Question

What is the difference between financial leverage and operating leverage?

Answer 1

Financial leverage refers to the use of debt to finance a company's operations. It amplifies returns but also increases risk. Operating leverage, on the other hand, relates to the fixed costs in a company's cost structure, impacting profitability as sales volume changes.

Answer 2

The main difference between financial leverage and operating leverage is the source of the leverage. Financial leverage refers to the use of borrowed funds to increase the return on equity, while operating leverage refers to the use of fixed costs to increase the return on sales. Additionally, financial leverage increases the risk of bankruptcy, while operating leverage increases the risk of a decrease in profitability.

Answer 3

Financial leverage refers to the use of borrowed money to increase the potential return on an investment. Operating leverage, on the other hand, refers to the fixed costs a company incurs in the production of goods or services. While both types of leverage can increase potential profitability, they carry different risks and require different management strategies.