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When you evaluate whether you can increase production profitably, you are addressing operating leverage. If you are contemplating taking on additional debt, you have entered the realm of financial leverage. Both types are crucial to business success and have different, though related, meanings.
Operating leverage establish the relationship between sales and operating profit whereas financial leverage establish the relationship between operating profits and the capital employed.
Operating leverage is the result of the use of Fixed operating costs whereas financial leverage the result of use of the total cost of debt financing.
Operating leverage is used to measure the business risk whereas financial leverage used to measure the financial risk aspects.
financial leverage is measure of debt, usually defined as total debt divided by owner's equity and operating leverage compares sales to the cost of production
The extend to which a firm use the combination of fix and variable cost with respect to sale is call operating leverage
While The degree to which an organization utilizing debt money is called Financial leverage.
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Financial Leverage shows how company's capital structure is financed.
And Operating Leverage tells us About company's cost Structure.
Operating leverage is concerned with investment activities of the firm. It is determined by the cost structure of the firm.
Financial leverage is concerned with financing activities of the firm.
It is determined by the capital structure of the firm
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