STUDY OF LEVERAGES FOR HERO MOTORCORP LTD.

Degree of operating leverage

DOL=Contribution/EBIT=sales-variable cost/sales-variable cost-fixed cost

The risk of a company was minimised in the financial year 2018 due
to decrease in proportion of fixed costs to variable costs. Presently
the operating leverage is within the industry standard.

DOL is the percentage change in ebit by percentage change in sales,Dol is increasing in 2018
compared to other years , As the sales have increased, but operating expenses has decreased, which
leads to greater change in ebit. ,so ebit has more compounding effect on it.

Degree of financial leverage=EBIT/EBT

DFL is also increasing fdrom 2015 to 2019 as it is percentage change of eps by percentage change in
ebit , the eps is increasing from 2015 to 2019 , hence the dfl also increases. Since the company has
reached maturity it does not invest too much in fixed assets and hence the debt is low compared to
equity i.e. the company can sustain itself through equity. The sudden increase in EPS in 2016 lead to
a spike in the financial leverage which signifies that proportionately the financial risk of a company
has also increased. Moreover the bottomline has not improved to that extent.

Degree of total leverage=Degree of operating leverage x Degree of financial leverage

The combined leverage increases in synchronisation with the above two.

Interest Coverage Ratio

ICR=EBIT/interest expenses

The perfect interest cover ratio is about 1.5. The high estimations of interest coverage ratios show
that the organization is in good financial health.

Debt-Equity Ratio
The ideal debt to equity ratio is 1-1.5. Since the auto industry is capital intensive it can have a D/E
ratio higher than 2. The low estimations of obligation to value shows that the organization is
supporting itself on high estimations of value and has low obligation.

Capital Structure
The debt has reduced over the years and hence the value of the firm has decreased rapidly in 2019.
Due to which the debt to equity ratio has lowered and has impacted the costs of equity and debt
too.