Question

What does a degree of financial leverage (DFL) of 2.0 indicate?

Answer 1

Degree of financial leverage measures the effect of capital structure (like leverage or debt proportion) on company's net income or earning from tax.

DFL = %∆EPS/%∆EBIT

So DFL of 2 means the capital structure of company is such that if operating income i.e. EBIT increase by 1% then it's earning per share or net income will increase by 2%. Or vice versa that if company's operating income decrease by 1% then it's net income will decrease by 2%. So we can see that higher the leverage higher will be the risk.