Degree of Financial Leverage Calculator
The degree of financial leverage (DFL) shows how a company's use of debt amplifies the effect of changes in operating income on its bottom line. Because interest is a fixed cost, every percentage change in EBIT produces a larger percentage change in pre-tax earnings. Enter EBIT and interest expense, and the calculator returns the DFL, the earnings before taxes, and the interest burden. A higher DFL means more earnings volatility and more financial risk from leverage.
Degree of financial leverage formula
Earnings before taxes = EBIT - interest expense
DFL = EBIT / (EBIT - interest expense)
Interest as % of EBIT = interest expense / EBIT * 100
EBIT is operating income before interest and taxes. Earnings before taxes must be nonzero for DFL to be defined. A DFL of 1 means no interest expense and therefore no financial leverage.
Financial leverage context
- Financial leverage uses fixed-cost debt to magnify returns to equity holders.
- Higher DFL increases both potential gains and the risk of losses for shareholders.
- A DFL of 2 means a 1 percent change in EBIT drives a 2 percent change in pre-tax earnings.
- DFL rises as interest expense grows relative to EBIT.
- Multiply DFL by the degree of operating leverage to obtain total leverage.
Degree of financial leverage: frequently asked questions
What is the degree of financial leverage?
The degree of financial leverage (DFL) measures how sensitive a company's earnings per share or net income is to a change in operating income (EBIT). It captures how fixed financing costs, mainly interest, amplify changes in EBIT into larger changes in bottom-line earnings.
What is the DFL formula?
DFL = EBIT divided by (EBIT minus interest expense). EBIT is earnings before interest and taxes; subtracting interest gives earnings before taxes. The ratio shows how a 1 percent change in EBIT translates into a larger percent change in pre-tax earnings.
Why does financial leverage amplify earnings?
Interest is a fixed cost that does not change with operating income. When EBIT rises, the same fixed interest is spread over a larger base, so net income rises faster than EBIT. When EBIT falls, the fixed interest magnifies the decline, increasing risk.
What does a DFL of 1 mean?
A DFL of 1 means there is no interest expense, so earnings before taxes equal EBIT and a 1 percent change in EBIT produces exactly a 1 percent change in pre-tax earnings. There is no financial leverage effect.
How do DOL and DFL combine?
Multiplying the degree of operating leverage (DOL) by the degree of financial leverage (DFL) gives the degree of total leverage (DTL), which measures how a change in sales flows all the way through to earnings per share.
Official sources
- U.S. Securities and Exchange Commission: How to Read Financial Statements.
- U.S. Securities and Exchange Commission: Investor.gov, Leverage.
Reviewed by the CalculatorHub team, edited by James Graham, 16 June 2026. See our methodology.