What is financial leverage? Degree of Financial Leverage

Financial leverage coefficient, also known as Degree of Financial Leverage in English, or DFL for short, is a financial indicator that measures the sensitivity of a company's net income or earnings per share to fluctuations and changes in its capital structure. It is one of the company's important financial risk indicators. Financial leverage usually refers to financing costs, that is, the interest and other costs that need to be paid for debt after expanding the scale of the company through financing liabilities. The financial leverage coefficient divides the company's net income change rate or earnings per share change rate by the profit after interest and tax change rate. The ratio obtained represents the sensitivity of the company's profitability based on fluctuations in financial leverage. When the ratio is higher, the rate at which the company's net income or earnings per share increases or decreases is more affected by the change rate of profit before interest and tax. Different groups of people can use different formulas to calculate the financial leverage coefficient to calculate the degree to which their benefits are affected by financial leverage. For example, companies can use the net income change rate, while investors can use the earnings per share change rate to calculate it.