The term leverage simply means the relationship between two interrelated variables. one variable is dependent on other variable normally. it is used to calculate the profit of the business or any organisation by three methods but first we need to know that what are the types of leverage and how they are mentioned so the following description will help you to understand it better:
Normally, variables are of two types
First is independent variable and second is dependent variable.
- The leverage can be measured as the % change in the dependent variable due a % change in independent variable. After knowing about leverage there are three methods or three types by which generally we can calculate leverage three of them are discussed below:
1. Operating Leverage
- The OL is the relationship between sales (or contributions) with the EBIT.
- Contribution is generally taken for the above calculations
2. Financial Leverage
- It measures the relationship between EBIT and EPS
- It also means the ratio of earnings before Interest payment with earnings after Interest payment.
3. Combined Leverage
- The overall risk of the firm is evaluated by combining the OL and FL and is known as C.
These three types of leverage are helpful to calculate leverage, profits and other things according to the given data in very easy steps.
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