Sunrise Foods Limited, a mid-sized packaged-foods company, is reviewing its cost structure and capital mix before approaching its board with next…

Total Assets = ₹ 50 crores Total Assets Turnover Ratio = Sales ÷ Total Assets = 3 Hence, Total Sales = 50 × 3 = ₹ 150 crores Computation of Profit after Tax (PAT) Particulars ₹ in crores Sales 150.00 Less: Variable operating cost @ 60% 90.00 Contribution 60.00 Less: Fixed cost (other than interest) 10.00 EBIT (Earnings before interest and tax) 50.00 Less: Interest on debentures (12% × 25) 3.00 EBT (Earnings before tax) 47.00 Less: Tax @ 30% 14.10 EAT (Earnings after tax) 32.90 (i) Earnings per Share EPS = Earnings available to equity shareholders ÷ Number of equity shares EPS = 32.90 crores ÷ 1.20 crore shares = ₹ 27.42 (ii) Operating Leverage Operating Leverage = Contribution ÷ EBIT = 60 ÷ 50 = 1.20 An operating leverage of 1.20 shows that fixed costs form a modest part of Sunrise Foods' cost structure. A 1% change in sales would change EBIT by about 1.20%, so the company's operating profit is only mildly sensitive to swings in sales volume. (iii) Financial Leverage Financial Leverage = EBIT ÷ EBT = 50 ÷ 47 = 1.06 The financial leverage is quite low, indicating that Sunrise Foods' interest burden is small compared to its operating profit, the debenture obligation is well covered by EBIT, leaving the company financially comfortable. (iv) Combined Leverage Combined Leverage = Operating Leverage × Financial Leverage = 1.20 × 1.06 = 1.28 A combined leverage of 1.28 means a 1% increase in sales would raise EPS by roughly 1.28%, Sunrise Foods carries a moderate overall risk from the combination of its fixed operating costs and its use of debt. Together, the operating, financial and combined leverages give the board a quick read on how sensitive the company's profits and shareholder earnings are to changes in sales, which is useful context before deciding on any further borrowing or capacity expansion.