what does the dcl tell you 
this ratio summarizes the effects of combining financial and operating leverage and what effect this combination or variations of this combination has on the corporation s earnings while not all corporations use both operating and financial leverage this formula can be used if they do a firm with a relatively high level of combined leverage is seen as riskier than a firm with less combined leverage because high leverage means more fixed costs to the firm the degree of operating leverage measures the effects that operating leverage has on a company s earnings potential and indicates how earnings are affected by sales activity the degree of operating leverage is calculated by dividing the percentage change of a company s earnings before interest and taxes ebit by the percentage change of its sales over the same period the degree of financial leverage is calculated by dividing the percentage change in a company s eps by its percentage change in ebit the ratio indicates how a company s eps is affected by percentage changes in its ebit a higher degree of financial leverage indicates that the company has more volatile eps degree of combined leverage exampleas stated previously the degree of combined leverage may be calculated by multiplying the degree of operating leverage by the degree of financial leverage assume hypothetical company spacerocket had an ebit of 50 million for the current fiscal year and an ebit of 40 million for the previous fiscal year or a 25 increase year over year yoy spacerocket reported sales of 80 million for the current fiscal year and sales of 65 million for the previous fiscal year a 23 08 increase additionally spacerocket reported an eps of 2 50 for the current fiscal year and an eps of 2 for the previous fiscal year a 25 increase spacerocket thus had a degree of operating leverage of 1 08 and a degree of financial leverage of 1 consequently spacerocket had a degree of combined leverage of 1 08 for every 1 change in spacerocket s sales its eps would change by 1 08 