How is DFL calculated?

DFL = EBIT / (EBIT - Interest). For a company with $500K EBIT and $100K interest: DFL = $500K / $400K = 1.25. A 10% EBIT increase leads to a 12.5% EPS increase.

What is the risk of high financial leverage?

Fixed interest obligations create solvency risk when EBIT declines. If EBIT falls below interest expense, the company cannot service its debt and may face distress.

How does DFL affect equity returns?

When ROIC exceeds cost of debt, financial leverage amplifies ROE. When ROIC falls below cost of debt, leverage amplifies ROE destruction. This is the financial leverage trade-off.

Degree of Financial Leverage (DFL) Calculator

Calculate DFL: % Change in EPS / % Change in EBIT. Measures how debt financing amplifies EPS sensitivity to EBIT changes. Higher debt = higher DFL = higher financial risk.

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Frequently Asked Questions

How is DFL calculated?

What is the risk of high financial leverage?

How does DFL affect equity returns?