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Meaning of Combined 
Leverage
? The combine leverage may be defined as the relationship b/w contribution and 
the taxable income.
Combined Leverage = Operating Leverage × Financial Leverage
or
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???????? ?? ???? or
?????????? ???? ???? ?????? ??????
Page 3


Meaning of Combined 
Leverage
? The combine leverage may be defined as the relationship b/w contribution and 
the taxable income.
Combined Leverage = Operating Leverage × Financial Leverage
or
?????? ???? ???? ???????? ?? ???????? ×
???????? ?? ???? or
?????????? ???? ???? ?????? ?????? Degree of Combined Leverage
? DCL measures the percentage change in earnings per share due to percentage 
change in sales.
DCL =        DOL × DFL
or                                
% ? ???? ???????? % ? ???? ?????? ???? ×
% ? ???? ??????
% ? ???? ???????? or
% ? ???? ?????? % ? ???? ?????? ????
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FAQs on PPT -Combined Leverage - Accountancy and Financial Management - B Com

1. What is combined leverage in finance?
Ans. Combined leverage in finance refers to the total effect of operating leverage and financial leverage on a company's overall profitability. It measures the impact of changes in sales revenue on a company's earnings before interest and taxes (EBIT). By understanding combined leverage, a company can assess the risk and potential return associated with its capital structure.
2. How is combined leverage calculated?
Ans. Combined leverage is calculated by multiplying the operating leverage factor (percentage change in EBIT divided by percentage change in sales) with the financial leverage factor (percentage change in EPS divided by percentage change in EBIT). The formula for combined leverage is: Combined Leverage = Operating Leverage x Financial Leverage.
3. What is the significance of combined leverage for a company?
Ans. Combined leverage is significant for a company as it helps in determining the level of risk it faces due to its capital structure. A higher combined leverage indicates a higher risk, as small changes in sales can have a significant impact on earnings. On the other hand, a lower combined leverage indicates a lower risk, as sales fluctuations may have a lesser impact on earnings.
4. How does combined leverage affect a company's profitability?
Ans. Combined leverage can affect a company's profitability by magnifying the impact of changes in sales revenue. If a company has a high combined leverage, a small increase in sales can result in a substantial increase in earnings. Conversely, a small decrease in sales can lead to a significant decline in earnings. Therefore, understanding and managing combined leverage is crucial for optimizing profitability.
5. What are the implications of high combined leverage for a company's financial health?
Ans. High combined leverage can have implications for a company's financial health. It can increase the company's vulnerability to economic downturns or adverse market conditions. A company with high combined leverage may struggle to meet its financial obligations, such as interest payments on debt, during lean periods. Therefore, it is important for companies to carefully manage their combined leverage to maintain a healthy financial position.
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