Degree of Combined Leverage
Degree of Combined Leverage
Operating leverage times financial leverage: the percentage change in earnings per share for a one percent change in sales. Fixed operating costs amplify sales into operating income; fixed interest amplifies operating income into net income; this captures both at once.
When to use: Use to see how volatile earnings will be for a given sales swing. A high combined leverage means small revenue changes produce large profit changes, in both directions.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| DTL | Degree of Combined Leverage | EPS sensitivity to sales | integer |
| DOL | Degree of Operating Leverage | Contribution margin / EBIT | integer |
| DFL | Degree of Financial Leverage | EBIT / EBT | integer |
Real-Life Examples
Example 1: Heavy Fixed Costs and Debt
Degree of operating leverage 3.0, degree of financial leverage 1.5.
Given
Step-by-Step
A 10% rise in sales lifts EPS about 45%; a 10% fall cuts it 45%. Cyclical industries with debt live here.
Example 2: Flexible Costs, Light Debt
Degree of operating leverage 1.5, degree of financial leverage 1.2.
Given
Step-by-Step
EPS moves less than twice as fast as sales. Variable cost structures and low debt keep earnings steady.
Frequently Asked Questions
Each leverage is a ratio of percentage changes, and the sales-to-EPS chain passes through operating income: %ΔEPS/%ΔSales = (%ΔEBIT/%ΔSales) × (%ΔEPS/%ΔEBIT).