Financial leverage . It is most often used to describe the ability of the business to utilize fixed cost assets or funds that maximize returns in favor of owners. The increase also increases the uncertainty in the returns and at the same time increases the volume of the possible returns. Leverage comes in different degrees; the higher the risk, the higher the previous returns.
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- 1 Types of leverage
- 2 Operational
- 3 Financial
- 4 Total, mixed or combined
- 5 Source
Types of leverage
There are three types of leverage:
- 1) Operational
- 2) Financial
- 3) Total, mixed or combined
The operating leverage is the ability to use the fixed cost in order to achieve an increase in sales, more than proportional increase of utility.
Algebraically it can be represented: GAO = VPUO VPV Where: GAO = degree of operating leverage VPUO = variation in operating income VPV = variation% sales
Financial leverage is the ability to use fixed financial charges with the aim of facing a change in operating income to achieve a more than proportional increase in earnings per share, and it is determined: GAF = Variation% profit per share Variation% profit in operations
We consider that for the Cuban public company for the calculation of the degree of financial leverage (GAF), earnings per share can be replaced by the retained earnings available.
Total, mixed or combined
Total leverage is the one that measures the combined effect of both fixed costs and fixed finance charges, and is therefore determined as:
GAT = Variation% of earnings per share
Variation% of sales