Leverage:The word leverage, borrowed from physics, is frequently used in financial management. The object of application of which is made to gain higher financial benefits compared to the fixed charges payable, as it happens in physics i. e. , gaining larger benefits by using a lesser amount of force. In short, the term leverage is used to describe the ability of a firm to use fixed cost assets or funds to increase the return to its equity shareholders. There are three types of Leverage:Operating LeverageFinancial LeverageTotal LeverageComponents of the Degree of Total LeverageThe two leverages that degree of total leverage accounts for are as follows:Operating leverage “ This part of a companys fixed costs reveals how effectively revenue from sales is translated into operating income. A business with a high level of operating leverage can increase its bottom line significantly with just a relatively small increase in revenues because it has effectively leveraged its operating costs so as to maximize profits. Financial leverage “ Financial leverage is a metric used to evaluate the extent to which a company uses debt to increase its assets and net income. Examining a companys financial leverage shows the impact on earnings per share of changes in EBIT that result from taking on additional debt. Calculating Degree of Total LeverageDegree of total leverage = Degree of operating leverage x Degree of financial leverage Therefore, total leverage is a combination of financial leverage and operating leverage.