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Financial Management and Business Data Analytics · Leverage Analyses and EBIT - EPS Analysis

Combined Leverage and Degree of Combined Leverage (DCL)

Updated 10 October 2026 · Fact-checked

Combined leverage joins operating and financial leverage to show total risk. The Degree of Combined Leverage (DCL) = DOL × DFL = Contribution ÷ (EBIT − Interest), or % change in EPS ÷ % change in sales. Multiply DCL by the % change in sales to get the % change in EPS.

Understand Combined Leverage and DCL

A firm faces two kinds of fixed cost. Fixed operating costs (rent, salaries, depreciation) create operating leverage. Fixed financing costs (interest, and preference dividend if given) create financial leverage.

Operating leverage magnifies a change in sales into a bigger change in EBIT. Financial leverage then magnifies that change in EBIT into a bigger change in EPS. Both effects work in a chain, so the total effect on EPS is the product of the two.

Combined leverage is this total effect. The Degree of Combined Leverage (DCL) tells you the percentage change in EPS for each 1% change in sales. If DCL is 3, a 10% rise in sales lifts EPS by about 30%. A 10% fall in sales cuts EPS by about 30%.

A high DCL means high total risk. Profits swing sharply with sales. A firm with high fixed operating costs usually should keep fixed financing costs low, and the other way round, to keep DCL under control.

DCL applies at one sales level and one capital structure. If sales, costs or debt change, recompute it. The figure is also only valid for the base level you calculated it at.

Key rules to remember

Degree of Operating Leverage
DOL = Contribution ÷ EBIT
Contribution = Sales − Variable cost. EBIT = Contribution − Fixed operating cost.
Degree of Financial Leverage
DFL = EBIT ÷ (EBIT − Interest)
With preference shares: DFL = EBIT ÷ [EBIT − Interest − Preference dividend ÷ (1 − t)].
Degree of Combined Leverage
DCL = DOL × DFL = Contribution ÷ (EBIT − Interest)
EBIT cancels out in the product. Use PBT as the denominator when there is no preference dividend.
DCL from percentage changes
DCL = % change in EPS ÷ % change in sales
Valid as a measure at the base level of sales.
Forecast change in EPS
% change in EPS = DCL × % change in sales
New EPS = Old EPS × (1 + % change in EPS).

How to solve Combined Leverage and DCL questions

Use this order for any question on combined leverage, whether it asks for DCL or for the effect of a sales change.

  1. 1Prepare a short income statement: Sales, Variable cost, Contribution, Fixed operating cost, EBIT, Interest, PBT.
  2. 2Compute DOL = Contribution ÷ EBIT.
  3. 3Compute DFL = EBIT ÷ PBT. Adjust for preference dividend only if the question gives it, grossing it up for tax.
  4. 4Compute DCL = DOL × DFL. Check it equals Contribution ÷ PBT.
  5. 5If asked for the effect of a sales change, multiply DCL by the % change in sales to get the % change in EPS.
  6. 6Apply the percentage to the base EPS, or recompute the full statement to verify.
  7. 7State the interpretation in one line: what the DCL says about total risk.

Quickest way: Contribution over PBT shortcut

When to use it: Use when the question gives sales, variable cost, fixed cost and interest and asks for DCL or the EPS impact of a sales change.

  1. Work out Contribution = Sales − Variable cost.
  2. Work out PBT = Contribution − Fixed cost − Interest.
  3. DCL = Contribution ÷ PBT in one division.
  4. Multiply by the % change in sales to get the % change in EPS.
  5. Only build the full statement if the question asks for new EPS figures.

Common mistakes in Combined Leverage and DCL

  • Using EBIT instead of Contribution in the numerator of DCL.

    Students mix up the DFL numerator with the DCL numerator.

    Fix: DCL always has Contribution on top. EBIT on top gives DFL.

  • Subtracting fixed operating cost twice or forgetting it when finding EBIT.

    Rushing through the statement.

    Fix: Always write the layout: Contribution − Fixed cost = EBIT, then − Interest = PBT.

  • Adding DOL and DFL instead of multiplying.

    Thinking the two risks add up.

    Fix: The effects compound, so DCL = DOL × DFL.

  • Treating preference dividend as tax-deductible or ignoring it.

    Preference dividend is paid after tax, unlike interest.

    Fix: Divide the preference dividend by (1 − tax rate) before subtracting it from EBIT in DFL.

  • Applying the base-level DCL to a large change in sales or to a changed capital structure.

    Treating DCL as a constant.

    Fix: Recompute DCL whenever sales, fixed costs or debt change. Use it for the base level only.

  • Reading the result as a rupee change instead of a percentage change.

    Forgetting DCL is a ratio of percentages.

    Fix: Convert the % change in EPS to rupees by applying it to the base EPS.

Worked examples

Example 1

Sales ₹10,00,000; variable cost ₹6,00,000; fixed operating cost ₹2,00,000; interest ₹50,000. Calculate DOL, DFL and DCL. If sales rise by 10%, find the % change in PBT-based EPS.

Show the solution
  1. Contribution = 10,00,000 − 6,00,000 = ₹4,00,000.
  2. EBIT = 4,00,000 − 2,00,000 = ₹2,00,000.
  3. PBT = 2,00,000 − 50,000 = ₹1,50,000.
  4. DOL = 4,00,000 ÷ 2,00,000 = 2.
  5. DFL = 2,00,000 ÷ 1,50,000 = 1.33 (4/3).
  6. DCL = 2 × 4/3 = 2.67. Check: 4,00,000 ÷ 1,50,000 = 2.67.
  7. % change in EPS = 2.67 × 10% = 26.67%.

Answer: DOL = 2, DFL = 1.33, DCL = 2.67. A 10% rise in sales raises EPS by about 26.67%.

Example 2

A company has 50,000 equity shares, no preference shares and a tax rate of 25%. Sales are ₹20,00,000, variable cost 60% of sales, fixed cost ₹4,00,000, interest ₹1,00,000. Sales fall by 5%. Find the DCL and the new EPS.

Show the solution
  1. Variable cost = 60% × 20,00,000 = ₹12,00,000. Contribution = ₹8,00,000.
  2. EBIT = 8,00,000 − 4,00,000 = ₹4,00,000.
  3. PBT = 4,00,000 − 1,00,000 = ₹3,00,000.
  4. Tax at 25% = ₹75,000. PAT = ₹2,25,000.
  5. Base EPS = 2,25,000 ÷ 50,000 = ₹4.50.
  6. DCL = 8,00,000 ÷ 3,00,000 = 2.67 (8/3).
  7. % change in EPS = 8/3 × (−5%) = −13.33%.
  8. New EPS = 4.50 × (1 − 0.1333) = ₹3.90.
  9. Check: new sales 19,00,000; contribution 7,60,000; PBT 7,60,000 − 4,00,000 − 1,00,000 = 2,60,000; PAT 1,95,000; EPS 3.90.

Answer: DCL = 2.67. EPS falls by 13.33% from ₹4.50 to ₹3.90.

Exam tips

  • Show the income statement first. Step marks are given for contribution, EBIT and PBT even if the final ratio slips.
  • Write both routes when time allows: DOL × DFL and Contribution ÷ PBT. They must match.
  • In MCQs, check whether the question asks for the % change in EPS or the new EPS value.
  • Always add a one-line interpretation, such as what a DCL of 2.67 means for total risk.
  • Watch for preference dividend or tax data. These change the DFL denominator.

Practice questions from Leverage Analyses and EBIT - EPS Analysis

Combined Leverage and DCL in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Combined Leverage and DCL: frequently asked questions

What is the formula for degree of combined leverage?

DCL = DOL × DFL, which simplifies to Contribution ÷ (EBIT − Interest). It can also be found as % change in EPS ÷ % change in sales.

What is the relationship between DOL, DFL and DCL?

DCL is the product of DOL and DFL. DOL captures how sales changes move EBIT, and DFL captures how EBIT changes move EPS. Together they show how sales changes move EPS.

How do I find the percentage change in EPS using DCL?

Multiply DCL by the percentage change in sales. For example, DCL of 3 and a 4% rise in sales gives a 12% rise in EPS. Apply that percentage to the old EPS for the new EPS.

Can DCL be used if there is preference share capital?

Yes. Include the tax-grossed preference dividend in the financial leverage denominator. Then DCL = Contribution ÷ [EBIT − Interest − Preference dividend ÷ (1 − t)].