DOL

A type of leverage ratio summarizing the effect a particular amount of operating leverage has on a company's earnings before interest and taxes (EBIT). Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of operating leverage, the more volatile the EBIT figure will be relative to a given change in sales, all other things remaining the same. The formula is as follows:

This ratio is useful as it helps the user in determining the effects that a given level of operating leverage has on the earnings potential of the firm. This ratio can also be used to help the firm determine the most appropriate level of operating leverage in order to maximize the company's EBIT 2002 -2003 -1.73 2004 0.82 2005 -0.65 2006 1.17 2007 2.98 2008 1.74 2009 4.44 2010 2.23 2011 9.09

If the operating leverage is high, then a smallest percentage change in sales can increase the netoperating income. The net operating income is the amount of income that is left after payments of fixed cost are made, regardless of how much sales has been made. Since the Degree of Operating Leverage or DOL helps in determining how the change in sales volume would affect the profits of the company, it is important to ascertain the value of degree of operating leverage in order to minimize the losses to the company. A business would benefit if the can estimate the Degree of Operating Leverage or DOL. The impact of the leverage on the percentage of sales can be quite striking if not taken seriously; therefore it is really important to minimize these risks of the business. If you get a higher degree of operating leverage or DOL then you should try and balance the operating leverage to balance with thefinancial leverage in order to provide with profits to the company. A company’s balance Degree of Operating Leverage can provide the financial leverage is an important factor contributing to business profits. Even a small percentage of increase in sales can help in having a greater proportion of profits in the company, so it is really important to maintain a balance between both financial leverage and operating leverage to yield maximum benefits. As we see from the table that DOL in 2009 is 9.09 which is on the higher side in terms of all other financial year infact in 2003 and 2005 DOL is in negative which is very good for the company. That shows that if there is a change in term of sale of the company that does not reflect in degree of leaverage of the company

and the degree of financial leverage has on earnings per share (EPS). taxes. It is important to balance the financial leverage according to the operating costs of the company as it would minimize the level of risks involved. and this is when the company’s business begins to turn to provide profit. the formula is: . which is based on the changes that take place in the interest rates. and will include higher expenses before interest and taxes (EBIT).86 This formula can be even used to compare data of many companies that can help an investor in deciding which company to invest in. the firm under evaluation will be trying to optimize EPS.73 -0. Debts added to a business would provide an interest expense to the company which is a fixed cost. It would help an investor to strike a great deal as when the there is an economic decline the losses of the company can be substantiated with this investment and during the rise in the economic conditions the volume of sales would be well compensated. the more volatile EPS will be. operating expenses and other financial factors. And in 2007 DFL is in negative which is good for the company DCL A leverage ratio that summarizes the combined effect the degree of operating leverage (DOL).42 0.15 0. This ratio can be used to help determine the most optimal level of financial and operating leverage to use in any firm. As we see from the table that DFL of GSK in the financial year of 2008 is on a higher side as compared to other year so higher DOL of a company mean higher degree of risk especially if earnings from operations decline while the interest expense remains. The higher the degree of financial leverage.DFL A leverage ratio summarizing the affect a particular amount of financial leverage has on a company's earnings per share (EPS).70 2.98 1. all other things remaining the same. 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -1. Financial leverage involves using fixed costs to finance the firm.31 0. For illustration. The degree of financial leverage is useful for figuring out the fate of net income in the future.94 1. based on the result of how much risk is attached with each companies capital structures.22 2. and this ratio can be used to help determine the most appropriate level of financial leverage to use to achieve that goal. The formula is as follows: Most likely. given a particular change in sales.

65 2008 4. has on the corporation's earnings. then this formula can be used.98 2004 0. 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. and what effect this combination. Maintaining the risk and not increasing it from where it is. both the financial leverage ratio and the operating leverage ratio can provide you with an idea of how much risk per share are involved. It is up to the company to maintain the degree of combined leverage so as to minimize the risks involved in the business. it helps us in ascertaining the total risk involved in the business. 2002 -2003 1.74 2010 2.69 2009 10. As wee can see clearly from the table that in financial year 2009 and 20011 DCL is about 10.77 2005 -0. or variations of this combination.85 2006 0.This ratio can be very useful. So after 2007 company DCL is on higher side. So in these two financial year company is in more risky condition as compared to other financial year.18 2011 16. as it summarizes the effects of combining both financial and operating leverage. Operating Leverage measures the operating risk or business risk of the company while Financial Leverage measures the financial risk of the company. Operating leverage is determined by the percentage change in earning 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. Together when combined. but if they do. as the high leverage means more fixed costs to the firm. The balanced degree of combined leverage (DCL) provides with an increase in the earnings per share of the equity holders which is why it is important to calculate the Degree of Combined Leverage (DCL) for better understanding of the position of the company and minimizing the risks of the company.74 and 16. Not all corporations use both operating and financial leverage.85 2007 -0.90 respctively which is again on a higher side as compared to other financial year. 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.90 Since the degree of combined leverage is calculated by combining both the operational leverage and the financial leverage. .

Sign up to vote on this title
UsefulNot useful