Mr. Davis is a certified public accountant specializing in corporate risk and capital structure analysis.
The **Degree of Financial Leverage (DFL) Calculator** measures how sensitive a company’s Earnings Per Share (or Net Income) is to changes in its operating earnings (EBIT). This versatile four-variable calculator solves for any missing input: **Earnings Before Interest and Taxes ($EBIT$)**, **Interest Expense ($IE$)**, **Tax Expense ($T$)**, or the **DFL Ratio ($R$)**. **Input any three of the four core variables** to find the missing one.
Degree of Financial Leverage Calculator
Degree of Financial Leverage (DFL) Formulas
The DFL is mathematically defined as the ratio of Earnings Before Interest and Taxes (EBIT) to Earnings Before Taxes (EBT).
Note: The tax rate ($T$) is used for complementary metrics like EAT (Earnings After Tax) but not in the core DFL formula itself.
Formula Source: Investopedia: Degree of Financial Leverage
Variables Explained
The calculation relies on these four core financial variables, with $EBIT$ and $IE$ being mandatory for the core ratio:
- Earnings Before Interest and Taxes (EBIT): The company’s operating income for the period ($).
- Interest Expense (IE): The cost of debt financing for the period ($).
- Tax Rate (T): The company’s tax rate (used to find Net Income sensitivity) (%).
- DFL Ratio (R): The final ratio that indicates the level of financial risk (unitless multiplier).
Related Calculators
Analyze your company’s leverage and risk profile with these related tools:
- Degree of Operating Leverage (DOL) Calculator
- Degree of Combined Leverage (DCL) Calculator
- Debt-to-Equity Ratio Calculator
- Break-Even Point Calculator
What is the Degree of Financial Leverage (DFL)?
The **Degree of Financial Leverage (DFL)** is a metric that indicates how much a company’s reliance on debt financing (interest expense) magnifies changes in its Earnings Before Taxes (EBT) or Net Income, resulting from changes in its core operating income (EBIT). A DFL greater than 1.0 means that a 1% change in EBIT will result in a greater than 1% change in EBT/Net Income.
For example, a DFL of 1.5 indicates that a 10% increase in EBIT will lead to a 15% increase in EBT. While high leverage can boost returns for shareholders during good economic times, it significantly amplifies losses during downturns, reflecting higher financial risk.
How to Calculate DFL (Example)
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Identify Components:
The $\mathbf{EBIT}$ is $\mathbf{\$200,000}$. The $\mathbf{IE}$ is $\mathbf{\$50,000}$. The $\mathbf{T}$ is $\mathbf{30\%}$.
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Calculate Earnings Before Taxes (EBT):
$$ EBT = EBIT – IE = \$200,000 – \$50,000 = \mathbf{\$150,000} $$
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Apply the DFL Formula:
$$ DFL = \frac{EBIT}{EBT} = \frac{\$200,000}{\$150,000} \approx \mathbf{1.33} $$
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Interpret the Ratio:
The DFL Ratio is $\mathbf{1.33}$. This means that for every 1% change in EBIT, the Earnings Before Taxes (EBT) will change by 1.33%.
Frequently Asked Questions (FAQ)
A: DFL helps investors and managers understand the level of fixed financial obligations (interest payments) a company has, and how these commitments amplify both profits and losses, which is critical for risk assessment.
A: A DFL of 1.0 means the company has no interest expense ($IE = 0$), indicating no financial leverage. In this case, EBT equals EBIT, and any change in operating income passes straight through to EBT.
A: Yes. If Interest Expense ($IE$) is greater than EBIT, EBT will be negative (a loss). The DFL ratio will be negative, indicating extreme financial distress and high bankruptcy risk.
A: The Tax Rate ($T$) does not affect the calculation of the DFL ratio itself, as DFL uses pre-tax figures (EBIT and EBT). However, the ultimate impact on Net Income (EAT) is often the focus of financial analysis when using DFL.