Financial Statement Analysis
 Ratio Analysis of Financial Statements (Formula, Types, Excel)
 Ratio Analysis Advantages
 Ratio Analysis
 Liquidity Ratios
 Cash Ratio
 Cash Ratio Formula
 Quick Ratio
 Quick Ratio Formula
 Current Ratio
 Current Ratio Formula
 Acid Test Ratio Formula
 Defensive Interval Ratio
 Working Capital Ratio
 Working Capital Formula
 Net Working Capital Formula
 Changes in Net Working Capital
 Cash Flow from Operations Ratio
 Cash Reserve Ratio
 Operating Cycle Formula
 Current Ratio vs Quick Ratio
 Bid Ask Spread
 Liquidity vs Solvency
 Liquidity
 Solvency
 Solvency Ratios
 Equity Ratio
 Capital Adequacy Ratio
 Liquidity Risk
 Altman Z Score
 Turnover Ratios
 Inventory Turnover Ratio
 Accounts Receivable Turnover
 Accounts Receivables Turnover Ratio
 Accounts Payable Turnover Ratio
 Days Inventory Outstanding
 Days in Inventory
 Days Sales Outstanding
 Average Collection Period
 Days Payable Outstanding
 Cash Conversion Cycle
 Cash Conversion Cycle (CCC) Formula
 Fixed Asset Turnover Ratio Formula
 Debtor Days Formula
 Working Capital Turnover Ratio
 Profitability Ratios
 Profitability Ratios Formula
 Common Size Income Statement
 Vertical Analysis of Income Statement
 Profit Margin
 Gross Profit Margin Formula
 Gross Profit Percentage
 Operating Profit Margin Formula
 EBIT Margin Formula
 Operating Income Formula
 Net Profit Margin Formula
 EBIDTA Margin
 Degree of Operating Leverage Formula (DOL)
 NOPAT Formula
 OIBDA
 Earnings Per Share
 Basic EPS
 Diluted EPS
 Basic EPS vs Diluted EPS
 Return on Equity (ROE)
 Return on Capital Employed (ROCE)
 Return on Invested Capital (ROIC)
 Return on Sales
 ROIC Formula (Return on Invested Capital)
 Return on Investment Formula (ROI)
 ROIC vs ROCE
 ROE vs ROA
 CFROI
 Cash on Cash Return
 Return on Total Assets (ROA)
 Return on Average Capital Employed
 Capital employed Employed
 Return on Average Assets (ROAA)
 Return on Average Equity (ROAE)
 Return on Assets Formula
 Return on Equity Formula
 DuPont Formula
 Net Interest Margin Formula
 Earnings Per Share Formula
 Diluted EPS Formula
 Contribution Margin Formula
 Unit Contribution Margin
 Revenue Per Employee Ratio
 Operating Leverage
 EBIT vs EBITDA
 EBITDAR
 Capital Gains Yield
 Tax Equivalent Yield
 LTM Revenue
 Operating Expense Ratio Formula
 Overhead Ratio Formula
 Variable Costing Formula
 Capitalization Rate
 Cap Rate Formula
 Comparative Income Statement
 Capacity Utilization Rate Formula
 Total Expense Ratio Formula
 Efficiency Ratios
 Dividend Ratios
 Debt Ratios
 Debt to Equity Ratio
 Debt Coverage Ratio
 Debt Ratio
 Debt to Asset Ratio Formula
 Coverage Ratio
 Coverage Ratio Formula
 Debt to Income Ratio Formula (DTI)
 Capital Gearing Ratio
 Capitalization Ratio
 Interest Coverage Ratio
 Times Interest Earned Ratio
 Debt Service Coverage Ratio (DSCR)
 DSCR Formula (Debt service coverage ratio)
 Financial Leverage Ratio
 Financial Leverage Formula
 Degree of Financial Leverage Formula
 Net Debt Formula
 Leverage Ratios
 Leverage Ratios Formula
 Operating Leverage vs Financial Leverage
 Current Yield
 Debt Yield Ratio
 Solvency Ratio Formula
Table of Contents
What is a Degree of Operating Leverage Formula (DOL)?
The formula for a degree of operating leverage (DOL) is used to determine the impact of a change in a company’s sales on the operating income of that company.
 The concept of DOL revolves around the proportion of fixed costs and variable costs in the overall cost structure of a company.
 A company with a higher proportion of fixed costs has a higher degree of operating leverage as compared to a company with a higher proportion of variable costs.
 If in case the DOL is high, then the earnings before interest and taxes (EBIT) is more sensitive to the percentage change in sales while all other variables remaining the same, and vice versa.
The formula of Degree of Operating Leverage (DOL) is derived by dividing the percentage change in the EBIT by the percentage change in the sales and mathematically, DOL Formula is represented as,
Conversely, the formula for DOL can also be derived by dividing the contribution margin by the EBIT of the company which is mathematically represented as,
This formula of Degree of Operating Leverage can be further expanded as shown below,
Degree of Operating Leverage = (Sales – Variable cost) / (Sales – Fixed cost – Variable cost)
Explanation of the Degree of Operating Leverage Formula
The formula for calculation of the degree of operating leverage can be derived by using the following three steps:
Step 1: Firstly, determine the operating income or EBIT during the current year and the previous year. Now, compute the percentage change in EBIT initially by deducting the EBIT of the previous year from that of the current year and then dividing the result by the EBIT of the previous year as shown below,
Percentage change in EBIT = (EBIT _{current year} – EBIT _{previous year)} / EBIT _{previous year} * 100%
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Step 2: Next, determine the sales during the current year and the previous year. Now, compute the percentage change in sales initially by deducting the sales of the previous year from that of the current year and then dividing the result by the sales of the previous year as shown below,
Percentage change in sales = (Sales _{current year} – Sales _{previous year)} / Sales _{previous year} * 100%
Step 3: Finally, the formula of Degree of Operating Leverage (DOL) can be calculated by dividing the value in Step 1 by that of Step 2 as above.
Examples of Degree of Operating Leverage Formula
Let’s see some simple to advanced examples of a degree of operating leverage equation to understand it better.
Degree of Operating Leverage Formula – Example #1
Let us take the example of Company A which has clocked sales of $800,000 in year one which further increased to $1,000,000 in year two. In year one, the operating expenses of the company stood at $450,000, while in year two, the same went up to $550,000. Determine the DOL for Company A.
Use the following data for the calculation of Degree of Operating Leverage Formula.
EBIT in year 1
 EBIT in year 1 = Sales in year 1 – Operating expense in year 1
 = $800,000 – $450,000
 = $350,000
EBIT in Year 2
 EBIT in year 2 = Sales in year 2 – Operating expense in year 2
 = $1,000,000 – $550,000
 = $450,000
Change in EBIT
 Change in EBIT = EBIT in year 2 – EBIT in year 1
 = $450,000 – $350,000
 = $100,000
Percentage Change in EBIT
 Percentage change in EBIT = Change in EBIT / EBIT in year 1 * 100%
 = $100,000 / $350,000 * 100%
 = 28.57%
Change in Sales
 Change in sales = Sales in year 2 – Sales in year 1
 = $1,000,000 – $800,000
 = $200,000
Percentage Change in Sales
 Percentage change in sales = Change in sales / Sales in year 1 * 100%
 = $200,000 / $800,000 * 100%
 = 25.00%
Calculation of Degree of Operating Leverage Formula will be –
Now, Degree of Operating Leverage Formula = Percentage change in EBIT / Percentage change in sales
 DOL Formula= 28.57% / 25.00%
 = 1.14
Therefore, the DOL of Company A is 1.14.
Degree of Operating Leverage Formula – Example #2
Let us take the example of another Company B which is in the business of chocolate manufacturing and in the current year has achieved a sales volume of 18,000 pieces with an average sales price of $50 per piece. The overall cost structure of the company is such that the fixed cost is $100,000 while the variable cost is $25 per piece. Calculate Degree of Operating Leverage for Company B.
Use the following data for the calculation of Degree of Operating Leverage Formula.
Sales = Sales volume * Average sales price per piece
 = 18,000 * $50
 = $900,000
Variable cost = Sales volume * Variable cost per piece
 = 18,000 * $25
 = $450,000
Contribution Margin
Contribution margin = Sales – Variable cost
 = $900,000 – $450,000
 = $450,000
EBIT
EBIT = Sales – Variable cost – Fixed cost
 = $900,000 – $450,000 – $100,000
 = $350,000
Calculation of Degree of Operating Leverage formula will be as follows –
Now, Degree of Operating Leverage Formula = Contribution margin / EBIT
 DOL Formula = $450,000 / $350,000
Degree of Operating Leverage
 = 1.29
Therefore, the DOL of Company B is 1.29.
Degree of Operating Leverage Calculator
You can use the following Degree of Operating Leverage Calculator.
Percentage Change in EBIT  
Percentage Change in Sales  
DOL Formula =  
DOL Formula = 


Relevance and Uses of Degree of Operating Leverage Formula
It is important to understand the concept of DOL formula because it helps a company to appreciate the effects of operating leverage on the probable earnings of the company. It is a key ratio for a company to determine a suitable level of operating leverage that can be utilized to secure the maximum benefit out of the operating income of a company.
If a company has high operating leverage, then it means that a large proportion of its overall cost structure is due to fixed costs. Such a company will enjoy huge changes in profits with a relatively smaller increase in sales. On the other hand, if a company has low operating leverage, then it means that variable costs contribute a large proportion of its overall cost structure. Such a company does not need to increase sales per se to cover its lower fixed costs, but it earns a smaller profit on each incremental sale.
Nevertheless, a company with high operating leverage should always keep in mind that, visàvis a company with low operating leverage, it is more vulnerable to poor corporate decisions and other variables that may result in significant decrease in income.
Recommended Articles
This has been a guide to Degree of Operating Leverage (DOL) Formula. Here we discuss how to calculate the Degree of Operating Leverage using practical examples along with downloadable excel templates. You may learn more about Financial Analysis from the following articles –
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