A ratio that measures how sensitive a company's earnings per share are to changes in operating income, calculated as the percentage change in EPS divided by the percentage change in EBIT. It quantifies the amplification effect of debt on shareholder returns.
Formalized in the 1970s as financial analysts sought to quantify the risk-return tradeoffs of different capital structures. The 'degree' terminology emphasizes that leverage exists on a spectrum, with measurable incremental effects on earnings volatility.
The degree of financial leverage is like a financial seismograph that measures how much shareholder earthquakes get amplified by debt! A DFL of 3.0 means that a 10% drop in operating income becomes a 30% crater in earnings per share - which explains why leveraged buyouts can be so lucrative in good times and so devastating in bad times.
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