A company is analyzing its risk profile using combined leverage. It observes that its Degree of Operating Leverage (DOL) is low while its Degree of…
CA Intermediate · Financial Management and Strategic Management · MTP · May 2026
A company is analyzing its risk profile using combined leverage. It observes that its Degree of Operating Leverage (DOL) is low while its Degree of Financial Leverage (DFL) is high. The management believes this combination helps balance overall risk. Based on the concept of combined leverage, EXPLAIN whether this is a suitable risk combination and JUSTIFY your answer briefly.
Suggested Answer and Working Notes:
A combination of low DOL and high DFL is considered the best balanced combination of risk. Low DOL indicates lower operating (business) risk and higher EBITHigh DFL indicates higher financial risk due to the use of debt. This combination is suitable because the Higher financial risk is balanced by lower total business risk, resulting in a moderate and well-balanced total risk.
Topics: Part-A: Financial Management
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