Write the difference between financial leverage and operating leverage.

The major differences between financial leverage and operating leverage are as follows −

Financial leverageOperating leverage
  • Use of capital structure to earn better returns and to reduce taxes.

  • Tells about capital structure of the firm.

  • Measures financial risk.

  • Relates EBIT and EPS.

  • More the financial leverage, more financial risk.

  • Preferred high.


  • Rise to financial risk.

  • Degree of financial leverage relates to liabilities side in balance sheet(different source of finance).

  • Firm ability to use fix costs to generate more returns.

  • Tells about fixed cost of the firm.

  • Measures operating risk of the business.

  • Relates sales and EBIT.

  • Higher the operating leverage, more operating risk.

  • Preferred low.

  • Rise to business risk.

  • DOL = Contribution/EBIT.

  • Degree of operating leverage is higher than breakeven point.

Updated on: 24-Jul-2020


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