Operating Leverage Article Critique
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1. What is the author's focus?
2. What points is the author making?
3. How does the authors points apply to financial management?
4. What is the difference between operating leverge and financial leverage?
5. What is the author's conclusion, findings or recommendation?
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Solution Summary
This is an analysis of an article wherein the author attempts to draw a comparison relative to leverage and performance of the company. Recognizing the variables which are included within the analysis, leads to an understanding of the potential factors which can influence the performance related to shareholders expectations.
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1.
The author's focus relates to the relationship between operating leverage and financial leverage, and the ability to use these as predictors of future performance for banks (in particular).
2.
The author is trying to make the following points:
- Operating leverage is particularly troubling as a measure of efficient operations because there may be too many variables to consider in order to determine the true level of operating leverage --- that is, there may be too many revenue variables which are difficult to measure (things like one time gains, or revenue from a specific source which may not be related to the core business of banking).
- The fact that there is an excess of revenue versus expenses usually bodes well for the bank or firm.
- Financial leverage is a bit more understandable and is used as a measurement tool to determine ultimate results ...
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