A Degree of Financial Leverage (DFL) is a leverage ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. The higher the DFL, the greater is the impact on EPS from even small changes in operating income.There are pros and cons to having a high DFL. On one hand, it can allow companies to take on more risk and expand their businesses more quickly since they have less need to rely on outside financing. This can lead to increased profits and stock prices for shareholders.However, if things go wrong and operating income falls, then EPS will also fall dramatically, leading to large losses for shareholders. For this reason it is important for companies using high levels of debt financing to monitor their DFL closely so they are aware of any risks associated with it.
