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FINANCE / DEBT SENSITIVITY

Degree of Financial Leverage Calculator

Measure earnings sensitivity created by fixed interest expense at a stated EBIT level.

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  • 02 Values stay in this browser tab
  • 03 Use boundary

Conversion input

Known value

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Inputs

Preparing the calculator...

METHOD / WORKED EXAMPLE

See how interest amplifies earnings changes

Financial leverage shows the sensitivity introduced by fixed interest expense at the supplied EBIT level.

WORKED DEFAULT

Check the calculation with the default inputs

With EBIT of $300,000 and interest expense of $75,000, earnings before tax is $225,000 and DFL is 1.3333.

  1. Entered EBIT$300,000
  2. Less interest expense$225,000 pre-tax earnings
  3. EBIT divided by pre-tax earnings1.3333 DFL

READ THE RESULT

Interpret the output in context

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

Know where the model stops

  • EBIT and interest cover the same period.
  • Interest expense is fixed for the small change being considered.
  • Taxes and preferred dividends are outside this version.

This simplified model excludes preferred dividends, taxes, changing debt balances, and non-interest financing costs.

OpenStax: capital structure and financial leverage

COMMON QUESTIONS

Degree of Financial Leverage Calculator FAQs

How is DFL different from interest coverage?

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.

Why must EBIT exceed interest expense?

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.

Does a higher DFL always mean better returns?

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.

Use boundary

Calculation path

The calculator divides EBIT by earnings before tax after subtracting matching-period interest expense.

Calculation path

DFL = EBIT / (EBIT - interest expense).