Archive | Financial Leverages

Top 3 Ratios under Activity Leverage | Financial Leverages

There are three ratios under this head which merit mention:- 1. Operating Leverage 2. Financial Leverage 3. Total Leverage. Ratio # 1. Operating Leverage: Operating leverage is concerned with the operation of any firm. The cost structure of any firm gives rise to operating leverage because of the existence of fixed nature of costs. This […]

Structural Leverage (With Formula) | Financial Leverages

The below mentioned article provides a structural leverage. These ratios express the relationship between owner’s capital and outsider’s stake in the firm. The structural leverage ratios are also called as ‘capital gearing ratios’. The structural leverage ratios are classified as: (i) Debt-equity ratio, (ii) Total debt-equity ratio, and (iii) Debt to Net worth ratio. i. […]

Trading on Equity | Financial Leverages

In this article we will discuss about the concept of trading on equity. The use of fixed return bearing securities like preference share capital, debentures, bonds, term loans etc. to increase the earnings available to equity shareholders is termed as ‘trading on equity’. It refers to the practice of using borrowed funds and preference capital […]

Financial Leverage: Impact, Degree and Limitations

After reading this article you will learn about Financial Leverage:- 1. Impact of Financial Leverage 2. Degree of Financial Leverage 3. Significance 4. Limitations. Impact of Financial Leverage: The financial leverage is used to magnify the shareholders earnings. It is based on the assumption that the fixed charges/costs funds can be obtained at a cost […]

Formula for Calculating Combined Leverage

Combined/composite/total leverage measures the relationship between quantity produced and sold and EPS. Thus, the degree of combined leverage (DCL) is computed as under: Illustration: Calculate the degree of operating leverage, degree of financial leverage and the degree of combined leverage for the following firms and interpret the result: Solution: Interpretation and Comments: From the above […]

Profit/Volume (P/V) Graph: Meaning and Method

After reading this article you will learn about Profit/Volume (P/V) Graph:- 1. Meaning of Profit/Volume Graph or Profit Chart 2. Method of Constructing P/V Graph. Meaning of Profit/Volume Graph or Profit Chart: A P/V Graph expresses the relationships between profit and volume. Its usefulness is to show a direct relationship between profit and the volume […]

Financial Leverage: Meaning, Types and Degree

After reading this article you will learn about Financial Leverage:- 1. Meaning of Financial Leverage 2. Types of Financial Leverage 3. Degree 4. EBIT-EPS Analysis. Meaning of Financial Leverage: Financial leverage may be expressed when the residual net income (earnings after interest and taxes and preference dividend) varies not in proportion with operating profit (EBIT). […]

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