DFL

Degree of Financial Leverage

Short definition

The degree of financial leverage (DFL) is the percentage change in EPS/net income for a percentage change in EBIT. It is EBIT / (EBIT − interest); a heavier interest load raises DFL.

Detailed explanation

The denominator EBIT − interest is close to pre-tax, pre-preference profit; preference stock and floating rates pollute the formula. ICR = EBIT / interest is a cousin: as ICR approaches 1, DFL explodes.

Principal is not in DFL; cash leverage lives in DSCR and the amortisation schedule. Floating rates also open DFL to a rate shock — then a scenario beats a point DFL.

Why it matters for the CFO

High DFL is a small EBIT miss destroying profit and ROE. A credit committee wants ICR/DSCR, not DFL; they are the flow and coverage faces of the same story.

How it is calculated

DFL = %ΔEPS / %ΔFVÖK = FVÖK / (FVÖK − Faiz)

The percentage form is between two points. EBIT/(EBIT − interest) is the local elasticity; preference dividends narrow the denominator.

Variables in the formula

• DFL: degree of financial leverage
• Faiz: period interest (and similar fixed finance cost)

How to read it

DFL = 1.5 implies a 10% EBIT drop is about a 15% EPS drop. Do not publish it when EBIT is near interest. There is no universal target DFL.

Numerical example

EBIT 50 mn TL, interest 20 mn TL → DFL = 50/30 ≈ 1.67. A 10% EBIT drop cuts pre-tax profit by about 16.7% (ignoring tax).

Definitions are educational. They are not investment, credit or tax advice.