Distinguish between operating leverage and financial leverage

Both operating and financial leverage result in the magnification of changes to earnings due to the presence of fixed costs in a company’s cost structure. The difference is only the part of the income statement we are looking at. Operating leverage is the magnification on the top half of the income statement¾how EBIT changes in response to changes in sales; the relevant fixed cost is the fixed cost of operating the business. Financial leverage is the magnification on the bottom half of the income statement¾how earnings per share changes in response to changes in EBIT; the relevant fixed cost is the fixed cost of financing, in particular interest.