EPS sensitivity to EBIT changes. The Financial Leverage Calculator takes operating profit (ebit), interest expense and returns degree of financial leverage plus profit before tax, earnings change for a 10% rise in ebit. Results update as you type, and the formula is shown under the result so you can repeat it in your own spreadsheet.
Financial ratios are only useful in comparison: against last year, against a competitor, or against the benchmark for your industry. Take the figures from the same set of accounts, note whether they are yearly or monthly, and read each ratio alongside the others in its family. Use the worked example below to check the maths against your own figures.
How the Financial Leverage Calculator works
Debt magnifies the effect of operating profit on the earnings left for owners. A DFL of 1.25 means a 10% change in EBIT becomes a 12.5% change in earnings before tax.
Worked example
With the example values (operating profit (ebit) of $300,000, interest expense of $60,000), the degree of financial leverage is 1.25x; profit before tax $240,000.00, earnings change for a 10% rise in ebit 12.50%. Change any figure above and the result updates immediately; use Copy results to paste the summary into a note or email.
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Frequently Asked Questions
How is degree of financial leverage calculated?
degree of financial leverage = EBIT ÷ (EBIT − interest).
Which figures do I need?
Operating profit (ebit), interest expense. Take them from the same period and the same set of accounts or reports so the ratio is consistent, and check the example values as a guide to the units expected.
What is a good value for this ratio?
Benchmarks differ by industry, size and business model, so compare with companies like yours and with your own history. A ratio moving in the wrong direction for several periods matters more than any single number.
