Rytvae Consulting · Think Right · Invest Right
Operating & Financial Leverage
Result
Chart
Show formula & working
DOL = Contribution ÷ EBIT · DFL = EBIT ÷ (EBIT − Interest − Preference dividend ÷ (1 − tax)) · DCL = DOL × DFL
Details
How this works
Operating leverage comes from fixed operating costs: once they are covered, profit grows faster than sales.
Financial leverage comes from interest: it magnifies the effect of EBIT changes on profit before tax. Combined, they show the total sensitivity of profit to sales.
Frequently asked questions
Is high leverage bad?
It cuts both ways — profits rise faster in good times and fall faster in bad ones.
Which costs are fixed?
Those that do not change with volume in the short term: rent, salaries, depreciation.
Want your ratios read the way a lender reads them?
Classification, quasi-equity and one-off items all move the ratios. Talk to Rytvae before you approach lenders.