Degree of Financial Leverage Calculator
Calculate degree of financial leverage, earnings per share, and interest coverage from EBIT, interest, tax rate, and shares using the standard fixed interest model.
How financial leverage works
Enter EBIT, interest expense, a tax rate, and shares outstanding for one reporting period. The calculator subtracts interest from EBIT to find earnings before tax, then applies the entered tax rate to estimate net income and divides by shares to calculate EPS.
Degree of financial leverage is EBIT divided by earnings before tax. Interest coverage is EBIT divided by interest expense. Both ratios preserve negative values. DFL is undefined when earnings before tax is zero, and interest coverage is undefined when interest expense is zero.
The worked example uses EBIT of USD 100, interest of USD 20, a 25% tax rate, and 10 shares. It gives EBT of USD 80, modeled net income of USD 60, EPS of USD 6 per share, DFL of 1.25, and interest coverage of 5.
This calculation assumes interest, tax rate, and shares stay fixed for the modeled comparison. It does not estimate actual tax refunds, financing changes, preferred dividends, principal payments, or future results. If browser storage is available, entered assumptions can be saved for a later visit.
Step by step
- Enter EBIT and interest expense in the same currency and period.
- Enter the tax rate as a percentage and enter shares outstanding.
- Review EBT, modeled net income, EPS, DFL, and interest coverage.
Worked example
Enter EBIT of USD 100, interest expense of USD 20, tax rate of 25%, and 10 shares. EBT is USD 100 − USD 20 = USD 80. Modeled net income is USD 80 × (1 − 0.25) = USD 60, so EPS is USD 60 ÷ 10 = USD 6 per share.
DFL is USD 100 ÷ USD 80 = 1.25 and interest coverage is USD 100 ÷ USD 20 = 5. These are ratios for the entered period. They do not predict how actual earnings or financing will change.
When to use this calculator
Use DFL to inspect the relationship among EBIT, fixed interest, and EPS under a stated set of assumptions. The coefficient is meaningful only with its inputs and baseline values.
Use it alongside the income statement and financing details. It does not judge whether borrowing is appropriate or predict the company's ability to pay.
Common input errors
Use full EBIT and interest amounts in the same currency and reporting period, not amounts in different scales. Enter the tax rate as a percentage such as 25 for 25%, and enter the actual share count used for the period.
Do not treat a zero denominator as a ratio of zero. DFL is undefined at zero EBT, and interest coverage is undefined at zero interest. Negative results are retained rather than relabeled as low risk.
Formula
EBT = EBIT − interest expense
Modeled net income = EBT × (1 − tax rate percent ÷ 100)
EPS = modeled net income ÷ shares outstanding
DFL = EBIT ÷ EBT
Interest coverage = EBIT ÷ interest expense
Enter tax rate as a percent, such as 25 for 25%; the calculation divides that input by 100. The tax formula applies the entered rate algebraically to positive or negative EBT. It does not establish eligibility for a tax refund. When modeled EPS is zero, a percentage EPS change from that baseline is undefined. DFL is also undefined when EBT is zero.
Assumptions and limitations
This calculator applies a constant tax rate algebraically, assumes fixed interest and shares, and excludes preferred dividends, repayments, refinancing, cash flow, and changes in financing. It cannot verify source data or company terms. Results are calculations from the entered assumptions, not forecasts, risk grades, or borrowing advice.
Key terms
- EBIT
- Earnings before interest and tax for the reporting period represented by the input.
- Earnings before tax
- EBIT minus interest expense in this model. It can be positive, zero, or negative.
- Degree of financial leverage
- EBIT divided by earnings before tax when earnings before tax is not zero. The ratio is undefined at zero EBT.
Compare related measures
Degree of operating leverage relates EBIT sensitivity to sales changes. Degree of combined leverage combines operating and financial leverage coefficients. Each measure answers a different question and uses its own assumptions.
Keep the reporting period and units consistent when comparing leverage measures. The DFL result alone does not describe operating costs, debt terms, liquidity, or the path of future earnings.
FAQ
What does degree of financial leverage measure?
DFL is calculated as EBIT divided by EBT. With fixed interest, tax rate, and share count, it represents the model coefficient linking changes in EBIT to EPS when the percentage comparison is defined. It is not a forecast of a company's results.
How is DFL calculated?
The calculator finds EBT as EBIT minus interest expense, models net income as EBT times one minus the tax rate percent divided by 100, then divides by shares for EPS. For example, a 25% input becomes 0.25 in the formula. DFL is EBIT divided by EBT. Interest coverage is EBIT divided by interest expense.
What happens when EBT is zero?
DFL is undefined when EBT equals zero because the formula divides by EBT. The calculator shows that state separately from a valid ratio of zero. EPS and modeled net income can still be calculated when inputs are valid.
What does interest coverage show?
Interest coverage is EBIT divided by interest expense. It is undefined when interest expense is zero. The result is a mathematical ratio, not a credit rating or a universal safety threshold.
How does the tax rate affect the results?
The entered tax rate changes modeled net income and EPS, while the DFL formula uses EBIT and pretax EBT. The calculation applies one constant rate to losses as well as earnings. That algebraic loss benefit is not a claim about actual tax refund eligibility.
Related tools
Compare DFL with operating leverage or combined leverage when examining linked business and financing assumptions. Keep the input period and units aligned.