Degree Of Combined Leverage - DCL

A leverage ratio that summarizes the combined effect the degree of operating leverage (DOL), and the degree of financial leverage has on earnings per share (EPS), given a particular change in sales. This ratio can be used to help determine the most optimal level of financial and operating leverage to use in any firm. For illustration, the formula is:

This ratio can be very useful, as it summarizes the effects of combining both financial and operating leverage, and what effect this combination, or variations of this combination, has on the corporation's earnings. Not all corporations use both operating and financial leverage, but if they do, then this formula can be used.

It is worth noting that a firm with a relatively high level of combined leverage is seen as riskier than a firm with less combined leverage, as the high leverage means more fixed costs to the firm.