Degree of financial leverage

The degree of financial leverage measures the percentage change in earnings per share caused by a 1% change in operating income, driven by a firm's fixed interest payments.

ByHoang TruongUpdated July 5, 2026

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Delacroix Fittings has EBIT of €500,000 and pays €200,000 of fixed interest, giving a degree of financial leverage of €500,000 ÷ €300,000 ≈ 1.67. A 10% rise in EBIT should lift EPS by about 16.7% — and it does, from €2.25 to €2.625, because interest stays fixed while EBIT grows.

Where it fits

SubjectCorporate FinanceCoreTopicCapital Structure & LeverageCore

The formula

LaTeX

DFL = \frac{\%\Delta EPS}{\%\Delta EBIT}

Variables

$D F L$: Degree of financial leverage (dimensionless)
$%Δ E P S$: Percentage change in earnings per share (decimal)
$%Δ E B I T$: Percentage change in operating income (EBIT) (decimal)

Defines DFL as the amplification factor between a percentage change in operating income and the resulting percentage change in earnings per share.

LaTeX

DFL = \frac{EBIT}{EBIT - I}

Variables

$E B I T$: Earnings before interest and tax (€)
$I$: Annual interest expense (€)

Gives DFL directly at a given level of EBIT, without needing to compute EPS at two different output levels.

Check yourself

PracticeCORE

Meridian Foods has EBIT of €900,000 and annual interest expense of €300,000. If EBIT is expected to rise by 8% next year, what is the expected percentage change in earnings per share?

Select an answer to check your understanding.