156010

Business Risk Analysis (Leverage Analysis)

Business Risk Analysis (Leverage Analysis)

Business risk (Total leverage or Combined leverage) consists of operational risk and (Operating leverage) Financial risk (Financial leverage). Business risk arises from the investment and financing policies of the company, which affect both operational risk and financial risk as well.

Degree of Operating leverage

Caused by fixed costs (Fixed costs) such as building rent, employee salaries, etc. The higher the proportion of fixed costs, the higher the risk from operations. Or it can be said that if there is a high fixed cost Small changes in sales will affect operating income. We can analyze the level of operating risk from

DOL = % EBIT
% Sale

Degree of Financial Leverage

The higher the interest expense, the higher the financial risk. which is related to the debt financing policy. We can analyze the level of financial risk from

DFL = % Net Income
% EBIT

When both factors are taken into account the level of business risk (Total leverage or Combined leverage), the formula can be used as follows:

Combined leverage = %Net Income
%Sale