aarushi mehtaKnowledge Contributor
How many types of leverage are there. Explain them
How many types of leverage are there. Explain them
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Sure, here’s a brief summary of each type of leverage:
Financial Leverage: Using borrowed funds to amplify returns. It increases potential profits when investments perform well but also increases risk because debt must be repaid regardless of performance.
Operating Leverage: Operating leverage involves fixed costs in a company’s cost structure. When a company has high fixed costs and generates more revenue, it experiences increased profitability due to the lower incremental costs associated with higher production.
Sales Leverage: Sales leverage refers to the impact of sales volume on a company’s profitability. If a company can increase sales without significantly increasing costs, it can achieve higher profitability due to economies of scale and spreading fixed costs over a larger revenue base.