# Combined Leverage (CL)
## What it measures
Combined Leverage captures the relationship between Sales and EPS — it shows the effect that a change in sales will have on EPS.
CL measures total risk, which is the combination of operating risk (from fixed operating cost) and financial risk (from fixed financial cost). Therefore CL is caused by both Fixed Operating Cost and Fixed Financial Cost.
## Formulas for Degree of Combined Leverage (DCL)
| # | Condition | Formula |
|---|---|---|
| 1 | — | DCL = DOL × DFL |
| 2 | — | DCL = % Change in EPS ÷ % Change in Sales |
| 3 | Preference shares issued | DCL = Contribution ÷ [EBIT − Interest − PD ÷ (1 − tax)] |
| 4 | No preference shares | DCL = Contribution ÷ EBT |
> Doubt busters:
> 1. ICAI sometimes uses Formula 4 even when preference shares are issued — so you may use either Formula 3 or Formula 4.
> 2. Logically, Formula 3 is correct when preference shares are issued.
## Analysis & Interpretation (total risk)
| DOL | DFL | Comment |
|---|---|---|
| Low | Low | Lower total risk, but cannot take advantage of trading on equity |
| High | High | Higher total risk — very risky combination |
| High | Low | Moderate total risk — not a good combination (low EBIT from high DOL, little trading-on-equity benefit from low DFL) |
| Low | High | Moderate total risk — best combination; high financial risk is balanced by low business risk |
> Additional notes:
> - All three leverages (OL, FL, CL) can be positive or negative.
> - Depreciation is treated as a fixed operating cost.
> - In reverse-working problems where both OL and FL are given, alternative solutions are possible depending on the approach.