Question

Is it possible for a firm to have a high degree of operating leverage and a low level of business risk? 200 words

Answer 1

Yes, it is possible for a company to have a high degree of operating leverage and a low degree of business risk and the company will be having a high stream of cash flows because when the company is generating a higher amount of cash flows associated with his business then the company will not be having the risk edge in normal company will have with high operating leverage.

Operating leverage will generally mean that there is a high fixed cost associated with the operation of the company and fixed cost are generally leading to higher risk because they are payable even when the company is not having any kind of operations, so those companies who are having a adequate amount of cash inflows are used to hedge with this kind of risk because they will be having optimum Liquidity in the hand in order to repay the debt obligation in the short amount of time and it will also help them to limit their exposure related with fixed cost.

Whenever there will be a higher operating leverage associated with the company, and if the company is a matured company which has optimum amount of cash flows in its hands and it does not have other debt payable, so it will have an adequate cash stream available with it and then it can have a higher fixed cost and it can even easily able to bear the fixed cost and these companies are also able to maximize their operations by maximization of their operating leverages because they have higher amount of cash inflows in order to offset any kind of risk arising out of the negative impact associated with increasing operating leverage.