In the Measures of Leverage topic, I can’t help but wonder why Investing Activities are not discussed at all, only business risk and financial risk are discussed. Does anyone know why investing activities aren’t part of the picture?
Depends on how you define investing activities. If you’re talking about investing in fixed assets then the chapter covers some of it, if you’re talking about investing in other companies- then not so much.
If you think about it, the degree of operating leverage (DOL) measures your variability in operating profits in response to changes in units sold. The DOL is heavily influenced by your level of fixed operating costs, which can be attributed to your level of fixed assets. If you associate investing activities with the level of property plant and equipment (if you associated purchase of PPE with the investing section on the statement of cash flows) then DOL does capture the impact of fixed assets. This is discussed in the chapter.
However if you are talking about investing in public companies, then that’s more of a portfolio management or equities reading topic. Does that help?
Yep I was talking about investing in other companies. I know it’s not a major component of most companies, so I guess it probably doesn’t matter much most of the time, but with companies with a lot of cross holding, this would be a major factor. I understand that DOL already accounts for fixed asset investment, but these are part of operations of the company.