## Financial Ratios

**Simple Method****Contribution Margin Ratio**The contribution margin as a percentage of total sales is called as contribution margin ratio.

Contribution Margin Ratio = Contribution Margin/Sales = 1 - variable costs/sales.

**Operation Leverage Effect (OLE)**Operation leverage effect = contribution margin ratio/return on sales (ROS)

Where:

ROS = Percentage change in income (ROA) = OLE x % change in sales

**Financial Leverage Effect (FLE)**It measures the amount of debt held by the business firm that they use to finance their operations.

Financial leverage effect = operating income /net income

**Combined Leverage Ratio**Combined Leverage Ratio = Operating Leverage Ratio X Financial Leverage Ratio.

#### Business Risk Ratios