5/14/2012

FINANCIAL REPORTING AND ANALYSIS

CA K.K.Ramesh & CA K.P.Rajendran

Business Analysis
Business analysis involves analyzing a companys business environment, its strategies and its financial position and performance.

Business Analysis
Financial statement analysis is an integral and important part of the broader field of business analysis.

Business Analysis
Business analysis is useful in a wide range of business decisions such as:
whether to invest in equity or in debt securities(equity and debt valuation) whether to extend credit through short or long-term loans (credit risk assessment). how to value a business in an initial public offering (IPO).

Business Analysis
Business analysis is the process of evaluating a companys economic prospects and risks.

Business Analysis
how to evaluate restructurings including mergers, acquisitions and divestitures. What would be the future earnings of the company (earnings predictions).

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Business Analysis
Business analysis is applied in many forms by security analysts, investment advisors, fund managers, investment bankers, credit raters, corporate bankers and individual investors to make informed decisions in a variety of situations.

Business Analysis
Credit analysis involves the evaluation of the credit worthiness of the company. Creditworthiness is the ability of a company to honor its credit obligations.

Types of Business Analysis

Business analysis can take two forms
Credit analysis and Equity analysis

Business Analysis
The benefits of creditors are limited to the contracted rate of interest. At the same time, creditors face the risk of default.

Business Analysis
Credit analysis is performed from the point of view of debt investors and lenders.

Business Analysis
Due to this asymmetric risk-return relationship of creditors, the main focus of the credit analysis is on risk rather than profit.

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Business Analysis
For a debt investor, the Profit level is important only to the extent that it should provide adequate margin of safety for the company to meet its credit obligation.

Business Analysis
This involves analysis of both liquidity and solvency

Business Analysis
A debt investor is more interested in the variability and sensitivity of the profits to business conditions which is a measure of the default risk

Business Analysis
Liquidity is the ability of a company to meet its short term obligation or immediate commitment. Liquidity depends on a companys cash flows and and the makeup of its current assets and current liabilities.

Business Analysis
In other words, credit analysis focuses on downside risk rather than upside potential.

Business Analysis
Solvency, on the other hand, is the ability of a company to meet its longterm obligations. It depends on both a companys longterm profitability and its capital structure.

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Business Analysis
Credit analysis from the point of view of the short-term creditors focus more on the current financial conditions, cash flows and liquidity of the current assets.

Financial Analysis
In financial analysis, an analyst seeks to answer such questions as:
How successfully has the company performed, relative to its own past performance and relative to its competitors? How is the company likely to perform in the future? Based on expectations about future performance, what is the value of the company or its securities?

Business Analysis
Credit analysis from the point of the long-term debt investors involve more detailed and forward-looking analysis. The main focus will be on projection of cash flows and evaluation of extended profitability or sustainable earning power of the company.

Financial Analysis
Even though the primary source of information for financial analysis is a companys annual report, including the financial statements, footnotes, and managements discussion and analysis, an effective financial analysis requires some important nonfinancial information like industry and economic data.

Financial Analysis
Financial analysis applies analytical tools to financial data to assess a companys performance and trends in that performance.

Financial Analysis
Financial analysis of a company may be performed for a variety of reasons, such as valuing equity securities, assessing credit risk, or conducting due diligence related to an acquisition.

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Financial Analysis
Two most common categories of financial analysis are:
Equity analysis, where financial analysis is performed from the owners perspective, either for valuation or performance evaluation. Credit analysis, where financial analysis is performed from the creditors (such as a banker or bondholder) perspective.

Financial Analysis
Equity analysis usually places a greater emphasis on growth, where as credit analysis usually places a greater emphasis on risks.

Financial Analysis
The focus of equity analysis and credit analysis varies due to the differing interest of the owners and creditors.

Ratio Analysis
A financial Ratio is a relationship between two financial variables. A financial ratio is an indicator of the financial performance of a company.

Financial Analysis
Both equity and credit analysis assess the entitys ability to generate and grow earnings and cash flow, as well as any associated risks.

Ratio Analysis
Even though absolute figures are also useful in assessing the financial performance of a company, absolute figures do not take into account the effect of size. A ratio, on the other hand, reduces the effect of size, thereby enhancing comparison between companies and over time.

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Liquidity Ratios
Liquidity is the ability of a company to meet its short-term obligation. Liquidity measures how quickly assets are converted into cash Liquidity ratios measure the ability of a company to pay off its short-term obligations.

Liquidity Ratios
Larger companies may have more potential funding sources like money markets and discretionary access to capital markets than smaller companies. This reduces the size of their liquidity buffer compared to smaller companies.

Liquidity Ratios
The level of liquidity needed differs from one industry to another and is also, to some extent company specific.

Liquidity Ratios
Contingent liabilities, such as letters of credit or financial guarantees, can also be relevant when assessing liquidity of a company. Contingent liabilities, which is usually disclosed in the footnotes to the balance sheet, represents potential cash outflows and should be included in assessing a companys liquidity, when appropriate.

Liquidity Ratios
Judging whether a company has adequate liquidity requires analysis of its current liquidity position, anticipated future funding needs, and options for procuring additional funds.

Liquidity Ratios
The importance of contingent liabilities varies for the non-banking and banking sector. In the banking sector, contingent liabilities represent potentially significant cash outflows that are not dependent only on the banks financial condition.

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Liquidity Ratios
Although outflows in normal market circumstances may be low, a general macroeconomic or market crisis can trigger a substantial increase in cash outflows related to contingent liabilities because of the increase in defaults and business bankruptcies that often accompany such events.

Current Ratio
The size of the current ratio that a healthy company needs to maintain is dependant upon the relationship between inflows of cash and the demands for cash payments.

Current Ratio
Current Ratio measures the liquidity and short-term solvency of a company. It is given by the formula:

Current Ratio
A company that has a continuous inflow of cash or other liquid assets, such as a utility company, may be able to meet its current obligation easily despite a small current ratio.

Currennt Ratio
Current Assets Current Ratio= Current Liabilities

Current Ratio
On the other hand, a manufacturing firm with a long product development and manufacturing cycle may need to maintain a larger current ratio.

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Current Ratio
A higher current ratio indicates a higher level of liquidity (i.e., greater ability to meet short-term obligations). A lower current ratio, on the other hand, indicates less liquidity.

Current Ratio
The rule of thumb for current ratio is 2:1. But for a manufacturing company like Ashok Leyland, a current ratio of even 1.5:1 may be satisfactory. For a company with fast turnover of cash, like a utility company, a current ratio of even 1:1 is satisfactory.

Current Ratio
The current ratio implicitly assumes that inventories and accounts receivables are indeed liquid (which is presumably not the case when related turnover ratios are low).

Acid Test Ratio (Quick Ratio)

The Acid test ratio (or quick ratio) is a more conservative measure of liquidity and measures the absolute liquidity of a company.

Current Ratio
A low current ratio may indicate liquidity or short term solvency risk, while a very high current ratio may indicate that either the current assets of the company is not current or liquid or there is excessive investment in current assets which may result in lower profits due to high carrying costs.

Acid Test Ratio (Quick Ratio)

In calculating quick ratio, only more liquid current assets which can be liquidated within a very short period of time (some times referred as quick assets) is considered.

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Acid Test Ratio (Quick Ratio)

Quick assets include only cash, marketable securities and receivables. Inventory is not included on the presumption that inventory might not be easily and quickly converted into cash.

Acid Test Ratio (Quick Ratio)

Quick Assets Quick Ratio= Current Liabilities Quick Assets = Cash + Marketable Securities + Receivables

Acid Test Ratio (Quick Ratio)

Prepaid expenses are also not included in quick assets because prepaid expenses represent costs of the current period that have been paid in advance and cannot usually be converted back into cash.

Acid Test Ratio (Quick Ratio)

The rule of thumb for acid test ratio is 1:1. For a company with fast turnover of cash, an acid test ratio even below 1:1 is satisfactory.

Acid Test Ratio (Quick Ratio)

In situations were inventories are illiquid, (as indicated, for example, by low inventory turnover ratios), the quick ratio may be a better indicator of liquidity than the current ratio. The Acid test ratio or Quick ratio is calculated using the following formula:

Cash Ratio
The Cash Ratio normally represents a reliable measure of an entitys liquidity in a crisis situation. Only highly liquid assets like cash and marketable securities are considered for this ratio

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Cash Ratio
The Ratio is given by: Cash + Marketable Securities Current Liabilities

Defensive Interval Ratio

A higher defensive interval ratio indicates greater liquidity. If a companys defensive interval ratio is very low relative to peer companies or to the companys own history, the analyst would want to ascertain whether there is sufficient cash inflow expected to mitigate the low defensive interval ratio.

Defensive Interval Ratio

This ratio measures how long the company can continue to pay its expenses from its existing liquid assets without receiving any additional cash inflow.

Defensive Interval Ratio (DIR)

Quick Assets DIR = Daily Cash Expenses Quick Assets = Cash + Marketable Securities + Receivables

Defensive Interval Ratio

For example, a defensive interval ratio of 50 would indicate that the company can continue to pay its operating expenses for 50 days before running out of liquid assets, assuming no additional cash inflows.

Cash Conversion Cycle (Net Operating Cycle)

Cash conversion cycle is the time that elapses from the point when a company invests in working capital until the point at which the company collects cash. It is the time between the outlay of cash and the collection of cash.

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Cash Conversion Cycle (Net Operating Cycle)

Cash conversion cycle = Days of inventory on hand (DOH) + Days of sales outstanding (DSO) Number of days of payables.

Solvency Ratios
Solvency refers to a companys ability to meet its long-term debt obligations (i.e., interest and principal payments).

Cash Conversion Cycle (Net Operating Cycle)

A shorter Cash conversion cycle indicates greater liquidity. The short cash conversion cycle implies that the company only needs to finance its inventory and accounts receivable for a short period of time.

Solvency Ratios
Solvency ratios provide information regarding the relative amount of debt in the companys capital structure, and the adequacy of its earnings and cash flow to cover interest expenses and other fixed charges (such as lease payments) as they come due.

Cash Conversion Cycle (Net Operating Cycle)

A longer cash conversion cycle indicates lower liquidity. It implies that the company must finance its inventory and accounts receivable for a longer period of time.

Solvency Ratios
Solvency ratios also measure the financial leverage and financial risk of a company.

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Solvency Ratios
Solvency ratios are primarily of two types. Debt ratios, the first type, measure the amount of the debt capital relative to the equity capital. Coverage ratios, the second type, measure the ability of a company to cover its debt payments.

Solvency Ratios
In Debt-to-assets ratio, total debt include total of interest-bearing short-term and long-term debt, excluding accrued expenses and accounts payable. Total assets include fixed assets as well as current assets.

Solvency Ratios
Debt Ratios
Ratio Debt-to-assets ratio Debt-to-capital ratio Numerator Total debt Total long-term debt Denominator Total assets Total long-term debt + Total shareholders equity Total shareholders equity Average total equity

Debt-to-Assets Ratio
This ratio measures the percentage of total assets financed with debt. For example, a debt-to-assets ratio of 0.40 or 40 percent indicates that 40% of the companys assets are financed with debt. A higher ratio means higher financial risk and thus weaker solvency.

Debt-to equity ratio Financial leverage ratio

Total long-term debt Average total assets

Solvency Ratios
Coverage Ratios
Ratio Interest coverage ratio Fixed charge coverage Numerator EBIT EBIT + Lease payments Denominator Interest payments Interest payments + Lease payments

Debt-to-Capital Ratio
The debt-to-capital ratio measures the percentage of a companys capital (long-term debt plus equity) represented by long-term debt. As with the previous ratio, a higher ratio means higher financial risk and thus weaker solvency.

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Debt-to Equity Ratio

The debt-to-equity ratio measures the amount of long-term debt relative to the equity. Interpretation is similar to the preceding two ratios; that is, a higher ratio indicates weaker solvency.

Financial Leverage Ratio

However, financial leverage also creates risks for the shareholders. Unlike dividend payment, which is at the discretion of the board of directors, interest payment on debt is a contractual obligation. A firm faces risks of financial distress if it defaults interest and principal payments on debt.

Financial Leverage Ratio

The financial leverage ratio measures the financial risk of a company. The ratio measures the multiple of assets to equity. The higher the ratio the higher the potential risk and reward to the equityholders.

Interest Coverage Ratio

This ratio measures the number of times a companys EBIT could cover its interest payments. A higher interest coverage ratio indicates stronger solvency, offering greater assurance that the company can service its debt from operating earnings.

Financial Leverage Ratio

A positive financial leverage is advantages to the equityholders of a firm, if the firm earns a higher rate of return on its investments as compared to the after-tax cost of its debt.

Fixed Charges Coverage Ratio

This ratio measures the number of times a companys earnings before interest, taxes and lease payments can cover the companys interest and lease payments.

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Fixed Charges Coverage Ratio

Like interest coverage ratio, a higher fixed charge coverage ratio implies stronger solvency, offering greater assurance that the company can service debts from operating earnings.

Activity Ratios
Ratio Total asset turnover Fixed assets turnover Working capital turnover Numerator Sales Sales Sales Denominator Average total assets Average net fixed assets Average working capital

Activity Ratios
Activity Ratios measure the investment efficiency of a company These ratios measure the efficiency in utilization of resources or assets by a company

Activity Ratios
Ratio Inventory turnover Numerator Cost of goods sold Denominator Average inventory Inventory turnover Average receivables Receivables turnover

Days of inventory on 365 hand Receivables turnover Sales Days of sales outstanding 365

Activity Ratios
Activity ratios reflect the efficient management of both current assets and long-term assets. As efficiency has a direct impact on liquidity, some activity ratios are also useful in assessing liquidity.

Activity Ratios
Ratio Payables turnover Number of days of payables Numerator Purchases 365 Denominator Average payables Payables turnover

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Total Asset Turnover Ratio

The total asset turnover ratio measures the companys overall ability to generate revenue with a given level of assets. In other words, the ratio measures the companys effectiveness in utilizing all of its assets.

Total Asset Turnover Ratio

The most valid comparison of the asset turnover ratio in such cases would be comparison over different periods for the same firm.

Total Asset Turnover Ratio

While a higher ratio indicates greater efficiency, a lower ratio can be indicator of inefficiency or of relative capital intensity of the business.

Fixed Asset Turnover Ratio

Fixed assets turnover ratio measures how efficiently the company generates revenue from its investments in fixed assets.

Total Asset Turnover Ratio

Since different industries require very different asset structures, comparing asset turnover ratios of different industries is meaningless. Likewise when a company is engaged in many industries, the exact meaning of an asset turnover ratio may be obscured.

Fixed Asset Turnover Ratio

A higher fixed assets turnover ratio generally indicates more efficient use of fixed assets in generating revenue.

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Fixed Asset Turnover Ratio

A low ratio can indicate inefficiency, a capital-intensive business environment, or a new business not yet operating at full capacity.

Fixed Asset Turnover Ratio

Sometimes, the fixed asset turnover ratio can be erratic because although revenue may have a steady growth rate, increase in fixed assets may not follow a smoother pattern In such cases, the year-to-year change in the ratio may not necessarily indicate change in the companys efficiency.

Fixed Asset Turnover Ratio

Fixed assets turnover ratio can also be affected by factors other than a companys efficiency.

Working Capital Turnover Ratio

Working capital turnover ratio indicates how efficiently the company generates revenue with its working capital. It measures the speed with which funds are provided by current assets to satisfy current liabilities.

Fixed Asset Turnover Ratio

The ratio would be lower for a company whose assets are newer (and, therefore, less depreciated and so reflected in the balance sheet at a higher carrying value) than the ratio for a company with older assets (that are thus more depreciated and so reflected at a lower carrying value).

Working Capital Turnover Ratio

A high working capital turnover ratio indicates greater efficiency.

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Inventory Turnover Ratio

The inventory turnover ratio measures the efficiency in management of inventory. It indicates the number of times the inventory has turned over or sold during the year.

Inventory Holding Period

Inventory holding period or Days of inventory on hand 365 = Inventory turnover ratio

Inventory Turnover Ratio

Inventory Turnover Ratio Cost of Goods Sold = Average Inventory

Inventory Holding Period

The inventory holding period or Days inventory on hand (DOH), indicates the number of days, on an average, the company holds inventory on hand or equivalently, the number of days worth of inventory, on an average, kept on hand by the company.

Inventory Holding Period

An alternative for measuring efficiency in utilization of resources in inventory is to convert inventory turnover ratio into Days of inventory on hand (DOH) which is otherwise known as inventory holding period.

Inventory Turnover Ratio

A high inventory turnover ratio (or low inventory holding period) relative to industry norms might indicate highly effective inventory management.

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Inventory Turnover Ratio

A high inventory turnover ratio is also a measure of the liquidity of the inventory and the ability of the company to convert inventories to cash quickly.

Inventory Turnover Ratio

While slower growth combined with higher inventory turnover could indicate inadequate inventory level, higher revenue growth (which is above industrys growth) with high inventory turnover may indicate greater inventory management efficiency.

Inventory Turnover Ratio

A high inventory turnover ratio may also indicate that the company does not carry adequate inventory which might lead to stock-out situation and associated revenue loss.

Inventory Turnover Ratio

A low inventory turnover ratio (or high DOH) indicates slow moving and non moving inventory and that inventory is not liquid. A low inventory turnover ratio may also suggest excessive investment in inventory which may result in high inventory carrying cost and low profit.

Inventory Turnover Ratio

To assess which explanation is more likely, an analyst must compare the companys revenue growth with that of the industry.

Receivables Turnover Ratio & Days of Sales Outstanding

Receivables Turnover Ratio and Days of Sales Outstanding (also known as Average Collection Period) gives an indication on the amount of time that lapses between sales and receipt of payment from customers. It is calculated as:

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Receivables Turnover Ratio

Receivables Turnover Ratio Net Sales = Average Receivables

Receivables Turnover Ratio

The Days of sales outstanding or Average Collection Period is compared to the credit period offered to the customer to evaluate the efficiency of the credit management.

Days Sales Outstanding or Average Collection Period

Days of Sales Outstanding or Average Collection Period (ACP) 365 = Receivables turnover ratio

Receivables Turnover Ratio

A relatively high receivables turnover ratio (and low Days of sales outstanding) might indicate highly efficient credit and collection procedures.

Receivables Turnover Ratio

Receivables Turnover Ratio or Days of Sales Outstanding shows how fast the company collects cash from customers.

Receivables Turnover Ratio

Alternatively, a high receivables turnover ratio could also indicate that the companys credit or collection policies are stringent, suggesting the possibility of sales being lost to competitors offering more lenient terms.

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Receivables Turnover Ratio

A relatively low receivables turnover ratio would typically raise questions about the efficiency of the companys credit and collection procedures. Comparing the companys sales growth relative to the industry can help the analyst assess whether sales are being lost due to stringent credit policies.

Payables Turnover Ratio

Payables Turnover Ratio Purchases = Average Payables

Receivables Turnover Ratio

The details of receivables aging (how much receivables have been outstanding by age) can also be used along with Days of sales outstanding to understand trends in collection.

Number of Days of Payables

Number of Days of Payables 365 = Payables turnover ratio

Payables Turnover Ratio and Number of Days of Payables

The Payables Turnover Ratio measures how many times per year the company pays off its creditors and the Number of Days of Payables indicate the average number of days the company takes to pay its suppliers. The ratio is calculated as follows:

Payables Turnover Ratio

If the amount of purchases is not directly available, it can be computed as cost of goods sold plus ending inventory less beginning inventory. Alternatively cost of goods sold is sometimes used as an approximation of purchases.

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Payables Turnover Ratio

A high payables turnover ratio (or low number of days of payables) relative to the industry is an indication that the company is not making full use of the available credit facilities. Alternatively it could result from the company taking advantage of prompt payment discount.

Profitability Ratios
The ability of a company to generate profit on capital invested is a key determinant of the companys performance and value and operating efficiency. Profitability Ratios measure the operating efficiency of a company.

Payables Turnover Ratio

An excessively low turnover ratio (high days payable) could indicate delay and problem in making payments on time, or alternatively, exploitation of lenient supplier terms.

Profitability Ratios
Profitability reflects a competitive position in the market and the quality of its management. Profit is enhanced either by improving the margin or by improving the turnover or investment efficiency.

Payables Turnover Ratio

If liquidity ratios indicate that the company has sufficient cash and other short-term assets to pay obligations and yet the days payable ratio is relatively high, the analyst would favor the lenient supplier credit and collection policies as an explanation.

Profitability Ratios
Profitability ratios measure the return earned by the company during a period. The return earned by a company during a period can be measured in two ways: return on sales or return on investment

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Profitability Ratios
Return on sales profitability ratios measure the margin on sales Return on investment profitability ratios measure return relative to assets, equity or total capital employed by the company.

Gross Profit Margin

Gross profit margin indicates the percentage of revenue available to cover operating and other expenditures. Higher gross profit margin indicates a combination of higher product pricing and lower product costs.

Profitability Ratios
Return on Sales
Ratio Gross profit margin Operating profit margin Net profit margin Numerator Gross profit Operating profit (EBIT) Net profit Denominator Sales Sales Sales

Gross Profit Margin

A product, having a better competitive advantage (e.g., superior branding, better quality or exclusive technology) may earn higher gross profit margin. Higher gross profit margin may also indicate that a company has a competitive advantage in product costs.

Profitability Ratios
Return on Investments
Ratio Operating ROA Return on assets (ROA) Return on capital employed Return on equity (ROE) Numerator Operating profit (EBIT) Net profit Operating profit (EBIT) Net profit Denominator Average total assets Average total assets Long-term debt and equity Average equity

Operating Profit Margin

Operating profit is calculated as gross margin minus operating costs. An operating margin increasing faster than the gross margin can indicate operating efficiency and efficiency in controlling operating costs.

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Operating Profit Margin

On the other hand, a declining operating profit margin is an indicator of deteriorating control over operating costs.

Valuation Ratios
Valuation Ratios
Ratio P/E P/CF P/S P/BV Numerator Price per share Price per share Price per share Price per share Denominator Earnings per share Cash flow per share Sales per share Book value per share

Net Profit Margin

Net profit is calculated as revenue minus all expenses. Net profit margin provides an indication of a companys profitability.

Price-Earning Ratio (P/E)

Price-Earning (P/E) ratio expresses the relationship between price per share and earnings per share.

Valuation Ratios
Valuation Ratios are used in investment decision making.

Price-Earning Ratio (P/E)

In other words, the P/E multiple tells us how much price an ordinary shareholder is willing to pay for one rupee of current earnings of the company.

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Price-Earning Ratio (P/E)

While Earning per share is an indicator of the earning potential of a company, P/E ratio is a measure of the risk of a company.

EBITDA per Share

In comparing companies in the same sector, where investment in fixed assets are at different levels due to different stages of infrastructure maturity, EBITDA per share would be a better measure, because it is calculated using income before interest, taxes and depreciation.

Price to Cash Flow (P/CF) Ratio

Because P/E ratio is calculated using net income, this ratio can be sensitive to nonrecurring earnings or one-off earnings.

Price to Sales (P/S) Ratio

Price to sales ratio is sometimes used as a comparative price metric when a company does not have positive net income.

Price to Cash Flow (P/CF) Ratio

Further, as net income is more susceptible to manipulation compared to cash flows, analyst may use Price to cash flow as an alternative measure, particularly where earnings quality may be an issue.

Price to Book Value (P/B) Ratio

This is the ratio of the price to book value per share. This ratio is often an indicator of the relationship between a companys required rate of return and its actual rate of return.

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Leverage Analysis
Leverage is the magnifying effect of the fixed costs and the debt on the operating income and the net income available to the equity holders of a company. Leverage can take two forms: operating leverage and financial leverage.

Leverage Analysis
Financial leverage is the magnifying effect of the changes in EBIT on the Earnings Before Tax (EBT). It is due to the existence of debt in the capital structure resulting in fixed financial charges.

Leverage Analysis
Operating leverage results from the existence of fixed costs in the cost structure. It is the magnifying effect of the changes in sales on the operating income.

Leverage Analysis
As a result of the fixed financial charges, a given percentage of change in EBIT results in a larger percentage of change in EBT or earnings available to equity holders. Financial leverage measures the financial risk of a company.

Leverage Analysis
Operating leverage measures the operating risk of a company. Profitable companies may use operating leverage because when revenue increase, with operating leverage, their operating income increases at a faster rate.

Leverage Analysis
If a company can earn more on its funds than it pays interest, the inclusion of some level of debt in its capital structure may lower its overall cost of capital and increase returns available to equity holders.

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Leverage Analysis
However higher level of debt in capital structure also increases the risk of equity holders and credit risk of debt investors.

Leverage Analysis
A higher operating leverage will result in greater risk or variation in operating income available to service the debt. In other words higher operating leverage can a limit a companys capacity to use financial leverage to improve the return available to equity holders.

Leverage Analysis
An analyst should take into account the level and trend of the financial leverage and compare it to the financial leverages of other companies in the same industry in order to get an insight into the financial risk of a company.

Leverage Analysis
An analyst should also consider the relationship between operating leverage and financial leverage.

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