What is combined leverage?

what is

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Combined leverage refers to the impact of both operating leverage and financial leverage on a company's earnings before interest and taxes (EBIT).

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It measures the sensitivity of a company's net income to changes in sales.

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A company with high combined leverage will experience a large change in net income for a given change in sales.

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It takes into account both fixed operating and financial costs in determining a company's profitability.

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Companies with high combined leverage have a higher risk of financial distress in the event of a downturn in sales.

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It is important for companies to understand their combined leverage in order to make informed decisions about their capital structure and operating expenses.

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A company can reduce its combined leverage by either reducing fixed costs or increasing sales volume.

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Combined leverage can be used by investors to assess a company's risk and potential for profitability.

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Combined leverage can help a company determine the optimal level of debt to use in its capital structure to maximize profits.

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Companies can use scenario analysis to determine the potential impact of changes in sales on their net income, given their level of combined leverage.

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Combined leverage varies across industries, with high fixed cost industries like manufacturing having higher combined leverage than low fixed cost industries such as services.

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