Leverage essay
Leverage refers to the investment strategy that a firm uses to expand its business operations by using borrowed money. The borrowed cash used is primarily from business investors, owners, and shareholders. The use of leverage ensures that company interests are observed, and there is an increase in the potential returns of different investments.
Operating Leverage
Operating leverage is the amount of debt that an organization is willing to risk to finance its operations. Operating leverage can either be high or low, depending on the type of investment that an organization is ready to make (Li & Zeng, 2020). Organizations with little operating leverage mean that they have lower fixed costs but high sales, while high operating leverage means they have high fixed costs regardless of any sales made.
Financial Leverage
Financial leverage refers to an organization using borrowed debt to purchase more assets, which leads to enhanced earnings and favorable tax conditions. The rationale behind financial leverage is that the higher the debt accrued, the more the assets acquired, thus generating more returns (Li & Zeng, 2020). However, organizations investing in financial leverage can experience disproportionate losses if they what they borrow does not equal to the returns.
Total Leverage
Total leverage essentially combines financial and operating leverage. This means that earnings and sales revenue must be equal, indicating that borrowed debt led to similar returns in profits (Li & Zeng, 2020). An organization operating in total leverage also means it has balanced fixed costs indicating it does not borrow more than its operating costs.
Financial Statements of Business Of Interest
The business of interest is IPG Photonics, which is an organization providing fiber laser solutions in technology. As noted earlier, an organization operating in high leverage means that whenever a business prospect develops, it has the required tools and capital to invest with the idea. In the financial year 2018, the total amount in sales was $1, 459, 874, which was higher compared to $1, 408, 889 in the year 2017 (IPG Photonics, 2020). As such, IPG Photonics operates on high operating leverage, thus has ample finances to increase its investment opportunities earning higher revenue.