Financial Leverages

LEVERAGES

Degree of Operating Leverage

Company

Degree of Operating Leverage

Autron

-17 .90

Ambertech

18 .29 Operating Leverage

Operating Leverage is the term that describes the impact on operating income of a change in the level of output . Brigham says that "If a high percentage of a firm 's costs are fixed , and hence do not decline when demand decreases , this increases he company 's business risk . This factor is called operating leverage . If a high percentage of a firm 's costs are fixed , the firm is

said to have a high degree of operating leverage . The degree of operating leverage (DOL ) is defined as the percentage change in operating income (or EBIT ) that results from a given percentage change in sales .In effect , the DOL is an index number which measures the effect of a change in sales [number of units] on operating income , or EBIT

Autron

Generally , the higher the operating leverage , the more a company 's income is affected by fluctuation in sales volume . The higher income vs sales ratio results from a smaller portion of variable costs , which means the Company does not have to pay as much additional money for each unit produced or sold . The more significant the volume of sales , the more beneficial the investment in fixed costs becomes . Applying this principle the operating leverage of Autron is in a good position and any change in sales volume will not violently affect the income of this company

Ambertech

The position of this company with respect to the Operating Leverage is not advantageous to the company as the ratio is high . It signifies that the fixed costs are at a higher level . This means that any small change in sales volume will adversely affect the profitability of the company

Degree of Financial Leverage

Company

Degree of Financial Leverage

Autron

0 .24

Ambertech

1 .14 Financial Leverage

`Financial leverage ' is the term used to describe the impact on returns of a change to the extent to which the firm 's assets are financed with borrowed money . In their 1997 article Buccino and Mckinley define operating leverage as the impact of a change in revenue on profit or cash flow . It arises , they say , whenever a firm can increase its revenues without a proportionate increase in operating expenses . Cash allocated to increasing revenue , such as marketing and business development expenditures , are quickly "consumed by high fixed expenses

Autron

The degree to which a business is utilizing borrowed money . Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt they may also be unable to find new lenders in the future . Financial leverage is not always bad however it can increase the shareholders return on their investment and often there are tax advantages associated with borrowing . Applying this basic principle , with a low financial leverage , this company is utlising very lower level of borrowed funds . The interest burden on the company will naturally be less and...