Lease Rental Discounting
Many corporations and individuals earn a significant portion of their income from rents that they derive from their immovable properties. The financing needs of these people are different from the vast majority of the population. It is for this reason that special products like lease rental discounting have been created to meet their needs. In […]
Hedge Funds and Regulations
Technically, the term hedge fund does not exist. In fact, the term hedge fund applies to any fund which is sold to accredited private investors and does not have to follow through with the regulation process! Now, investment advisory is a highly regulated industry and there are several laws which have been passed to ensure […]
Time Correction: How Markets Tacitly Reconcile Bulls and Bears!
Booms and busts have now become a normal part of the business cycles. Due to monetary inflation, the value of assets is expected to rise every year. However, a lot of time this rise does not happen. Sometimes, this rise is replaced by a fall. This fall is called a market correction or a crash […]
Portfolio Revision – Meaning, its Need and Strategies
What is a Portfolio ? A combination of various investment products like bonds, shares, securities, mutual funds and so on is called a portfolio. In the current scenario, individuals hire well trained and experienced portfolio managers who as per the client’s risk taking capability combine various investment products and create a customized portfolio for guaranteed […]
What are Development Impact Bonds and How are they Evaluated
Development impact bonds are a revolutionary new type of bonds which are being introduced in the market. These bonds have been introduced to ensure that the profit motive of the financier is also met while meeting the development needs of the social entrepreneur. What are Development Impact Bonds? Development impact bonds are a three-way financial […]
Most firms use both operating leverage and capital leverage to some extent.
In today’s business world it is almost impossible to run a business without having some degree of automation and mechanization (operating leverage). It is also not possible to grow at an adequate speed unless the company is taking advantage of borrowed money.
However, the degree to which a company uses operating leverage and financial leverage can be different.
Some companies use more financial leverage than operating leverage while other use more operating leverage. This creates a challenging scenario whereas an analyst has to interpret the different degrees of riskiness of companies with different cost and capital structures. The degree of combined leverage (DCL) makes it possible to do this.
PAT/Number of Shares = Earnings per Share (EPS)
Therefore if operating leverage of a firm= 1.4 whereas financial leverage = 2, then the degree of combined leverage equals 1.4 * 2 = 2.8
Degree of operating leverage shows how a change in sales affects the EBIDTA of the firm. Whereas degree of financial leverage shows how a change in EBIDTA affects the EPS of the firm. Combining the two analysts can predict how a change in sales is likely to magnify the gains or losses to the EPS.
Your email address will not be published. Required fields are marked *
