Degree of Financial Leverage Calculator
The degree of financial leverage (DFL) shows how much a company's earnings to equity holders move for each percentage change in operating income. It captures the amplifying effect of fixed financing costs such as interest on debt. A firm with significant debt has a DFL above 1.0, so its net income swings more sharply than its EBIT. This calculator takes your earnings before interest and taxes (EBIT) and your interest expense and returns the degree of financial leverage, the amount of EBIT available after interest, and the implied earnings sensitivity for a sample change in operating income.
Degree of financial leverage formula
EBT = EBIT - interest expense
DFL = EBIT / EBT
Resulting earnings change % = DFL * EBIT change %
Interest coverage = EBIT / interest expense
When interest expense is zero, earnings before tax equals EBIT and DFL is exactly 1.0, indicating no financial leverage. As interest rises toward EBIT, DFL increases and earnings become highly sensitive to operating performance.
How to read the result
- DFL of 1.0 means no fixed financing cost; earnings move one-for-one with EBIT.
- DFL above 2.0 indicates substantial leverage; small EBIT swings cause large earnings swings.
- If EBIT is below interest expense, the firm cannot cover its interest and DFL turns negative or undefined; this calculator flags it as n/a.
- Interest coverage below about 1.5 times is widely viewed as a sign of financial strain.
- Compare DFL to industry peers, since asset-heavy and regulated sectors carry more debt by nature.
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). A DFL of 2.0 means a 1% change in EBIT produces a 2% change in earnings to equity holders, because fixed financing costs like interest amplify the effect.
How is DFL calculated?
The standard formula is DFL = EBIT / (EBIT minus interest expense). EBIT is earnings before interest and taxes (operating income). Interest expense is the fixed cost of debt financing. When interest is zero, DFL equals 1.0, meaning no financial leverage.
What does a high degree of financial leverage mean?
A high DFL signals that a large share of the company's financing comes from fixed-cost debt. This magnifies returns to shareholders when EBIT rises, but it also magnifies losses when EBIT falls, increasing financial risk and the chance of distress if earnings cannot cover interest.
What is a good degree of financial leverage?
There is no universal target; it depends on industry, earnings stability, and capital structure. Stable, predictable businesses such as utilities can sustain higher leverage, while cyclical businesses generally keep DFL lower. Compare against industry peers rather than an absolute benchmark.
How does DFL differ from operating leverage?
Operating leverage relates to fixed operating costs and measures how EBIT changes with sales. Financial leverage relates to fixed financing costs and measures how net income or EPS changes with EBIT. Combined leverage multiplies the two to show total sensitivity to a change in sales.
Official sources
- U.S. Securities and Exchange Commission, Investor.gov: Investing glossary.
- U.S. Census Bureau: Quarterly Financial Report.
Reviewed by the CalculatorHub team, edited by James Graham, 17 June 2026. See our methodology.