Financial
Degree of Operating (DOL), Financial (DFL), and Combined Leverage (DCL) formulas
Measure how fixed operating costs and debt interest magnify revenue swings into EBIT and EPS volatility via DOL, DFL, and DCL = DOL * DFL.
Quantify fixed-cost operating risk vs. debt-interest financial risk
This linear model assumes constant selling price, proportional variable costs, fixed operating costs and fixed interest over the relevant activity range. DOL is contribution margin/EBIT; DFL is EBIT/EBT; DCL is contribution margin/EBT. It describes sensitivity around the supplied operating point, not an unconditional forecast.
With these assumptions, a 10% volume-driven sales decline also reduces variable costs by 10%. EBT falls40% for the example. EPS follows that percentage only with constant shares, a compatible constant tax treatment and no other earnings adjustments. Price-only revenue changes or capacity step-costs do not follow this calculation.
| Leverage Metric ($1,000k Rev, $400k Var, $400k Fixed, $50k Int) | Formula | Multiplier & Impact of +10% Sales |
|---|---|---|
| Contribution Margin & EBIT | $1,000k - $400k = $600k CM | EBIT = $600k - $400k = $200k |
| Degree of Operating Leverage (DOL) | CM / EBIT = $600k / $200k | 3.00x (+30.0% EBIT) |
| Degree of Financial Leverage (DFL) | EBIT / (EBIT - Int) = $200k / $150k | 1.33x |
| Degree of Combined Leverage (DCL) | DOL * DFL = CM / EBT = $600k / $150k | 4.00x (+40.0% EBT / EPS) |
Degree of Operating Leverage (DOL)
A2=Revenue (1000), B2=VariableCost (400), C2=FixedOperatingCost (400).
=IF(OR(COUNT(A2:D2)<>4,MIN(A2:D2)<0),"Invalid inputs",IF(A2-B2-C2=0,"Undefined",LET(cm, A2 - B2, ebit, cm - C2, ROUND(cm / ebit, 2))))Combined leverage (DCL)
D2=InterestExpense (50); DCL simplifies cleanly to ContributionMargin / (EBIT - Interest).
Ratios with a zero denominator are undefined. Negative denominators are retained as mathematical ratios but do not have the usual positive-profit magnification interpretation. Do not multiply rounded DOL and DFL to calculate DCL.
=IF(OR(COUNT(A2:D2)<>4,MIN(A2:D2)<0),"Invalid inputs",IF(A2-B2-C2-D2=0,"Undefined",LET(cm, A2 - B2, ebt, cm - C2 - D2, ROUND(cm / ebt, 2))))Financial leverage (DFL)
Use unrounded EBIT and EBT from the same period.
=IF(OR(COUNT(A2:D2)<>4,MIN(A2:D2)<0),"Invalid inputs",IF(A2-B2-C2-D2=0,"Undefined",LET(ebit, A2 - B2 - C2, ROUND(ebit / (ebit - D2), 2))))Try the example
Use the original values or change them to test your understanding.