“One type of leverage affects both EBIT and EPS. The other type affects only EPS.” Explain this statement.

Verified Answer

Operating leverage affects both EBIT and EPS and financial leverage affects only EPS.
Operating leverage measures the percentage of fixed cost in total cost. If the percentage of fixed cost is high, then there is a high degree of operating leverage and if the percentage of fixed cost is low then there is a low degree of operating leverage. Therefore, operating leverage affects both EBIT and EPS. Whereas, financial leverage is also known as trading on equity. It is when additional assets are acquired by the use of debt. Therefore it affects only EPS.