Interest Expense Formula
Financial Statement Analysis
 Ratio Analysis of Financial Statements (Formula, Types, Excel)
 Ratio Analysis Advantages
 Ratio Analysis
 Liquidity Ratios
 Cash Ratio
 Cash Ratio Formula
 Quick Ratio
 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
 Change in Net Working Capital (NWC) Formula
 Cash Flow from Operations Ratio
 Cash Flow Per Share
 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
 Accounts Payable Turnover Ratio
 Days Inventory Outstanding
 Days in Inventory
 Days Sales Outstanding
 Days Sales Uncollected
 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
 Markup Percentage 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
 Overcapitalization
 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
Related Courses
 What is Financial Leverage Formula?
 Financial Leverage Formula
 Degree of Financial Leverage Formula
 Financial Leverage Calculator
What is Financial Leverage Formula?
Financial leverage Equation shows business dependency on debt which means financial leverage tells how much company is dependent on borrowing and how the company is generating revenue out of its debt or borrowing. Debt can be borrowing fund from Bank in the form of a loan or by issuing equity in a market to get the funds. These funds help a company to grow, generate revenue, increase its share price and market standard which leads to increase fund performance and potential to give a high rate of return on investments. Financial leverage equation is a total debt upon shareholder equity.
Financial Leverage Formula
The equation of financial leverage can be written as follows:
Here,
Total Debt = Short Term Debt + Long Term Debt
Examples of Financial Leverage Formula
Let’s see some simple to advanced examples of financial leverage equation to understand it better.
Financial Leverage Formula – Example #1
Let’s see an example to understand the calculation of financial leverage formula.
Suppose, a company Star Logistic Pvt. Ltd wants to know its financial leverage, the company had a debt of $100,000 and shareholder’s equity of $40,000. Calculation of Financial leverage will be.
 The result will be:
So from the above calculation, the financial leverage value will be: 2.5
4.8 (388 ratings)
Financial Leverage Formula – Example #2
A company named Apple Pvt. Ltd purchased machinery at $100,000 in cash and by using that company has generated revenue of $150,000. Whereas other company named Kiwi Pvt. Ltd has taken a loan to buy the same type of machinery and it also wants to generate revenue of $150,000. Kiwi uses financial leverage to generate revenue but unfortunately, Kiwi has faced a loss of $300,000.
Financial leverage equation helps a company to enhance earning and for tax treatment to reduce the net cost of borrowing as interest expense is tax deductible. There are below highlight of financial leverage equation.
 If a value of financial leverage is higher the more is the usage of debt which also leads to increase in expense of company in terms of processing fees and interest paid on it which may affect EPS and profitability of a company.
 Whereas if the value of financial leverage is low that means a company is issuing a lot of equity and financial securities to raise the fund for business growth at the same time risk is also increasing as risk on market is high and the market is too volatile.
 Financial risk also helps to find an actual financial position of company and risk associated company and its business.
 Financial leverage equation helps the investor to know creditability of company and risk involved in term of a monetary transaction. And helps to know the return on investment and helps to calculate potential returns.
Financial Leverage Formula – Example #3
Let’s see an example of the calculation of financial leverage. Suppose below is the Balance sheet of a company Rolta Pvt. Ltd for the year 2016, 2017 and 2018.
With help of abovegiven Balance sheet, we have gathered below information.
 Current Debt = 6,412 for 2016, 7,412 for 2017 and 9,629 for 2018
 Total Debt = 13,437 for 2016, 17,286 for 2017 and 21,230 for 2018
 Total Equity = 48,461 for 2016, 52,816 for 2017 and 63,986 for 2018
Now, let us now do the calculation of financial leverage for all the years using the above information.
So the financial leverage calculation for the year 2016
Financial Leverage calculation for the Year 2017
Financial Leverage calculation for the Year 2018
So, financial leverage increases from 28% in 2016 to and from 33% in 2017 to 34% in 2018.
What is a Degree of Financial Leverage (DFL) Formula?
There is another type of financial leverage which is very useful and that is Degree of Financial Leverage. Now, let us discuss it in brief.
The Degree of Financial Leverage formula is the ratio of percentage of change in EPS to the percentage of change in EBIT. This change happens due to a change in the capital structure of a company. DHL is very important for a company as it helps to know the quality of debt and also impact the capital structure of a company. Here, EPS is earning per share and EBIT is earnings before interest and tax.
The formula for Degree of Financial Leverage is as follows:
Example of Degree of Financial Leverage Formula (DFL)
Suppose a company Jin Décor has EPS 14.25 in 2017 and EPS change to 17.40 in 2018, EBIT value in 2017 was $100,120 and in 2018 value is 185,689. Now, let us now do the calculation using Degree of Financial Leverage formula which is.
Solution:
First, we have calculated the % of the change in EPS and % of the change in EBIT using the following formula.
Percentage of Change of EPS:
Percentage of Change of EBIT:
So in the belowgiven template is the calculation using Degree of Financial Leverage formula
So, the Degree of Financial Leverage formula calculation will be –
So, DFL for Jin Decor will be 0.259.
Financial Leverage Formula Calculator
Total Debt  
Share Holder's Equity  
Financial Leverage Formula  
Financial Leverage Formula 


Relevance and Uses of Financial Leverage Formula
Uses of Financial Leverage equation are as follows:
 Financial leverage used in corporate capital structuring.
 It helps in Taxation by reducing the net cost of borrowing as interest expense is tax deductible.
 It helps to know financial risk pertaining to the company.
 Financial Leverage also helps in taking major decision for a company.
Financial leverage equation is a very important and sensitive thing as borrowing fund helps a company to grow and increase profit but there is also rick involve which can lean to company potential loss. There are mainly two factors needed before considering the value of leverage and that factors are Economical condition of industry and type of industry.
Recommended Articles:
This has been a guide to Financial Leverage Formula. Here we discuss how to calculate financial leverage and also the degree of financial leverage formula along with along with practical examples. You can learn more about Financial Analysis from the following articles –
Leave a Reply