Operating leverage and financial leverage each amplify earnings sensitivity to sales on their own — multiplying them together shows the combined, compounded effect.
How it works
Contribution margin divided by operating income gives the degree of operating leverage; operating income divided by earnings before taxes (after subtracting interest expense) gives the degree of financial leverage. Multiplying the two together gives the degree of total leverage.
What this does not include
This does not include tax effects on the final earnings-per-share sensitivity, or how leverage changes as a company approaches its break-even point, where both DOL and DFL become highly sensitive to small changes in the underlying figures.
How to use this calculator
- Enter contribution margin, operating income, and interest expense.
Frequently asked questions
Why would a company want to know its DTL?
It’s a risk indicator — a high DTL means small sales swings translate into large earnings swings, useful for understanding a company’s overall business and financial risk combined.
Can a company have high operating leverage but low financial leverage?
Yes — a heavily automated, low-debt manufacturer might have high DOL but low DFL, while a highly leveraged but labor-light service company might show the opposite pattern.
Does DTL apply the same way to a small business as a large corporation?
The concept applies universally, though very small or early-stage businesses often show extreme or unstable DTL figures near their break-even point, making the metric less meaningful there.
