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BRILLIANT’S Leverage Analysis 381

cial leverage provides the potential of increas- H$aZr n‹S>oJrŸ& Bg àH$ma \$m`ZopÝe`c brdaoO Ohm± EH$
ing the shareholders earnings as well as creat- Amoa eo`ahmoëS>g© Ho$ {b`o bm^ _| d¥{Õ H$m Adga CnbãY
ing the risk of loss to them. It is a double-edged H$amVm h¡ dht Xygar Amoa hm{Z H$s Omo{I_ ^r CËnÞ H$aVm
sword. h¡Ÿ& `hr H$maU h¡ {H$ Bgo Xmo-Ymar Vbdma H$hVo h¢Ÿ&
Financial leverage is based on the assump- \$m`ZopÝe`c brdaoO Bg YmaUm na AmYm[aV h¡ {H$
tion that the firm is to earn more on the assets
\$_© Ûmam AnZo AgoQ²>g na {_bZo dmbm [aQ>Z©, ñWm`r
which are acquired by the use of funds on
which a fixed rate of interest/dividend is to be ã`mO/{S>{dS>oÝS> H$s VwbZm _| A{YH$ hmoJmŸ& AgoQ> H$s
paid. The difference between the earnings from A{ZªJ VWm \§$S> Ho$ Cn`moJ H$s {\$ŠñS> H$m°ñQ> Ho$ AÝVa
the assets and the fixed cost on the use of the H$m bm^ BpŠdQ>r eo`ahmoëS>g© H$mo {_boJm& AV: ñWm`r
funds goes to the equity shareholders. Thus,
use of fixed interest source of funds provides ã`mO XoZo dmco \§$S> Ho$ gmog© H$m Cn`moJ BpŠdQ>r na Á`mXm
increased return on equity without additional [aQ>Z© XoJm {OgHo$ {cE CÝh| {H$gr A{V[aº$ \§$S> H$s
requirement of funds from the shareholders. Amdí`H$Vm Zhr hmoJrŸ& Bgo 'Q´>oqS>J Am°Z B{ŠdQ>r' H$hVo
Therefore, financial leverage is also called ‘trad-
ing on equity’. However, in the period of ad- h¢Ÿ& `Ú{n, _§Xr Ho$ Xm¡a _| A{ZªJ H$m\$s Zht h¡, ñWm`r
versity when earnings are not adequate, the cmJV| BpŠdQ>r hmoëS>g© Ho$ {cE ~moP hmo gH$Vr h¢Ÿ&
presence of fixed charges will be a burden on
the earning of equity holders.
The financial leverage is computed as: \$m`ZopÝe`c brdaoO H$s JUZm Bg àH$ma H$aVo h¢…
EBIT
EBIT  Interest
Example, EBIT of a company is ` 3,000 CXmhaU, `{X {H$gr H$ånZr H$m ã`mO d Q>¡³g Ho$
while interest on debenture is ` 2,000, the fi- nyd© bm^ (EBIT) ` 3,000 h¡ VWm {S>~oÝMa na ã`mO
, 3 000 , 3 000
nancial leverage will be  3 ` 2,000 h¡ Vmo \$m`ZopÝe`c brdaoO  3 hmoJmŸ&
, 1 000 , 1 000
It means for every 1% increase in EBIT, the BgH$m A{^àm` `h h¡ {H$ EBIT _| 1% H$s d¥{Õ go
EPS will increase by 3% and vice-versa. EPS 3% ~‹T>oJm Am¡a 1% H$s H$_r go 3% KQ>oJmŸ&
Degree of Financial Leverage \$m`ZopÝe`b brdaoO H$s {S>J«r

The degree of financial leverage measures \$m`ZopÝe`b brdaoO H$s {S>J«r Am°naoqQ>J BÝH$_
the impact of a change in operating income (EBIT) _| n[adV©Z H$m B{ŠdQ>r na à{V eo`a BÝH$_ (EPS)
(EBIT) on change in earning per share on eq- _| n[adV©Z Ho$ à^md H$mo _mnVm h¡Ÿ& \$m`ZopÝe`b brdaoO
uity. Degree of financial leverage (DFL) can be H$s {S>J«r H$s JUZm Bg àH$ma hmoVr h¡…
calculated as:
Percentage change in EPS
DFL =  1
Percentage change in EBIT

 EPS EPS
Alternatively, DFL =
 EBIT  EBIT