What is the degree of financial leverage formula?

DFL = % change in EPS ÷ % change in EBIT = EBIT ÷ (EBIT − interest expense).

What does a DFL of 1 mean?

The company has no fixed financing costs, so EPS changes in the same proportion as EBIT.

How do preferred dividends enter DFL?

Subtract preferred dividends ÷ (1 − tax rate) from the denominator along with interest.

Is higher financial leverage bad?

It raises both expected returns to shareholders and risk. It is a trade-off, not simply good or bad.

Degree of Financial Leverage (DFL) Formula

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Degree of Financial Leverage (DFL) Calculator

The degree of financial leverage measures how much earnings per share change for a given change in operating profit. It is the percentage change in EPS divided by the percentage change in EBIT, which simplifies to EBIT ÷ (EBIT − interest). Its source is fixed financing costs: interest must be paid whatever profits are, so shareholders absorb every swing in EBIT on a smaller base.

Formula

DFL = % change in EPS% change in EBIT = EBITEBIT − Interest

Where

EBIT: earnings before interest and taxes
Interest: interest expense on debt for the period

Calculator

EBIT

Interest expense

Result and step-by-step solution

Degree of financial leverage

1.25

A 10% change in EBIT changes earnings per share by about 12.5%.

Earnings before tax
100,000.00 − 20,000.00 = 80,000.00
Divide
100,000.0080,000.00 = 1.25

How to use the formula

A company with no debt has a DFL of 1: EPS moves exactly in proportion to EBIT. As interest grows relative to EBIT, DFL rises; when EBIT barely covers interest, even a small fall in operating profit can wipe out earnings. If a company has preferred shares, their dividends are also fixed and are added to interest on a pre-tax basis, preferred dividends ÷ (1 − tax rate).

With EBIT of 100,000 and interest of 20,000, earnings before tax are 80,000 and DFL is 1.25: a 10% change in EBIT changes EPS by 12.5%. Financial leverage is often assessed together with interest coverage, which here is 5. Multiply by operating leverage for the combined leverage.

Frequently asked questions

What is the degree of financial leverage formula?: DFL = % change in EPS ÷ % change in EBIT = EBIT ÷ (EBIT − interest expense).
What does a DFL of 1 mean?: The company has no fixed financing costs, so EPS changes in the same proportion as EBIT.
How do preferred dividends enter DFL?: Subtract preferred dividends ÷ (1 − tax rate) from the denominator along with interest.
Is higher financial leverage bad?: It raises both expected returns to shareholders and risk. It is a trade-off, not simply good or bad.

Last reviewed: September 26, 2026. Calculations run in your browser and were checked against numpy-financial, SciPy and published spreadsheet examples.