LEVERAGE ANALYSIS IN

FINANCIAL MANAGEMENT
AFTERSCHO☺OL
– DEVELOPING CHANGE MAKERS
CENTRE FOR SOCIAL ENTREPRENEURSHIP
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 LEVERAGE ANALYSIS IN
FINANCIAL MANAGEMENT
Dr. T.K. Jain.
AFTERSCHO☺OL
Centre for social entrepreneurship
Bikaner M: 9414430763
tkjainbkn@yahoo.co.in
www.afterschool.tk, www.afterschoool.tk
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 WHY STUDY LEVERAGE ?
• It shows relation between various aspects
– particularly risk and reward
• Leverage is a relation of your efforts and
rewards
• Some factors like fixed cost resources etc
have impact on increase or decrease in
profit.

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 WHAT IS LEVERAGE?
• Lever is some tool to help you accelerate
your speed – have you used it ????
• It increases your speed and also your risk.
• We have two types of leverages in
FINANCIAL MANAGEMENT :
• A. operating leverage
• B. financial leverage

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 WHAT IS FINANCIAL
LEVERAGE?
• Use of fixed charge securities like
debentures in the overall capital structure
is called financial leverage.
• DFL = degree of financial leverage
• It tells us about the level of financial risk
that we are taking. If financial leverage
increases, the risk of the firm increases.

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 How is financial leverage
measured?
• % change in net income / % change in EBIT
• EBIT = earnings before interest and taxes, it is
also called net operating income
• Net income = income after payment of all dues
including interest.
• Example : your EBIT is 1000, your interest is
500. your EBIT increases by 20%, interest
remains same, so net income increases from
500 to 700. Thus DFL = 40/20 = 2 answer
• (% change in net income is 40% due to increase
in earning, but no change in interest).

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 What is operating leverage ?
• It measures the impact of change in
volume (sales) on EBIT. It measures the
riskiness due to fixed cost resources in the
organisation.
• DOL = degree of financial leverage = %
change in EBIT / % change in sales
• It measures the impact of fixed cost on
profitability
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 Example of operating leverage ..
• Suppose your sales are 300 and your
expenditures are 200. out of your total
expenditure, 120 is fixed expenditure and and
variable expenditureis 80. Suppose sales
increase by 40%, the variable expenses will also
increase by 40%. New sales = 420, new variable
exp. = 112. New total exp. = 232. Profit changed
from 100 to 188.
• DOL = 88/40 = 2.2 ans.

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 What is DCL?
• DCL = degree of combined leverage
• DCL = DOL * DFL (PRODUCT OF DOL
AND DFL)

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 About AFTERSCHO☺OL
• PGPSE - World’s most comprehensive
programme on social entrepreneurship –
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• Complete support from beginning to the
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Branches of AFTERSCHO☺OL
• PGPSE programme is open all over the
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• Those who complete PSPSE have the
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AFTERSCHO☺OL
• A few branches have already started -
one such branch is at KOTA (Rajasthan).

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 Workshop on social
entrepreneurship
• We conduct workshop on social
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• These workshops are great moments of
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 FREE ONLINE PROGRAMME
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• 3. Study material / books / ebooks / audio / audio
visual material to support the study
• 4. business plan preparation and presentations
of those plans in conferences / seminars

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 Pursue professional courses along
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