What is the degree of financial leverage?

The

level of financial leverage is a financial ratio that helps owners of businesses and managers to calculate the amount of fixed costs in the operation of their company. For this ratio, fixed costs usually represent the amount of payments that companies bring for construction, equipment and equipment. Companies with a high degree of lever effect often have the situation of more volatile income or cash flows. Economic decreases, such as recession and depression, may be harder for these companies, as fixed costs must be paid regardless of the current level of income. Profit per share is the amount of profit that the company allocates every share of the ordinary shares. The basic formula is net income, a less preferred share in stocks, divided by average outstanding shares of the company. EBIT is based on the statement of profit and loss of society. This number is also known as operating profit equal to operating income, less operating costs for a certain accounting period.

As an example, someone may assume the following: in July the company has a profit per share $ 1.25 in the US (USD) and EBIT $ 150,000. In August, these figures are $ 1.75 and $ 195,000. The percentage change in the share is 40% [(1.75 - 1.25) / 1.25], while the percentage of EBIT changes is 30% [(195 000 - 150 000) / 150 000]. The financial lever effect is 1.33 (0.4 / 0.3). Companies with a high financial leverage have generally volatile revenues per share, which can cause significant increase or decrease in stock value.

Profit per share is an important value in the business environment. Companies with high earnings are generally considered to be a more favorable propulsion because they tend to increase the financial return of investors. Investors usually avoid companies with high fixed costs because they represent a drain to the company's resources, regardless of their sales.

Owners and managers can alsoUse this calculation to create a trend analysis of fixed costs. Companies with a trend of higher fixed costs may need to be implemented by a plan to reduce business expenditure or increase in revenue to compensate for costs. Owners and managers can also use the degree of financial leverage as a scale for comparison with the industry or competitor.