What is Combined (Total) Leverage?
Combined leverage measures the total sensitivity of earnings per share to a change in sales. It captures both operating leverage (fixed operating costs amplifying sales swings into EBIT swings) and financial leverage (fixed interest amplifying EBIT swings into EPS swings).
How It Works
- Formula: Degree of Combined Leverage = DOL × DFL
- Tells you: a 1% change in sales causes a (DCL)% change in EPS
- High combined leverage = high risk and high reward
- Common in capital-intensive, debt-funded businesses
- Used in scenario planning to gauge downside risk
Saudi Context
Saudi cyclical sectors with heavy fixed assets and significant debt — petrochemicals, contractors, real-estate developers — typically run high combined leverage. The metric is a useful warning signal during oil-price or property cycles.
Example
A Saudi industrial company has DOL = 2.0 and DFL = 1.5, so DCL = 3.0. A 10% sales decline becomes a 20% EBIT decline and a 30% EPS decline. Investors and the CFO use this number to size cash buffers and covenant headroom.