Joachim Kuczynski, 29 September 2026
Combined leverage means to consider financial leverage and operating leverage (link to post) in an investment analysis. It is important to make the financial leverage adjustment first and the operating leverage adjustment second. The reason is that operating leverage depends on debt to equity ratio. You have to make the operating leverage adjustment based on the new debt to equity ratio. But aligning to new debt to equity ratio is just what you do in financial leverage adjustment. Hence you have to adapt debt to equity ratio first and fixed to variable expenses second. The reverse way leads to another and incorrect result.
I prepared an example to show that case:
Without any leverage effect we assume a WACC of 7.5%. The correct way of adapting combined leverage (operating after financial leverage) results in a WACC of 9.9%. The false way (financial after operating leverage) leads us to a WACC of 9.0%. The difference is almost 1%.