DFL: drag EBIT
Drag the bar to set EBIT. Interest is held still, so degree of financial leverage moves only because the residual after the coupon does. Raise EBIT and DFL falls toward 1. Drop EBIT toward the bill and the multiplier blows up.
Degree of financial leverage
1.14
EBIT
$80,000,000
The bill is a fixed $10,000,000. Raise EBIT and DFL falls toward 1. Drop EBIT toward the bill and the multiplier blows up. Illustrative arithmetic, not a covenant or advice.
Interest expense
$10,000,000, held still so only EBIT moves the multiplier.
In short
- Drag the bar up for more EBIT and a smaller DFL.
- Read DFL as a multiplier, not a percent.
- Drop EBIT toward the coupon and watch the multiplier rise.
- Focus the handle and use the arrow keys to step EBIT.
A multiplier on the residual
Degree of financial leverage is EBIT over EBIT minus interest. It is also coverage over coverage minus one. How degree of financial leverage works is the identity, with the interest coverage calculator under the answer.
How interest coverage works is the multiple. This picture is the multiplier.
The bill can move without new debt
Hold EBIT and raise interest, and DFL rises the same way coverage falls. Floating-rate debt that rolls into a higher coupon does this without any new borrowing. The leverage ratios on the balance sheet may not have moved at all.
At coverage of 1 the ratio stops
When EBIT equals the coupon, the residual is zero and DFL is not a number. This picture keeps EBIT above the bill on purpose. Interest coverage is the one-sentence version of the multiple sitting underneath.
Common questions
Why does DFL fall as I raise EBIT?
Because the residual after the coupon thickens. Far above the bill, a change in EBIT is almost a change in pre-tax profit, so the multiplier sits near 1.
Is 1.14 a covenant?
No. It is 8/7 on the teaching sheet. Loan agreements write coverage tests, often on EBITDA, not DFL.
Is this a credit rating?
No. It is one division. It is educational material, not 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.