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Interest coverage vs DFL

Interest coverage is EBIT over interest. Degree of financial leverage is EBIT over EBIT minus interest, which is coverage over coverage minus one. On $80,000,000 against $10,000,000 they read 8 times and 1.14. Same sheet, a multiple against a multiplier.

 Interest coverageDegree of financial leverage
FormulaEBIT / Interest.EBIT / (EBIT minus Interest), or coverage / (coverage minus 1).
First sheet$80,000,000 over $10,000,000 is 8 times.$80,000,000 over $70,000,000 is 8/7, which prints as 1.14.
Bill doubles$80,000,000 over $20,000,000 is 4 times.$80,000,000 over $60,000,000 is 4/3, which prints as 1.33.
EBIT halves$40,000,000 over $10,000,000 is 4 times again.$40,000,000 over $30,000,000 is 4/3, 1.33 again. Same coverage, same DFL.
At the crossingCoverage of 1 means EBIT just covers the bill.The residual is zero, so DFL is not a number.
When you would pick itWhether this year's operations earned this year's coupon.How hard the next change in EBIT will move pre-tax profit.
On this page

One residual, two printings

8 times and 1.14 are 80/1080 / 10 and 80/7080 / 70. How interest coverage works is the multiple. How degree of financial leverage works is the multiplier. The interest coverage calculator prints both.

Raise coverage and DFL falls toward 1. Cut coverage toward 1 and DFL blows up. They cannot disagree on this sheet, because they are one identity.

Interest coverage is the one-sentence version of the multiple.

Same coverage from two routes

Doubling the bill and halving EBIT both print 4 times coverage and DFL of 1.33. The multiplier does not know which piece moved. This is educational material, not financial advice.

Worked examples

8 times and 1.14

EBIT $80,000,000, interest $10,000,000. Coverage and DFL?

  1. Coverage 8 times.
  2. Residual $70,000,000.
  3. DFL 1.14.

Interest coverage is 8 times. Residual is $70,000,000. DFL is 1.14.

4 times and 1.33, from the bill

EBIT $80,000,000, interest $20,000,000. Coverage and DFL?

  1. Coverage 4 times.
  2. Residual $60,000,000.
  3. DFL 1.33.

Interest coverage is 4 times. Residual is $60,000,000. DFL is 1.33.

4 times and 1.33, from EBIT

EBIT $40,000,000, interest $10,000,000. Coverage and DFL?

  1. Coverage 4 times.
  2. Residual $30,000,000.
  3. DFL 1.33.

Interest coverage is 4 times. Residual is $30,000,000. DFL is 1.33, matching the second sheet.

Common questions

Can they disagree?

Not on one sheet. DFL is coverage over coverage minus one.

Which one do lenders quote?

Coverage, as a covenant multiple. DFL is the sensitivity of the residual to the next change in EBIT.

Is 1.14 a target?

It is 8/7 on the teaching sheet. This is educational material, not financial advice.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.