The concepts of operating leverage and financial leverage are key to understanding how a company will fare in fluctuating market conditions.
A company is said to be leveraged whenever it incurs either fixed operating costs (operating leverage) or fixed capital costs (financial leverage).
A company’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 company’s degree of financial leverage is the extent to which that company finances its assets by borrowing. ...