Financial Statement Analysis
 Ratio Analysis of Financial Statements (Formula, Types, Excel)
 Ratio Analysis Advantages
 Ratio Analysis
 Liquidity Ratios
 Cash Ratio
 Cash Ratio Formula
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 Quick Ratio Formula
 Current Ratio
 Current Ratio Formula
 Acid Test Ratio Formula
 Defensive Interval Ratio
 Working Capital Ratio
 Working Capital Formula
 Net Working Capital Formula
 Changes in Net Working Capital
 Cash Flow from Operations Ratio
 Cash Reserve Ratio
 Operating Cycle Formula
 Current Ratio vs Quick Ratio
 Bid Ask Spread
 Liquidity vs Solvency
 Liquidity
 Solvency
 Solvency Ratios
 Equity Ratio
 Capital Adequacy Ratio
 Liquidity Risk
 Altman Z Score
 Turnover Ratios
 Inventory Turnover Ratio
 Accounts Receivable Turnover
 Accounts Receivables Turnover Ratio
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 Days Inventory Outstanding
 Days in Inventory
 Days Sales Outstanding
 Average Collection Period
 Days Payable Outstanding
 Cash Conversion Cycle
 Cash Conversion Cycle (CCC) Formula
 Fixed Asset Turnover Ratio Formula
 Debtor Days Formula
 Working Capital Turnover Ratio
 Profitability Ratios
 Profitability Ratios Formula
 Common Size Income Statement
 Vertical Analysis of Income Statement
 Profit Margin
 Gross Profit Margin Formula
 Gross Profit Percentage
 Operating Profit Margin Formula
 EBIT Margin Formula
 Operating Income Formula
 Net Profit Margin Formula
 EBIDTA Margin
 Degree of Operating Leverage Formula (DOL)
 NOPAT Formula
 OIBDA
 Earnings Per Share
 Basic EPS
 Diluted EPS
 Basic EPS vs Diluted EPS
 Return on Equity (ROE)
 Return on Capital Employed (ROCE)
 Return on Invested Capital (ROIC)
 Return on Sales
 ROIC Formula (Return on Invested Capital)
 Return on Investment Formula (ROI)
 ROIC vs ROCE
 ROE vs ROA
 CFROI
 Cash on Cash Return
 Return on Total Assets (ROA)
 Return on Average Capital Employed
 Capital employed Employed
 Return on Average Assets (ROAA)
 Return on Average Equity (ROAE)
 Return on Assets Formula
 Return on Equity Formula
 DuPont Formula
 Net Interest Margin Formula
 Earnings Per Share Formula
 Diluted EPS Formula
 Contribution Margin Formula
 Unit Contribution Margin
 Revenue Per Employee Ratio
 Operating Leverage
 EBIT vs EBITDA
 EBITDAR
 Capital Gains Yield
 Tax Equivalent Yield
 LTM Revenue
 Operating Expense Ratio Formula
 Overhead Ratio Formula
 Variable Costing Formula
 Capitalization Rate
 Cap Rate Formula
 Comparative Income Statement
 Capacity Utilization Rate Formula
 Total Expense Ratio Formula
 Efficiency Ratios
 Dividend Ratios
 Debt Ratios
 Debt to Equity Ratio
 Debt Coverage Ratio
 Debt Ratio
 Debt to Asset Ratio Formula
 Coverage Ratio
 Coverage Ratio Formula
 Debt to Income Ratio Formula (DTI)
 Capital Gearing Ratio
 Capitalization Ratio
 Interest Coverage Ratio
 Times Interest Earned Ratio
 Debt Service Coverage Ratio (DSCR)
 DSCR Formula (Debt service coverage ratio)
 Financial Leverage Ratio
 Financial Leverage Formula
 Degree of Financial Leverage Formula
 Net Debt Formula
 Leverage Ratios
 Leverage Ratios Formula
 Operating Leverage vs Financial Leverage
 Current Yield
 Debt Yield Ratio
 Solvency Ratio Formula
What is the Degree of Financial Leverage Formula?
The term “degree of financial leverage (DFL)” refers to the sensitivity of net income to the fluctuation caused by a change in the capital structure and it revolves around the concept that is used in the evaluation of the amount of debt that a company is required to repay.
The formula for the degree of financial leverage is derived by dividing the percentage change in the net income by the percentage change in the earnings before interest and taxes (EBIT) and mathematically, the DFL Formula is represented as,
On the other hand, the formula for a DFL can also be derived by EBIT divided by the earnings before taxes (EBT) of the company which is mathematically represented as,
Explanation of the Degree of Financial Leverage Formula
The formula for the calculation of the degree of financial leverage is derived by using the following steps:
Step 1: Firstly, determine the net income of a particular year from the income statement. Then, calculate the percentage change in net income by subtracting the net income of the previous year from that of the current year and then dividing the result by the net income of the previous year.
% change in net income = (Net income _{current year} – Net income _{previous year)} / Net income _{previous year} * 100%
Step 2: Next, determine the EBIT for a particular year by adding back the interest expense and taxes to the net income, all of which are line items from the income statement. Then, calculate the percentage change in EBIT by subtracting the EBIT of the previous year from that of the current year and then dividing the result by the EBIT of the previous year.
% change in EBIT = (EBIT _{current year} – EBIT _{previous year)} / EBIT _{previous year} * 100%
Step 3: Finally, the DFL Formula can be calculated by dividing the percentage change in net income (step 1) by the percentage change in EBIT (step 2) as shown above.
The second formula for the calculation of the degree of financial leverage can be derived by using the following steps:
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Step 1: Firstly, determine the net income from the income statement and then calculate the EBIT of the company by adding back the interest expense and taxes to the net income.
EBIT = Net income + Interest expense + Taxes
Step 2: Next, calculate the EBT of the company by deducting the interest expense from the EBIT.
EBT = EBIT – Interest expense
Step 3: Finally, the DFL formula can be calculated by dividing the EBIT of the company (step 1) by the EBT (step 2) as mentioned above.
Examples of DFL Formula (with Excel Template)
Let’s see some simple to advanced examples of Degree of Financial Leverage Formula to understand it better.
Degree of Financial Leverage Formula Example #1
Let us take the example of Company XYZ Ltd which has clocked net income of $400,000 in the current year visàvis $300,000 in the previous year. In the current year, the interest expense and taxes of the company stood at $59,000 and $100,000 respectively, while in the previous year it stood at $40,000 and $90,000 respectively. Determine the DFL for Company XYZ Ltd.
Use the following data for the calculation of the degree of financial leverage formula.
For the calculation of a degree of financial leverage first, we will calculate the following values,
% Change in Net Income
% Change in Net Income = Change in net income / Net income _{previous year} * 100%
= $100,000 / $300,000 * 100%
= 33.33%
EBIT for Current Year
EBIT _{current year} = Net income _{current year} + Interest expense _{current year }+ Taxes _{current year}
= $400,000 + $59,000 + $100,000
= $559,000
EBIT for Previous Year
EBIT _{previous year} = Net income _{previous year} + Interest expense _{previous year} + Taxes _{previous year}
= $300,000 + $40,000 + $90,000
= $430,000
% Change in EBIT
% change in EBIT = Change in EBIT / EBIT _{previous year} * 100%
= $129,000 / $430,000 * 100%
= 30.00%
Now, the calculation of degree of financial leverage formula is as follows,
 DFL Formula = % change in net income / % change in EBIT
 DFL Formula= 33.33% / 30.00%
Degree of Financial Leverage will be –
DFL = 1.11
Therefore, a 1% change in the XYZ Ltd’s leverage will change its operating income by 1.11%.
Degree of Financial Leverage Formula Example #2
Let us take the example of another Company ABC Ltd which has clocked net income of $200,000 as per the last reported annual result. The interest was charged at 5% on an outstanding debt of $1,000,000 and taxes paid was $25,000. Determine the DFL for Company ABC Ltd.
Use the following data for the calculation of the degree of financial leverage.
Where Interest expense = Interest rate * Outstanding debt
= 5% * $1,000,000
= $50,000
For the calculation of the degree of financial leverage formula first, we will calculate the following values,
EBIT
EBIT = Net income + Interest expense + Taxes paid
= $200,000 + $50,000 + $25,000
= $275,000
EBT
EBT = Net income + Interest expense
= $200,000 + $25,000
= $225,000
Now, the calculation of degree of financial leverage formula is as follows,
 DFL Formula = EBIT / EBT
 DFL Formula = $275,000 / $225,000
Degree of Financial Leverage will be –
DFL = 1.22
Therefore, a 1% change in ABC Ltd’s leverage will change its operating income by 1.22%.
Calculator
You can download this Degree of Financial Leverage Calculator.
% Change in Net Income  
% Change in EBIT  
DFL Formula =  
DFL Formula = 


Relevance and Use of Degree of Financial Leverage Formula
It is important to understand the concept of the degree of financial leverage because it indicates the relationship between the capital structure of a company and its operating income. A low ratio is indicative of the low percentage of debt in a company’s capital structure, which again indicates that the sensitivity of the net income to the fluctuation in operating income is low and as such these companies are more stable. On the other hand, a high ratio indicates a higher percentage of debt in a company’s capital structure and these companies are vulnerable because their net income is more responsive to fluctuations in operating income.
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