Difference Between Operating Leverage And Financial Leverage
The major dissimilarities between operating and financial leverage can be highlighted as follows:
1. Introduction
Operating Leverage: Ability of a firm to use its operating costs to increase sales revenue and earning.
Financial Leverage: Ability of a firm to use it capital structure (financial charges) to increase after tax profit and earning per share.
2. Related To
Operating Leverage: It is related to operating costs or fixed costs.
Financial Leverage: It is related to capital structure
3. Type Of Risk Measured
Operating Leverage: Operating risk of the firm
Financial Leverage: Financial risk of the firm
4. Relationship
Operating Leverage: Represents the relationship between sales and earning before interest and tax
Financial Leverage: Represents the relationship between earning before interest and tax and earning per share.
5. Preferable
Operating Leverage: Lower operating leverage is preferable
Financial Leverage: Higher financial leverage is preferable
6. Formula For Calculation
Operating Leverage: It can be calculated by using the following formula
DOL = Contribution/EBIT
Where,
DOL means degree of operating leverage
EBIT means earning before interest and tax
Financial Leverage: It can be determined by using following formula
DFL = EBIT/EBT
Where,
DFL means degree of financial leverage
EBIT means earning before interest and tax
EBT means earning before tax
Operating Leverage Vs Financial Leverage (Comparison Chart)
I hope this post is helpful to understand the difference between operating leverage and financial leverage and to make comparison between them.
Operating Leverage Vs Financial Leverage (Comparison Chart)
Basis
|
Operating Leverage
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Financial Leverage
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Introduction
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Firm's ability to use operating costs
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Firm's ability to use capital structure
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Relation With
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Operating/Fixed Cost
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Capital Structure
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Risk Measured
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Operating Risk
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Financial Risk
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Relationship Between
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Sales And EBIT
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EBIT And EPS
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Preferable
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Lower degree
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Higher degree
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Formula
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Contribution/EBIT
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EBIT/EBT
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I hope this post is helpful to understand the difference between operating leverage and financial leverage and to make comparison between them.
