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Fundas : Understanding Operating Leverage


Leverage amplifies the profitability of companies. First thing that comes to mind when one speaks of leverage is the debt that the company has on its balance sheet - the company takes on debt to fund its assets and grow its business. This is called Financial Leverage. This sits on the liability side of the balance sheet - long and short term borrowings.

One would have come across companies where sales are growing say at 10%, however operating profits or EBIT is growing much faster . . .

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