What is Leverage & Operating Leverages

What is Leverage & Operating Leverages – Introduction

Leverage & Operating Leverages: Operation of a firm can be run by using different means of finances like preference shares, equity shares, and retained earnings or with debts. In general, a firm uses a combination of different financial instruments. All these different financial instruments make the capital structure of a firm. Capital structure refers to debt to equity ratio, which gives vision to a firm about the risk of capital structure and effect on the profitability of firm together with different factors, like a failure of profitability, cost of capital, the market value of the firm. Further using debt or leverage also increase risk the firm to bankruptcy. It also increases the return of the company especially returns on equity. This is just because of non-increment of the issue of more equity shares, leads to non-dilution of earnings per equity share as the debt financing will prohibit getting finances by issuing more number of equity shares. Hence it can be drawn out from the above introduction that debts financing up to an optimum level is good for the firm and increases the profitability of the firm.

Basically, there are three types of the leverages. – Operating Leverages, Financial Leverages, and Capital and Working Capital Marketing.

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