Financial Statement Analysis

- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Solvency
- Liquidity Risk
- Altman Z Score

- Turnover Ratios
- Profitability Ratios
- Profit Margin
- Gross Profit Margin Formula
- Operating Profit Margin Formula
- Net Profit Margin Formula
- EBIDTA Margin
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- ROIC vs ROCE
- CFROI
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Capitalization Rate
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- Financial Leverage Ratio
- Net Debt Formula
- Leverage Ratios
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio

## Operating Leverage vs Financial leverage (Differences)

**Operating Leverage vs Financial Leverage –** Leverage is a firm’s ability to employ new asset or funds to create better returns or to reduce costs. That’s why leverage for any company is very significant.

There are two kinds of leverage – operating leverage and financial leverage. When we combine the two, we get a third type of leverage – combined leverage. Since both of these (operating leverage and financial leverage) are quite different in nature and we look at different metrics to calculate them, we need to discuss it in detail to understand them better.

- Operating leverage can be defined as firm’s ability to use fixed costs (or expenses) to generate better returns for the firm.
- Financial leverage can be defined as firm’s ability to increase better returns and to reduce the cost of the firm by paying lesser taxes.

Operating leverage, on one hand, compares how well a firm uses its fixed costs and financial leverage, on the other hand, looks at various capital structures and chooses the one which reduces taxes most.

In this article, we at the comparative analysis of operating leverage vs financial leverage.

Without any ado, let’s get started with the head to head differences between operating leverage and financial leverage in an infographics

### Operating Leverage vs Financial leverage Infographics

Let’s look at the top differences between operating leverage and financial leverage below –

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### Operating Leverage vs Financial leverage (Comparison Table)

Basis for Comparison between Financial Leverage vs Operating Leverage |
Operating Leverage |
Financial Leverage |

1. Meaning |
Operating leverage can be defined as firm’s ability to use fixed costs to generate more returns. | Financial leverage can be defined as firm’s ability use capital structure to earn better returns and to reduce taxes. |

2. What it’s all about? |
It’s about the fixed costs of the firm. | It’s about the capital structure of the firm. |

3. Measurement |
Operating leverage measures the operating risk of a business. | Financial leverage measures the financial risk of a business. |

4. Calculation |
Operating leverage can be calculated when we divide contribution by EBIT of the firm. | Financial leverage can be calculated when we divide EBIT by EBT of the firm. |

5. Impact |
When degree of operating leverage is higher, it depicts more operating risk for the firm and vice versa. | When degree of financial leverage is higher, it depicts more financial risk for the firm and vice versa. |

6. In relation with |
The degree of operating leverage is usually higher than Break Even Point. | Financial leverage has a direct relationship with the liability side of the balance sheet. |

7. How much it is preferred? |
The preference is lower. | The preference is much higher. |

### Conclusion

Operating leverage and Financial leverage are both important in their own terms. And they both help businesses in generating better returns and reduce costs. So the question remains can a firm use both of these leverages? The answer is yes.

If a company can use their fixed costs well, they would be able to generate better returns just by using operating leverage. And at the same time, they can use financial leverage by changing their capital structure from total equity to 50-50, 60-40, or 70-30 equity-debt proportion. Even if changing the capital structure would prompt the company to pay interests, still, they would be able to generate a better rate of returns and would be able to reduce the amount of taxes at the same time.

That’s why using operating leverage and financial leverage is a great way to improve the rate of returns of the company and to reduce the costs during a particular period.

### Recommended Articles

This has a been a guide to the top differences between Operating Leverage vs Financial Leverage. Here we also discuss the Operating Leverage and Financial Leverage differences with examples, infographics, and comparison table. You may also have a look at the following articles for gaining further knowledge in corporate finance –

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