UNDERSTANDING LEVERAGE: A DUAL APPROACH TO MEASURING RISK AND PROFITABILITY IN FIRMS
DOI:
https://doi.org/10.55640/Keywords:
Leverage, Operating leverage(OL), Financial leverage (FL), Total leverage (TL), EBIT, ROE, Static approach, Dynamic approach.Abstract
This study investigates the multifaceted nature of leverage in corporate finance, distinguishing between its static and dynamic forms. Building on Dudycz's theoretical framework, the paper explores how operating and financial leverage impact a firm's earnings and return on equity, depending on varying levels of sales and debt. The analysis emphasizes the importance of clear measurement definitions, supported by visual models. The findings highlight that while leverage can significantly enhance profitability, it also magnifies risk. The study recommends precision in leverage assessment to inform strategic financial decisions better.
References
1.Dudycz, T. (2020). The Different Faces of Leverage.
2.Brigham, E.F. (1992). Fundamentals of Financial Management. The Dryden Press.
3.Ross, S.A., Westerfield, R.W., & Jaffe, J. (1996). Corporate Finance. IRWIN.
4.Damodaran, A. (1994). Damodaran on Valuation. John Wiley & Sons.
5.Schall, L.D., & Haley, C.W. (1983). Financial Management. McGraw-Hill.
6.Neveu, R.P. (1985). Fundamentals of Managerial Finance. South-Western Publishing.
7.Ellis, J., & Williams, D. (1993). Corporate Strategy and Financial Analysis. Pitman Publishing.
8.Garvey, G.T., & Hanka, G. (1999). "Capital Structure and Corporate Control," The Journal of Finance.
9.Brealey, R.A., & Myers, S.C. (1996). Principles of Corporate Finance. McGraw-Hill.
10.Buccino, G.P., & McKinley, K.S. (1997). "The Importance of Operating Leverage," The Secured Lender.
11.Süchting, J. (1995). Finanzmanagement. Gaabler Verlag.
12.Boer, F.P. (1999). The Valuation of Technology. John Wiley & Sons.
13.Siegel, J.G., J.K. Shim, and S.W. Hartman. (1992). The McGraw-Hill Pocket to Business Finance. 201 Decision-Making Tools for Managers. New York: McGraw-Hill.
14.Süchting, J. (1995). Finanzmanagement. Wiesbaden: Gaabler Verlag.
Downloads
Published
Issue
Section
License
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain the copyright of their manuscripts, and all Open Access articles are disseminated under the terms of the Creative Commons Attribution License 4.0 (CC-BY), which licenses unrestricted use, distribution, and reproduction in any medium, provided that the original work is appropriately cited. The use of general descriptive names, trade names, trademarks, and so forth in this publication, even if not specifically identified, does not imply that these names are not protected by the relevant laws and regulations.
