Degree of Combined Leverage (DCL)
The Degree of Combined Leverage (DCL) is the leverage ratio that sums up the combined effect of the Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL) has on the Earning per share or EPS given a particular change in shares. This ratio helps in ascertaining the best possible financial and operational leverage that is to be used in any firm or business.
Formula for Degree of Combined Leverage (DCL)
The formula used for ascertaining the Degree of Combined Leverage is:
DCL = %Change in EPS / %Change in Sales = DOL * DFL
This ratio has been known to be very useful to a company or firm as it helps a firm understand the effects of combining financial and operating leverage on the total earnings of the company. A high level of combined leverage shows the risk involved in the company as there are more fixed costs in the company, while a low combined leverage would mean better for the company.
Measuring Degree of Combined Leverage
Since the degree of combined leverage is calculated by combining both the operational leverage and the financial leverage, it helps us in ascertaining the total risk involved in the business. Operating Leverage measures the operating risk or business risk of the company while Financial Leverage measures the financial risk of the company. Together when combined, both the financial leverage ratio and the operating leverage ratio can provide you with an idea of how much risk per share are involved. Operating leverage is determined by the percentage change in earning before tax or interest is due and similarly financial leverage is determined by the percentage change in the gross before the tax and interest per share is due.
It is up to the company to maintain the degree of combined leverage so as to minimize the risks involved in the business. Maintaining the risk and not increasing it from where it is, the business should try to lower or minimize the financial leverage in order to balance the operating leverage and by minimizing the operating leverage when the financial leverage is to be balances. The balanced degree of combined leverage (DCL) provides with an increase in the earnings per share of the equity holders which is why it is important to calculate the Degree of Combined Leverage (DCL) for better understanding of the position of the company and minimizing the risks of the company.