Reference no: EM13969270
Accounting discussion broad
Choose a company, Pull its' most recent financials and calculate the DOL, DFL, and DCL. Indicate your results and discuss what they imply about the organizations capital structure.
In addition, a note on sources. Do NOT use Wikipedia, boundless, investopedia, brighthub etc. as sources. Go to primary or scholarly sources.
You can write like example, and respond it .
example
The company that I chose is UnderArmour. I obtained all my information from their investor website athttps://investor.underarmour.com/income.cfm All values are from the 2014 to 2015 fiscal years.
Degree of Operating Leverage (DOL)= % Change in Total Income Before Interest Expenses (EBIT)/ % Change in Sales
% Change in Total Income Before Interest Expenses= (401.31 M-347.55 M)/347.55 M*100=15.47%
% Change in Sales=(3.96 B-3.08 B)/3.08 B*100=28.57%
DOL=15.47/28.57=0.5415
Degree of Financial Leverage (DFL)=% Change in Earnings Per Share (EPS)/% Change in EBIT
% Change in Earnings Per Share=($1.05-$0.95)/$0.95*100=9.5%
DFL=9.5/15.47=0.6141
Degree of Combined Leverage (DCL)=DOL*DFL=0.3325
UnderArmour's fixed costs are rather low, since they outsource the majority of their production overseas. The DOL is 0.5415. This means that for a 1% increase in sales EBIT should increase by 0.5415%. UnderArmour's DOL is low, because they sell a lot of products, so selling a few more doesn't increase their profit by a very large margin.
The DFL is 0.6141. This means that for a 1% increase in EBIT, EPS should increase by 0.6141%. The rest of the increase goes to interest on debt and income taxes. So, UnderArmour has a somewhat high DFL since almost 40% of each additional $ increase in EBIT goes to interest on debt and income taxes.
The DCL is 0.3325. This means that for a 1% increase in sales, EPS should increase by 0.3325%. UnderArmour's DCL is average. Not much of the increase in sales goes to cover fixed costs, while a rather large portion goes to interest on debt and income taxes.
Since this is my first experience with these ratios I am not quite sure what a high or low value for them is. Because of that, I think it will be very interesting to see how UnderArmour's ratios compare to those of other companies.
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