The Low Pre-Tax Cash Flow Operating Leverage

Question: Discuss about the circumstance, in which the low pre-tax cash flow operating leverage is preferable. Answer: The extent of operating leverage depends on the sensitivity of the pre-tax operating cash flow. The financial leverage or the operating cash flow leverage is taken in order to achieve a better financial performance of the company in a particular financial year (Rezaei and Jafari 2015). Generally, the leverage is taken to maximize the profitability by reducing the cost of capital and risks of the company. In case of Dulax Group Limited, the company can apply the low pre-tax cash flow operating leverage only when the cost of capital is low. In the other words, it can be said that if the degree of sensitivity of the pre-tax operating cash flow of the company is less, then the company can apply the low pre-tax cash flow operating leverage (Dhaliwal et al. 2015). There is another circumstance in which the company can keep low pre-tax operating cash flow and that is when the percentage changes in the pre-tax profit is low or the fixed cost is high. This is because if the changes of percentage in the profit of the company are low, it indicates that the company has a stable financial position (Rezaei and Jafari 2015). At the same time, if the profit percentage of the company remains more or less stable, then the net operating cash inflow will also be stable and so the requirement of taking higher rate of pre-tax cash flow operating leverage will be less. Therefore, it can be said that in order to apply low pre-tax cash flow operating leverage, Dulax Group Limited needs to bring stability in the net operating cash inflows and at the same time needs to maintain high profitability. Reference List: Dhaliwal, D.S., Gaertner, F.B., Seung, H. and Trezevant, R., 2015. Historical cost, inflation, and the US corporate tax burden.Journal of Accounting and Public Policy,34(5), pp.467-489. Rezaei, M. and Jafari, S.M., 2015. Identifying the Relationship between Financial Leverage and Cash Flows of the Companies Listed in Tehran Stock Exchange.Indian Journal of Science and Technology,8(27).