DOL DFL DTL better

suxiaoxiao

Guys, can anyone explain DOL DFL DTL to get a better understnding? Please!

agulani

Consider leverage as "Fixed" ... How much capital is tied up to certain elements.

Degree of Operating Leverage = Amount of Fixed Costs (Fixed operating costs)
Degree of Financial Leverage = Amount of Fixed Financial Costs (Loans, Bonds Obligations etc.)

The more leverage there is, the "riskier" the operation is.

evolsteevol

DOL = change in NOI / change in qty
DFL = change in NI / change in NOI
DTL = change in NI / change in qty

Also remember that DTL = DOL x DFL

scr879

Thank you for your answers guys! Got it now.

rgonzalez

DOL = (Revenue - Variable Cost)/(Revenue - Variable Cost - Fixed Cost)

Measures how Operating Income changes relative to a change in Revenue. eg. If DOL = 1.3 and Revenue increase by 2%. Operating Income will increase 2% * 1.3 = 2.6%

DFL = (Revenue - Variable Cost - Fixed Cost)/(Revenue - Variable Cost - Fixed Cost - Interest)

Measures how Net Income changes relative to a change in Operating Income. eg. If DFL = 2 and Operating Income increase 5%. Net Income will increase 5% * 2 = 10%

DTL = (Revenue - Variable Cost)/(Revenue - Variable Cost - Fixed Cost - Interest)

Measures how Net Income changes relative to a change in Revenue. eg. If DTL = 4 and Revenue increase by 3%. Net Income will increase 3% * 4 = 12%

Relationship between the 3: DOL * DFL = DTL