FINANCE / DEBT SENSITIVITY
Measure earnings sensitivity created by fixed interest expense at a stated EBIT level.
METHOD / WORKED EXAMPLE
Financial leverage shows the sensitivity introduced by fixed interest expense at the supplied EBIT level.
WORKED DEFAULT
With EBIT of $300,000 and interest expense of $75,000, earnings before tax is $225,000 and DFL is 1.3333.
READ THE RESULT
A DFL of 1.3333 estimates that a 1% EBIT change corresponds to about a 1.33% change in pre-tax earnings near this point, under unchanged interest.
ASSUMPTIONS AND LIMITS
This simplified model excludes preferred dividends, taxes, changing debt balances, and non-interest financing costs.
COMMON QUESTIONS
Interest coverage divides EBIT by interest expense to show how many times operating earnings cover interest. DFL divides EBIT by earnings after interest to estimate sensitivity. They use related inputs but answer different questions.
This page is scoped to a positive pre-tax earnings case. When interest equals or exceeds EBIT, the denominator reaches zero or becomes negative and the simple sensitivity interpretation stops being useful.
No. A higher ratio means stronger sensitivity in both directions under this model. It can amplify an improvement in EBIT, but it can also amplify deterioration and does not measure liquidity or debt repayment capacity.
RELATED TOOLS
Use boundary
The calculator divides EBIT by earnings before tax after subtracting matching-period interest expense.
DFL = EBIT / (EBIT - interest expense).