Degree of Financial Leverage (DFL)
EBIT divided by EBT (earnings before tax = EBIT − interest). Measures how sensitively pre-tax earnings (and hence EPS) move to a percentage change in EBIT.
When to use: Use to quantify financial-leverage amplification. Higher DFL = bigger EPS swings for the same EBIT swing. A levered firm magnifies operating performance into shareholder returns — both up and down. Combine with DOL for total leverage.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| DFL | Degree of Financial Leverage | EBIT / EBT | integer |
| EBIT | EBIT | Earnings before interest and taxes (operating income) | $ |
| Interest | Interest Expense | Annual interest expense | $ |
Real-Life Examples
Example 1: Levered Firm
EBIT $200M, interest expense $80M.
Given
Step-by-Step
DFL of 1.67 — a 10% rise in EBIT lifts pre-tax earnings (and EPS) by ~16.7%. The leverage shows up disproportionately at the bottom line.
Frequently Asked Questions
Because interest is a fixed cost in EBT. When EBIT rises, the entire incremental amount flows to EBT (after the constant interest is deducted) — so percentage growth in EBT exceeds percentage growth in EBIT. The same applies in reverse on the way down.
Multiplicatively: total leverage = DOL × DFL. A firm with DOL=3 and DFL=2 has total leverage of 6 — a 5% sales swing produces a 30% EPS swing. Highly levered firms like LBO-owned companies often run total leverage of 10+.