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BRILLIANT’S                       Leverage Analysis                               385


                      The variabilities  of  EBIT  can be  distin-  EBIT _| n[adV©Z Xmo àH$ma H$s Omo{I_m| H$mo àH$Q>
                  guished between two types of risks, operating  H$aVm h¡… Am°naoqQ>J [añH$ Ed§ \$m`ZopÝe`c [añH$Ÿ& _me©b
                  risk and financial risk. The distinction between  Zo ~hþV nhbo BZ XmoZm| àH$ma H$s [añH$ _| AÝVa Bg àH$ma
                  operating  and  financial  risk  was  long  ago
                  recognised by Marshall in the following words:  ~Vm`m…
                      ‘Let us suppose that two men are carry-     "_mZm {H$ Xmo bmoJ EH$ g_mZ {~OZog H$a aho h¢Ÿ&
                  ing on similar business, the one working with  EH$ ñd`§ H$s ny§Or bJmH$a d Xygam CYma ny§Or boH$aŸ&
                  his  own  capital,  the other  chiefly with  bor-
                  rowed capital. There is one set of risk of the  XmoZm| {~OZog _| eof g^r Omo{I_| g_mZ ah|Jr {H$ÝVw
                  particular business in which they are engaged.  CYma ny§Or boH$a {~OZog H$aZo dmbm ã`mO Ho$ ñWm`r
                  But there is another set of risks, the burden of  ^ma Ho$ A{V[aº$ Omo{I_ dhZ H$aVm h¡ Omo ñd`§ H$s ny§Or
                  which has  to be  borne by  the man  working  bJmZo dmbo na Zht hmoVrŸ&'
                  with borrowed capital, and not by another.’
                      The combined effect of different degrees of  \$_© na Am°naoqQ>J Ed§ \$m`Z|{e`c crdaoO H$s {d{^Þ
                  operating and financial leverages on the firm  {S>J«r Ho$ H§$~mBÝS> à^md H$mo {ZåZmZwgma g_Pm`m J`m h¢:
                  is explained as below:

                                            Financial
                    S.      Operating NPP                                 Effect / Conclusion
                   No.      Leverage        Leverage
                    1.         High            High          Very risky. High interest  outflow, not commensurate
                                                             with  earnings.
                    2.         High            Low           Sales still unsatisfactory in relation to the fixed costs
                                                             to be  absorbed.  Long-term borrowings  not a  strain
                                                             on  earnings.
                    3.         Low             High          Ideal situation for profit maximisation.
                    4.         Low             Low           Management  over  cautious.


                    H«$.      Am°naoqQ>J    \$m`Z|{e`c                        à^md/{ZîH$f©
                              crdaoO          crdaoO

                    1.         CÀM             CÀM           ~hþV [añH$s, hmB© B§Q>aoñQ> AmCQ>âbmo, Am` Ho$ AmZwnm{VH$ Z
                                                             hmoZmŸ&
                    2.         CÀM             {ZåZ          gpå_{cV H$s OmZo dmcr {\$ŠñS> H$m°ñQ> Ho$ g§~§Y _| A^r ^r
                                                             Ag§VmofOZH$ {~H«$sŸ& c§~r Ad{Y Ho$ H$O© Am` na ~moP Zht
                                                             hmoVoŸ&
                    3.         {ZåZ            CÀM           àm°{\$Q> _¡pŠO_mBOoeZ Ho$ {cE AmXe© n[apñW{V
                    4.         {ZåZ            {ZåZ          gVH©$Vm go A{YH$ _¡ZoO_|Q>

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