DOL vs degree of financial leverage
Degree of operating leverage is contribution over EBIT. Degree of financial leverage is EBIT over EBIT minus interest. On the break-even sheet, 2,400 units print a DOL of 3. On the coverage sheet, $80,000,000 against $10,000,000 prints a DFL of 1.14. Different firms.
| Degree of operating leverage | Degree of financial leverage | |
|---|---|---|
| Formula | Q(P minus V) / (Q(P minus V) minus F). | EBIT / (EBIT minus Interest). |
| Teaching sheet | $35 price, $20 variable cost, $24,000 of fixed costs. At 2,400 units DOL is 3. | $80,000,000 of EBIT against $10,000,000 of interest. DFL is 1.14. |
| Where it lives | The cost base. Fixed costs against contribution. | The coupon. Interest against EBIT. |
| What thickens it | Sitting close to break-even. At 1,600 units EBIT is zero and DOL stops. | Sitting close to coverage of 1. When EBIT equals interest, DFL stops. |
| What it is not | A debt ratio. A firm with no borrowings can still have high operating leverage. | A cost-base fact. A firm with almost no fixed costs can still print a high DFL. |
| When you would pick it | How hard a change in units moves EBIT. | How hard a change in EBIT moves the residual after the coupon. |
On this page
Two multipliers, two sheets
DOL of 3 is of contribution over $12,000 of EBIT on the break-even teaching sheet. DFL of 1.14 is $80,000,000 over $70,000,000 on the coverage teaching sheet. Multiplying the two would combine them, and only after you have filled both sheets for one firm. This page does not.
How operating leverage works owns the 3. How degree of financial leverage works owns the 1.14. Operating against financial leverage is the cost base against the balance-sheet D/E, a different pair.
Fixed costs sit in DOL. Interest coverage sits in DFL.
Each falls as the residual thickens
At 3,200 units the same cost base prints a DOL of 2, because EBIT thickened to $24,000. At 4 times coverage, DFL is 1.33, and at 8 times it is 1.14, because the residual after interest thickened. The shape is the same. The statements are not. This is educational material, not financial advice.
Worked examples
DOL of 3 on the break-even sheet
Price $35, variable cost $20, fixed costs $24,000, 2,400 units. What is DOL?
- Contribution: .
- EBIT is the $12,000 target. DOL is 3.
DOL is 3 at 2,400 units on $84,000 of sales. EBIT is $12,000.
DFL of 1.14 on the coverage sheet
EBIT $80,000,000, interest $10,000,000. What is DFL?
- Coverage 8 times. Residual $70,000,000.
- DFL 1.14.
DFL is 1.14. Coverage is 8 times. Residual is $70,000,000. This is a different firm from the 2,400-unit sheet.
Common questions
Can I multiply DOL by DFL?
Only on one firm where both sheets are filled in. These teaching sheets are different firms. Multiplying 3 by 1.14 here is a mash.
Which one uses the break-even calculator?
DOL. DFL uses the interest coverage calculator.
Are 3 and 1.14 targets?
They are the teaching-sheet readings. 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.