Combined Leverage
Combined leverage is a leverage which refers to high profits due to fixed costs. It comprises fixed operating expenses with fixed financial expenses. It shows leverage profits and runs a risk which are in fixed quantity. Competitive business firms choose high level of degree of combined leverage whereas conservative business firms choose lower level of degree of combined leverage. Degree of combined leverage suggests risks and benefits involved in this especial leverage.
The formula which is employed to calculate this is as following:
Degree of combined leverage = Degree of financial leverage*Degree of operating leverage.
The Degree of Combined Leverage (DCL) is the leverage ratio that sums up the combined effect of the Degree of Operating Leverage and the Degree of Financial Leverage has on the Earning per share or Earnings Per Share given a particular change in shares. This ratio helps in ascertaining the best possible financial and operational leverage that is to be employed in any business firm or business.
Formula for Degree of Combined Leverage (DCL)
The formula employed for ascertaining the Degree of Combined Leverage is:
DCL = % Change in Earnings Per Share / %Change in Sales = DOL * DFL
This ratio has been known to be very practicable to a company or business firm as it assists a business 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 computed by combining both the operational leverage and the financial leverage, it helps us in ascertaining the total risk involved in the business. Operating Leverage appraises the business risk or the operating risk of the company while Financial Leverage appraises the financial risk of the company. At the same time 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 ascertained by the percentage change in bringing in 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 preserve the degree of combined leverage To a very great extent 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) renders with an increase in the earnings per share of the equity holders which is why it is significant to calculate the Degree of Combined Leverage (DCL) for better in agreement with the of the position of the company and minimizing the risks of the company.
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