverage Analysis In Financial Management Leverage is the burden which arises with the presence of fixed cost in business If a business is leveraged , it means that the firm has borrowed money to finance the purchase of assets 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 Operating Leverage- It arises with the presence of firm’s fixed operating costs such as salaries, rent, depreciation, utility expense etc. Financial Leverage- It arises with the presence of firm’s fixed financing costs such as interest expenses on debt and preference shares Combined Leverage- Product of operating and financial leverage Formulas for calculation of leverages- Operating Leverage = Contribution / EBIT Operating Leverage = % change in EBIT/ % change in sales Financial Leverage = EBIT/ EBT Financial Leverage = % change in EPS / % change in EBIT Combined Leverage = OL * FL Degree of Combined Leverage = % change in EPS / % change in Sales Thank you for watching Subscribe to my channel DevTech Finance