Financial Leverage
Short definition
Financial leverage is the way a fixed finance cost (interest, finance-like leases) amplifies an EBIT change into net income and ROE. Debt lifts ROE in a good year and breaks ICR and DSCR in a bad one.
Detailed explanation
When interest is near-fixed in cash and accrual, an EBIT drop hits EPS and ROE harder. Floating rates also open leverage to a rate shock; DFL only measures the volume–EBIT channel.
Balance-sheet leverage (D/E, net debt/EBITDA) is a stock; DFL is flow sensitivity. Read them together: high D/E with a long, cheap fixed coupon is a different risk from a floating, short book.
Why it matters for the CFO
Target leverage is often sold on tax shield and ROE; cash interest and principal still leave CFADS. In a high-rate period financial leverage can cost more than the shield.
How to read it
High DFL means an EBIT miss eats profit and covenant headroom. There is no universal healthy D/E; cash-flow stability and coupon terms set the room.
Related calculators
Güven Sayılgan’s writing on this topic
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Definitions are educational. They are not investment, credit or tax advice.