Meaning

Leverage provides the framework for financing decisions of a firm. Define as the employment of an asset or source of funds for which the firm has to pay a fixed cost or fixed return. Deleveraging is the action of reducing borrowings.

Types of Leverages

Operating Leverage

Financial Leverage

Operating Leverage
Leverage associated with the employment of fixed cost assets. Concerned with the relationship between the firms sales revenue and its earnings before interest and taxes (EBIT)

Financial Leverage
Measure of the amount of debt used by a firm. Concerned with the relationship between the firms EBIT and its common stock earnings per share (EPS). Used as a means of increasing he return to common shareholders.