Measure of Leverage

For your better understanding the importance of leverage in financial analysis, it is imperative to understand the three measures of leverage.

• Operating Leverage
• Financial Leverage
• Combined or Total Leverage.

In this lesson you will know much about the financial leverage. While operating leverage measures the change in the EBIT of a company to a particular change in output, the financial leverage measures the effect of the change in EBIT on the EPS of the company. Financial leverage also refers to the mix of debt and equity in the capital structure of the company. The measure of financial leverage is the degree of financial leverage (DFL) and it can be calculated as under: –

DFL = (Percentage change in EPS) / (Percentage change in

EBIT)

DFL = (D EPS / EPS) / (D EBIT / EBIT)

Substituting the equation with EPS, you will get,