Degree Of Combined Leverage - DCL
For those of you who are fans of The Big Bang Theory and quantitative theory in general, a) sorry and b) this one's for you: The Degree of Combined Leverage, or DCL, is a ratio to determine how operating leverage and financial leverage can affect earnings per share. The formula runs:
DCL= (% EPS change/% Sales Change) = Degree of Operating Leverage x Degree of Financial Leverage
DOL is calculated as the change % of company earnings before interest & taxes (EBIT) divided by % change of previous year, quarter, or similar time period.
DFL is calculated as the change % of EPS divided by the change % of EBIT.
You'll love running these calculations as your boss drums her fingers, angrily waiting for the numbers. Bazinga.
Related or Semi-related Video
Finance: What is operating leverage?729 Views
Finance a la shmoop. What is operating leverage? It's good leverage not like
debt which is a liability and quote bad leverage unquote. Good leverage means a [Operating leverage vs debt diagram]
few things like when you scale in operations and grow very very large then
you have leverage over your suppliers. It's a very different discussion when [Tomatoes in water]
you're buying Tomatoes for your spaghetti sauce like when you're buying
ten thousand tomatoes a month versus when you get very very big like Egyptian [Pyramid of tomato baskets]
pyramid big and are buying 10 million Tomatoes a month like that scale, you get
way more attention at that point from the non-union labor picking them in [Two guys pop out a bush]
Mexico and can command a whole lot more in discounting as far as deal terms go
and you know other favors when you negotiate well operating leverage works [A trolley being pushed around a supermarket]
with stocking grocery shelves as well, meaning that if you are coca-cola you
have a whole lot more operating leverage with Safeway than does Salmonelli's [Scales of the businesses and Safeway showing Coca-Cola with more leverage]
pesto in a can like nobody goes into a Safeway or Kroger's hunting for a brand
of pesto sauce but pretty much every soda drinker on earth which is pretty [Lots of people on a map of the world]
much every human on earth buys Coke or Pepsi and both have extreme operating
leverage. While operating leverage comes in a range of forms like for example
let's consider a semiconductor maker this isn't fizzy water and sugar and [Someone opens a soda can and it explodes everywhere]
union Teamster co-opting this is actually really hard Tech where it took
decades to be able to produce gigaflops of information put through a tiny piece [Binary code going by]
of fiber for a dollar, really hard to make highly unlikely that Somalia is
gonna one day be a big competitor in the semiconductor architecture business so [Guy plugs something in and it explodes]
the winner in that space a little company called
Intel. Yeah it had for a long time a virtual monopoly in being able to [Monopoly logo appears]
produce massive computing power for an incredibly cheap or high value price. [High value price tag appears]
Well Intel had massive operating leverage in its heyday until Apple and a
few Chinese companies spent a hundred billion dollars or so making themselves [Apple and Intel in a boxing ring]
into viable competitors and yeah and that's [Apple chucks a fire ring at Intel and knocks it out the ring]
what happens when you try to be a monopoly in a competitive world.
Well the key idea here is that operating leverage or power that a business has in [Definition of operating leverage]
running itself usually translates directly in the form of profit margins
like the more operating leverage accorded a company the higher its profit [Operational leverage is piled onto the scale and profit margins take off]
margins will usually run which is very different from this kind of operating [A surgeon wiggling a tool round in an operation]
leverage...