Leverage-Financial Management

This would be useful for those who are pursuing their CS Professional Program.

Leverage: An advantage derived indirectly i.e using one thing to derive a benefit on another thing.

There are three kinds of leverages:

a) Operating Leverage.

b) Financial Leverage.

c) Combined Leverage.

Operating leverage can be computed using the following formula:

Contribution/Earning before interest and tax(EBIT)

Financial Leverage can be computed using the following formula:

Earning before interest and tax(EBIT)/ earning before tax(EBT)

Combined Leverage can be computed using the following formula:

Financial Leverage * Operating Leverage

From the following table we can understand how to compute contribution , EBIT and EBT.

Particulars                                                           Amount

Sales                                                                   

Less: Variable cost                                             

Contribution                                                       

Less: Fixed cost                                                   

EBIT                                                                    

Less : Interest on borrowed funds                        

EBT                                                                     

Less: Tax                                                             

Profit after tax                                                    

Less: Preference share dividend                          

Profit available for Equity shareholders