Understanding Total Leverage in Corporate Finance

In corporate finance, total leverage measures the sensitivity of net income to changes in sales. This concept is crucial in understanding a company's operational risk and financial risk. Total leverage is calculated as the product of operating leverage and financial leverage. When a company's sales increase or decrease, total leverage shows the potential effect on earnings before interest and taxes (EBIT) and ultimately net income.

If a company has a high total leverage, it means that a small change in sales can lead to a larger change in earnings before interest and taxes (EBIT). On the other hand, lower total leverage indicates that the business has more stability in its earnings with respect to sales fluctuations.

What does total leverage help to measure in a company's financial analysis?