Write the difference between financial leverage and operating leverage.
The major differences between financial leverage and operating leverage are as follows −
|Financial leverage||Operating 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.
DFL = EBIT/EBT.
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.
Rise to business risk.
DOL = Contribution/EBIT.
Degree of operating leverage is higher than breakeven point.
Published on 24-Jul-2020 10:55:17