Operating Leverage

When a firm has high fixed operating costs, a small change in sales produces a larger percentage change in operating profit (EBIT). This magnifying effect is operating leverage.

• Degree of operating leverage (DOL) = Contribution / EBIT = % change in EBIT / % change in sales
• Degree of financial leverage (DFL) = EBIT / EBT = % change in EPS / % change in EBIT, arising from fixed interest costs
• Degree of combined leverage (DCL) = DOL × DFL = Contribution / EBT

A high DOL increases business risk: profits rise sharply in good times but fall sharply when sales decline. A firm close to its break-even point has a very high DOL. DOL is also the inverse of the margin of safety ratio.

For lenders, a borrower with high operating and financial leverage together is riskier, because both fixed operating costs and fixed interest must be met before shareholders earn anything.

स्थिर सञ्चालन लागत बढी भएको फर्ममा बिक्रीको सानो परिवर्तनले सञ्चालन नाफा (EBIT) मा ठूलो प्रतिशत परिवर्तन ल्याउँछ; यसलाई सञ्चालन लिभरेज भनिन्छ।

• DOL = योगदान / EBIT = EBIT मा % परिवर्तन / बिक्रीमा % परिवर्तन
• वित्तीय लिभरेज DFL = EBIT / EBT (स्थिर ब्याजका कारण)
• संयुक्त लिभरेज DCL = DOL × DFL = योगदान / EBT

उच्च DOL ले व्यावसायिक जोखिम बढाउँछ। समच्छेद नजिकको फर्मको DOL धेरै उच्च हुन्छ; DOL सुरक्षा सीमा अनुपातको उल्टो हो।