Joined: 13 Nov 2008
Online Status: Offline Posts: 82
Posted: 29 Sep 2009 at 11:54 | IP Logged
DFL is the mix of debt and equity a firm uses to finance operations. DOL really measures how sensitive EBIT will be to changes in sales. A firm with high fixed costs in relation to variable costs has a high DOL so their earnings are highly sensitive to changes in sales.
Joined: 13 Nov 2008
Online Status: Offline Posts: 82
Posted: 29 Sep 2009 at 12:08 | IP Logged
High DFL means highly leveraged, too much debt, very risky.
High DOL means sensitive/volatile earnings, so risky. Fixed costs are so high that drop in sales would harm profits badly because fixed costs don't change if sales drop. Low DOL means lower fixed costs and more variable costs which are dependent on sales. So drop in sales mean less significant drop in profits.
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Topic: operating leverage vs financial leverage
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