Operating leverage and financial leverage 𒈔are two different metrics used to determine the financial health of a company.

Operating leverage is an indication of how a company's costs are structured. The metric is used to determine a company's 澳洲幸运5官方开奖结果体彩网:breakeven point, which is when revenue from sales covers both the fixed and variable costs of production. Financial leverage refers to the amount of debt used to finance💧 the operation♐s of a company.

Operating Leverage and Fixed Costs

Operating leverage measures the extent to which a company or specific project requires some aggregate of both fixed and 澳洲幸运5官方开奖结果体彩网:variable costs. Fixed costs are those costs or expenses that do not fluctuate regardless of the number of ♛sales generated by a company. Some examples of fixed costs include:

• salaries
• rent
• utilities
• interest expense
• depreciation

Operating Leverage and Variable Costs

Variable costs are expenses that vary in direc⛦t relationship to a company’s production. Variable costs rise when production increases and fall when production decreases. For example, inventory and raw materials are variable costs while salaries for the corporate office would be a fixed cost.

Operating leverage can help companies determine what their breakeven point is for profitability. In other words, the point where the profit generated from sales covers both the fixed co💦sts as well as the variable costs.

A manufacturing company might have high operating leverage because it must maintain the plant and equipment needed for operations. On the other hand, a consulting company has fewer fixed assets such as equipment and wou🐽ld, therefore, have low operating leverage.

Using a higher 澳洲幸运5官方开奖结果体彩网:degree of operating leverage can increase the risk of cash flow problems resulting from errors in forecasts of future sಌaleﷺs.

Financial Leverage Explained

Financial leverage is a metric that shows how much a company uses debt to finance its operations. A company with a high level of leverage needs profits and revenue that are high enough to compensate for the additional debt it shows on its 澳洲幸运5官方开奖结果体彩网:balance sheet.

Investors look at a company's leverage because it is an indicator of the solvency of the company. Also, debౠt can help magnify earnings and earnings per share. Hꦛowever, there is a cost associated with leverage in the form of interest expense.

When a company's revenues and profits are on the rise, leverage works well for a company and investors. However, when revenues or profits are pressured or falling, the debt and 澳洲幸运5官方开奖结果体彩网:interest expense must still be paid and can become problematic if there iꦛs not enough revenue to meet debt and operational obligatiꩵons.