## Types of Leverages

There are three commonly used measures of leverage. Each links two points on the profitability statement and signals a type of risk.

### Where each leverage sits on the profitability statement

```

Sales xxx ┐

Less: Variable Cost (xxx) │ Operating

Contribution xxx │ Leverage

Less: Fixed Cost (xxx) ┘

EBIT / Operating Profit xxx ┐ ┐

Less: Interest (xxx) │ │ Combined

EBT xxx │ Financial │ Leverage

Less: Tax (xxx) │ Leverage │

EAT xxx │ │

Less: Preference Dividend (xxx) ┘ │

Earnings for Equity (EFE) xxx │

÷ No. of Equity Shares (N) │ │

EPS = EFE ÷ N xxx ┘

```

### Combined Leverage

Because CL spans Sales all the way to EPS, it equals the product of the other two:

$$DCL = DOL \times DFL$$

⚠️ Common exam mistakes

Mixing up which two variables each leverage connects (OL = Sales↔EBIT, FL = EBIT↔EPS, CL = Sales↔EPS).
Adding DOL and DFL instead of multiplying them to get combined leverage.
Associating operating leverage with financial risk — it indicates business risk.

Reference:

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Types of Leverages (Operating, Financial, Combined)

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