The World without Bankruptcy Laws
Bankruptcy is one of the natural states which a company may find itself in. Entrepreneurship is primarily about taking risks. When companies take risks, some of them succeed, whereas others fail. Hence failure is a natural part of the business. However, many critics of bankruptcy laws believe that there isn’t a need for an elaborate […]
The Wirecard and Infosys Scandals are a Lesson on How NOT to Treat Whistleblowers
What is the Wirecard Scandal all about and Why it is a Wakeup Call for Whistleblowers Anyone who has been following financial and business news over the last couple of years would have heard about Wirecard, the embattled German payments firm that had to file for bankruptcy after serious and humungous frauds were uncovered leading […]
Why the Digital Age Demands Decision Makers to be Like Elite Marines and Zen Monks
How Modern Decision Makers Have to Confront Present Shock and Information Overload We live in times when Information Overload is getting the better of cognitive abilities to absorb and process the needed data and information to make informed decisions. In addition, the Digital Age has also engendered the Present Shock of Virality and Instant Gratification […]
Why Indian Firms Must Strive for Strategic Autonomy in Their Geoeconomic Strategies
Geopolitics, Economics, and Geoeconomics In the evolving global trading and economic system, firms and corporates are impacted as much by the economic policies of nations as they are by the geopolitical and foreign policies. In other words, any global firm wishing to do business in the international sphere has to be cognizant of both the […]
Why Government Should Not Invest Public Money in Sports Stadiums Used by Professional Franchises
In the previous article, we have already come across some of the reasons why the government should not encourage funding of stadiums that are to be used by private franchises. We have already seen that the entire mechanism of government funding ends up being a regressive tax on the citizens of a particular city who […]
Most firms use both operating leverage and capital leverage to some extent.
In today’s business world it is almost impossible to run a business without having some degree of automation and mechanization (operating leverage). It is also not possible to grow at an adequate speed unless the company is taking advantage of borrowed money.
However, the degree to which a company uses operating leverage and financial leverage can be different.
Some companies use more financial leverage than operating leverage while other use more operating leverage. This creates a challenging scenario whereas an analyst has to interpret the different degrees of riskiness of companies with different cost and capital structures. The degree of combined leverage (DCL) makes it possible to do this.
PAT/Number of Shares = Earnings per Share (EPS)
Therefore if operating leverage of a firm= 1.4 whereas financial leverage = 2, then the degree of combined leverage equals 1.4 * 2 = 2.8
Degree of operating leverage shows how a change in sales affects the EBIDTA of the firm. Whereas degree of financial leverage shows how a change in EBIDTA affects the EPS of the firm. Combining the two analysts can predict how a change in sales is likely to magnify the gains or losses to the EPS.
Your email address will not be published. Required fields are marked *
Why are Corporations Hoarding Trillions in Cash?
February 7, 2025
Why College Education Should Not Be Free?
February 7, 2025
Why Do Mutual Funds Lend To Promoters?
February 7, 2025
