Financial gearing is related to the proportion of fixed financial cost in the firm’s overall cost structure. Operating gearing however relate to the proportion of fixed operating cost in the firm’s overall cost structure. Operating gearing mainly considers the relationship between changes in EBIT and changes in sales. The degree to which a firm is operationally geared can be measured as follows:
D.O.G. therefore measures the sensitivity or vulnerability of EBIT to changes in sales. It can also be used to measure Business Risk. If D.O.G is more than one, then the business is operationally geared.