Degree of Combined Leverage Explained for Australian Businesses (2026)

The degree of combined leverage (DCL) is a powerful metric that quantifies how a company’s earnings per share (EPS) will respond to changes in sales. It captures the impact of both operating leverage (fixed operating costs) and financial leverage (use of debt), offering a holistic view of risk and potential return. In simple terms, DCL tells you how sensitive your bottom line is to fluctuations in revenue.

For example, if a company’s DCL is 3, a 10% rise in sales could translate to a 30% jump in EPS—amplifying both profits and potential losses.

Australian businesses in 2026 face a unique mix of opportunities and challenges. The Albanese government’s ongoing review of corporate tax concessions and updated thin capitalisation rules have made debt-funded expansion more complex. At the same time, post-pandemic supply chain stabilisation and robust consumer demand have injected fresh momentum into many sectors.

• Tax Reform: The 2024-25 federal budget introduced stricter deductibility caps for interest expenses, particularly affecting companies with high financial leverage.

• Interest Rate Trends: With the RBA maintaining rates at 3.6% through early 2026, the cost of debt remains stable but is closely watched.

• Sector Variability: Tech and manufacturing firms—often with high fixed costs—are experiencing greater DCL, while service-based industries generally maintain lower leverage ratios.

These shifts mean that the DCL is more than just a theoretical tool—it’s a practical way to anticipate how policy and market changes will ripple through your financials.

To get your DCL, you’ll need two components:

• Degree of Operating Leverage (DOL): % Change in EBIT / % Change in Sales

• Degree of Financial Leverage (DFL): % Change in EPS / % Change in EBIT

DCL = DOL × DFL

Example: Suppose an Australian manufacturer expects a 5% increase in sales. With a DOL of 2 and a DFL of 1.5, the DCL is 3. This means EPS should rise by 15% if sales projections hold.

However, the DCL cuts both ways. In a downturn, high leverage can magnify losses. Businesses in 2026 are advised to stress-test their DCL under different revenue scenarios, factoring in rising wage costs and potential supply chain disruptions.

Forward-thinking CFOs are harnessing DCL to:

• Evaluate Expansion Plans: Before committing to new factories or tech investments, companies model the DCL to understand risk exposure.

• Optimise Capital Structure: With tighter tax rules on debt, many firms are recalibrating the debt-to-equity mix to achieve a balanced DCL.

• Communicate with Investors: In the ASX reporting season, clear explanations of DCL help justify earnings guidance and capital allocation decisions.

Case in Point: In early 2026, a Queensland-based agri-tech firm used DCL analysis to justify a modest increase in leverage, projecting that robust export demand would offset higher interest costs. The result: increased EPS and shareholder confidence, even as sector peers struggled with policy headwinds.

While DCL is a valuable diagnostic tool, it’s not foolproof. Over-reliance on leverage can expose companies to severe earnings swings in volatile markets. The key is to use DCL as part of a broader risk management toolkit—alongside scenario analysis and regular financial health checks.