Dr. Vasquez holds a PhD in Finance and specializes in risk management, capital structure, and combined leverage analysis.
The **Degree of Combined Leverage Calculator** (DCL) measures the impact of sales changes on a company’s earnings. This four-variable calculator solves for any missing input: **Net Sales (S)**, **Contribution Margin (CM)**, **Earnings Before Taxes (EBT)**, or the **DCL Ratio (R)**. **Input any three of the four core variables** to find the missing one.
Degree of Combined Leverage Calculator
Degree of Combined Leverage Formulas
DCL is calculated as the ratio of Contribution Margin to Earnings Before Taxes. Alternatively, it can be viewed as the product of DOL and DFL.
Formula Source: Investopedia: Degree of Combined Leverage
Variables Explained
The DCL calculation uses the following financial components:
- Contribution Margin (CM): Revenue minus variable costs. Represents the margin available to cover fixed costs and provide profit.
- Earnings Before Taxes (EBT): Profit after subtracting interest and operating expenses, but before taxes.
- DCL Ratio (R): The calculated ratio, expressed as a factor. Measures the percentage change in EBT for every 1% change in sales.
- Net Sales (S): The starting point for calculating CM (Sales – Variable Costs = CM). Used as the anchor variable in the calculator for context.
Related Calculators
Analyze related risk and profitability leverage metrics:
- Degree of Operating Leverage Calculator (DOL)
- Degree of Financial Leverage Calculator (DFL)
- Break-Even Point Calculator
- Return on Equity Calculator (ROE)
What is Degree of Combined Leverage (DCL)?
The **Degree of Combined Leverage (DCL)**, also known as Total Leverage, is a composite risk metric that quantifies the combined effect of operating leverage (fixed operating costs) and financial leverage (fixed financing costs like interest) on a company’s profitability. It essentially measures the sensitivity of a company’s final earnings (EBT) to a change in its sales revenue.
A DCL ratio of **2.5**, for example, means that a 10% increase in sales will result in a $2.5 \times 10\% = 25\%$ increase in Earnings Before Taxes. A **high DCL** indicates that small changes in sales can lead to large, volatile changes in profit, signaling high risk but also high potential reward. Conversely, a **low DCL** suggests stability and less volatility in earnings relative to sales.
How to Calculate DCL (Example)
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Identify Components:
A business has a $\mathbf{Contribution\ Margin\ (CM)}$ of $\mathbf{\$200,000}$ and $\mathbf{Earnings\ Before\ Taxes\ (EBT)}$ of $\mathbf{\$80,000}$.
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Apply the DCL Formula:
$$ DCL = \frac{CM}{EBT} = \frac{\$200,000}{\$80,000} $$
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Determine the Ratio:
The result is $\mathbf{2.50}$. This means that for every 1% change in sales, the company’s EBT changes by 2.50%.
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Interpret the Result:
If the company increases sales by 5%, its EBT is expected to increase by $5\% \times 2.50 = 12.5\%$.
Frequently Asked Questions (FAQ)
A: DCL is the product of the Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL). $$ DCL = DOL \times DFL $$
A: DCL provides the most comprehensive view of risk. A company with high DOL and high DFL (both high fixed costs) will have a very high DCL, meaning it faces high business and financial risk, as sales declines will severely impact profitability.
A: This depends on the company’s risk tolerance and economic outlook. In a strong economy, high DCL can maximize profits. In a weak economy, a high DCL can quickly lead to large losses. Most companies aim for a moderate DCL.
A: No, the standard DCL uses Earnings Before Taxes (EBT) in the denominator. This is because it measures the impact of operating and financing decisions before the fixed cost of taxation is applied.