Enter the degree of operating leverage and the degree of financial leverage into the Calculator. The calculator will evaluate the Total Leverage. 

Total Leverage Formula

TL = DOL * DFL

Variables:

  • TL is the Total Leverage ()
  • DOL is the degree of operating leverage
  • FDL is the degree of financial leverage

To calculate Total Leverage, multiply the degree of operating leverage by the degree of financial leverage.

How to Calculate Total Leverage?

The following steps outline how to calculate the Total Leverage.


  1. First, determine the degree of operating leverage. 
  2. Next, determine the degree of financial leverage. 
  3. Next, gather the formula from above = TL = DOL * DFL.
  4. Finally, calculate the Total Leverage.
  5. After inserting the variables and calculating the result, check your answer with the calculator above.

Example Problem : 

Use the following variables as an example problem to test your knowledge.

degree of operating leverage = 0.74

degree of financial leverage = 0.89

FAQs

What is the degree of operating leverage?
The degree of operating leverage (DOL) measures a company’s operating income sensitivity to changes in its sales volume. It quantifies how a percentage change in sales volume will affect the operating income due to fixed and variable costs.

What does the degree of financial leverage indicate?
The degree of financial leverage (DFL) indicates how sensitive a company’s net income is to changes in operating income. It reflects the extent to which a company uses debt to finance its operations and the impact of this debt on earnings.

Why is total leverage important for a company?
Total leverage combines the effects of operating and financial leverage. It shows how sensitive a company’s net income is to changes in sales volume, considering both operating costs and financial obligations. This is crucial for understanding the overall risk and potential for earnings volatility.

How can a company manage its total leverage?
A company can manage its total leverage by adjusting its cost structure, such as reducing fixed costs to lower operating leverage, or by modifying its capital structure, for example, by changing the mix of debt and equity to optimize financial leverage. Strategic planning and financial management are key to managing total leverage effectively.