Capital Structure and Global Diversification

Financial leverage tends to be at higher side when business organization borrows huge long term funds from outside stakeholders as compared to their internal funds. Financial leverage or capital gearing denotes use of debt in the business operations. In this case, Facebook Inc and Linked In have been used for the analysis of implication on EPS of higher debt taken. High leverage shows higher amount of debt is obtained for business operations and it also denotes higher interest expenses (Salama and Putnam, 2015). When EBIT is at higher side then EAT will also be at higher side and vice-versa. In this case, both companies has financial leverage and both are geared companies, Facebook Inc has negative EBIT. Degree of financial leverage measures change in EPS when there is increase or decrease in earnings before interest and tax. Three elements of degree of financial leverage are outstanding shares, interest expenses and earnings before interest and tax   (Singh and Faircloth, 2015). Earnings per share are directly related to earnings before interest and tax of the reporting period as it can be analyzed in present case of Facebook Inc and Linked In.   In this case, Facebook is having EPS of ($ 1.29) because its EBIT is in negative also i.e. ($ 150,942,000). On the other hand, EPS of Linked In is $ 1.31 and its EBIT is $ 6,225,000,000. This shows that EPS of companies is directly related to its EBIT. Salama, F., & Putnam, K. (2015). Accounting conservatism, capital structure, and global diversification. Pacific Accounting Review, 27(1), 119. Singh, M., & Faircloth, S. (2015). The impact of corporate debt on long term investment and firm performance. Applied Economics, 37(8), 875-883.