Business Analysis with Microsoft® Excel, Second Edition

Chapter 14. Planning Profits

The concepts of operating leverage and financial leverage are key to understanding how a company will fare in fluctuating market conditions. A firm is said to be leveraged whenever it incurs either fixed operating costs (operating leverage) or fixed capital costs (financial leverage). More specifically, a firm's degree of operating leverage is the extent to which its operations involve fixed operating expenses, such as fixed manufacturing costs, fixed selling costs, and fixed administrative costs.

A firm's degree of financial leverage is the extent to which that firm finances its assets by borrowing. More specifically, financial leverage is the extent to which a firm's Return on Assets exceeds the cost of financing ...