The combination of operating leverage and financial leverage is called combined leverage or total leverage. Operating leverage measures operating or business risk where as financial leverage measures financial risk. Combined leverage measures total risk of the business.
Operating leverage is measured by the percentage change in earning before interest and tax due to percentage change in sales where as financial leverage is measured by percentage change in earning before tax or earning per share due to percentage change in earning before interest and tax. Thus, the combined leverage is measured by percentage change in earning per share (EPS) due to percentage change in sales.
Measuring Degree Of Combined Leverage (DCL) On The Basis Of Income Statement
DCL = DOL x DFL = (CM/EBIT) x (EBIT/EBT) = CM/EBT
Where,
DCL = degree of combined leverage
DOL = degree of operating leverage
DFL = degree of financial leverage
CM = contribution margin
EBIT= earning before interest and tax
EBT = earning before tax
Measuring Degree Of Combined Leverage By Using Formula
DCL = Sales- variable cost/Sales - variable cost - fixed cost - interest
= S_VC/S-VC-FC-I
Operating leverage is measured by the percentage change in earning before interest and tax due to percentage change in sales where as financial leverage is measured by percentage change in earning before tax or earning per share due to percentage change in earning before interest and tax. Thus, the combined leverage is measured by percentage change in earning per share (EPS) due to percentage change in sales.
Measuring Degree Of Combined Leverage (DCL) On The Basis Of Income Statement
DCL = DOL x DFL = (CM/EBIT) x (EBIT/EBT) = CM/EBT
Where,
DCL = degree of combined leverage
DOL = degree of operating leverage
DFL = degree of financial leverage
CM = contribution margin
EBIT= earning before interest and tax
EBT = earning before tax
Measuring Degree Of Combined Leverage By Using Formula
DCL = Sales- variable cost/Sales - variable cost - fixed cost - interest
= S_VC/S-VC-FC-I
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