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DOL

A type of leverage ratio summarizing the effect a particular amount of operatingleverage has on a company's earnings before interest and taxes (EBIT). Operatingleverage involves using a large proportion of fixed costs to variable costs in theoperations of the firm. The higher the degree of operating leverage, the more volatile

the EBIT figure will be relative to a given change in sales, all other things remaining thesame. The formula is as follows:

This ratio is useful as it helps the user in determining the effects that a given level of

operating leverage has on the earnings potential of the firm. This ratio can also be used

to help the firm determine the most appropriate level of operating leverage in order to

maximize the company's EBIT

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-- -1.73 0.82 -0.65 1.17 2.98 1.74 4.44 2.23 9.09

If the operating leverage is high, then a smallest percentage change in sales can increase the

netoperating income. The net operatingincomeis the amount of income that is left after

payments of fixed cost are made, regardless of how much sales has been made. Since the

Degree of Operating Leverage or DOL helps in determining how the change in sales volume

would affect the profits of the company, it is important to ascertain the value of degree of

operating leverage in order to minimize the losses to the company.A business would benefit if the can estimate the Degree of Operating Leverage or DOL. The

impact of the leverage on the percentage of sales can be quite striking if not taken seriously;

therefore it is really important to minimize these risks of the business. If you get a higher degree

of operating leverage or DOL then you should try and balance the operating leverage to balance

with thefinancial leveragein order to provide with profits to the company. A companys balance

Degree of Operating Leverage can provide the financial leverage is an important factor

contributing to business profits. Even a small percentage of increase in sales can help in having

a greater proportion of profits in the company, so it is really important to maintain a balance

between both financial leverage and operating leverage to yield maximum benefits.

As we see from the table that DOL in 2009 is 9.09 which is on the higher side in terms of all other

financial year infact in 2003 and 2005 DOL is in negative which is very good for the company.

That shows that if there is a change in term of sale of the company that does not reflect in

degree of leaverage of the company

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DFL

A leverage ratio summarizing the affect a particular amount of financial leverage has on

a company's earnings per share (EPS). Financial leverage involves using fixed costs to

finance the firm, and will include higher expenses before interest and taxes (EBIT). The

higher the degree of financial leverage, the more volatile EPS will be, all other things

remaining the same. The formula is as follows:

Most likely, the firm under evaluation will be trying to optimize EPS, and this ratio can be

used to help determine the most appropriate level of financial leverage to use to achievethat goal.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-- 1.15 0.94 1.31 0.73 -0.22 2.70 2.42 0.98 1.86

This formula can be even used to compare data of many companies that can help an investor in

deciding which company to invest in, based on the result of how much risk is attached with each

companies capital structures. It would help an investor to strike a great deal as when the there is

an economic decline the losses of the company can be substantiated with this investment and

during the rise in the economic conditions the volume of sales would be well compensated.

The degree of financial leverage is useful for figuring out the fate of net income in the future,

which is based on the changes that take place in the interest rates, taxes,operating

expensesand other financial factors. Debts added to abusinesswould provide an interest

expense to the company which is a fixed cost, and this is when the companys business begins

to turn to provide profit. It is important to balance the financial leverage according to the

operating costs of the company as it would minimize the level of risks involved.

As we see from the table that DFL of GSK in the financial year of 2008 is on a higher side as

compared to other year so higher DOL of a company mean higher degree of risk especially if

earnings from operations decline while the interest expense remains. And in 2007 DFL is in

negative which is good for the company

DCL

A leverage ratio that summarizes the combined effect the degree of operating leverage(DOL), and the degree of financial leverage has on earnings per share (EPS), given aparticular change in sales. This ratio can be used to help determine the most optimal

level of financial and operating leverage to use in any firm. For illustration, the formulais:

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This ratio can be very useful, as it summarizes the effects of combining both financial

and operating leverage, and what effect this combination, or variations of this

combination, has on the corporation's earnings. Not all corporations use both operating

and financial leverage, but if they do, then this formula can be used.

It is worth noting that a firm with a relatively high level of combined leverage is seen

as riskier than a firm with less combined leverage, as the high leverage means more

fixed costs to the firm.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-- 1.98 0.77 -0.85 0.85 -0.65 4.69 10.74 2.18 16.90

Since the degree of combined leverage is calculated by combining both the operational leverage

and the financial leverage, it helps us in ascertaining the total risk involved in the business.

Operating Leverage measures the operating risk or business risk of the company while Financial

Leverage measures the financial risk of the company. Together when combined, both the

financial leverage ratio and the operating leverage ratio can provide you with an idea of how

much risk per share are involved. Operating leverage is determined by the percentage change in

earning before tax or interest is due and similarly financial leverage is determined by the

percentage change in the gross before the tax and interest per share is due.

It is up to the company to maintain the degree of combined leverage so as to minimize the risks

involved in the business. Maintaining the risk and not increasing it from where it is, the business

should try to lower or minimize the financial leverage in order to balance the operating leverage

and by minimizing the operating leverage when the financial leverage is to be balances. The

balanced degree of combined leverage (DCL) provides with an increase in theearnings per

shareof the equity holders which is why it is important to calculate the Degree of Combined

Leverage (DCL) for better understanding of the position of the company and minimizing the risks

of the company.

As wee can see clearly from the table that in financial year 2009 and 20011 DCL is about 10.74

and 16.90 respctively which is again on a higher side as compared to other financial year. So in

these two financial year company is in more risky condition as compared to other financial year.

So after 2007 company DCL is on higher side.

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