# DOL, DFL, DCL — Measuring Risk Through Leverage
Leverage measures how sensitively profits respond to a change in sales. Each layer of fixed cost amplifies that sensitivity.
## The three leverages
| Leverage | What it captures | Formula (definition) | Formula (% change) |
|---|---|---|---|
| DOL | Risk from operating fixed costs | Contribution ÷ EBIT | %Δ EBIT ÷ %Δ Sales |
| DFL | Risk from interest & pref. dividend | EBIT ÷ [EBIT − Int − PD/(1−t)] | %Δ EPS ÷ %Δ EBIT |
| DCL | Total risk = DOL × DFL | Contribution ÷ [EBIT − Int − PD/(1−t)] | %Δ EPS ÷ %Δ Sales |
Financial Leverage Ratio (capital structure, not income-statement) = Debt ÷ Equity. Do not confuse this with DFL.
## Relationship with Margin of Safety
> DOL = 1 ÷ MOS (and MOS = 1 ÷ DOL)
A company operating just above break-even has a tiny MOS and a huge DOL — small drops in sales wipe out profit.
## How leverages interact with shocks
For a given % change in sales:
- %Δ EBIT = DOL × %Δ Sales
- %Δ EPS = DCL × %Δ Sales = DOL × DFL × %Δ Sales
This chain lets you forecast EPS sensitivity without rebuilding the full income statement.
## Highest vs. lowest combined leverage
When a question gives multiple situations (different fixed costs) and plans (different debt mixes), the highest DCL combination = highest fixed cost × highest debt; the lowest DCL combination = lowest fixed cost × lowest debt. Always state both the value and the combination (e.g., "Situation 3 + Plan A").