The formula to calculate Financial Leverage (FL) is:
\[ FL = \frac{EBIT}{EBT} \]
Where:
Let's say the earnings before interest and tax (\( EBIT \)) is $100,000 and the earnings before tax (\( EBT \)) is $50,000. Using the formula:
\[ FL = \frac{100,000}{50,000} \]
We get:
\[ FL = 2 \]
So, the Financial Leverage (\( FL \)) is 2.
Financial leverage is a metric that describes how well a company performs relative to its interest earnings. In other words, it is the ratio of EBIT to EBT.
Definition: Financial leverage measures the degree to which a company uses borrowed money to finance its operations.
Formula: \( \text{Financial Leverage} = \frac{\text{Total Debt}}{\text{Total Equity}} \)
Example: \( \text{Financial Leverage} = \frac{500000}{250000} \)
Definition: Financial leverage is calculated as the ratio of a company's total debt to its total equity.
Formula: \( \text{Financial Leverage} = \frac{\text{Total Debt}}{\text{Total Equity}} \)
Example: \( \text{Financial Leverage} = \frac{300000}{150000} \)
Definition: The financial leverage ratio is a measure of the proportion of debt in a company's capital structure.
Formula: \( \text{Financial Leverage Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}} \)
Example: \( \text{Financial Leverage Ratio} = \frac{400000}{200000} \)
Definition: The degree of financial leverage measures the sensitivity of a company's earnings per share to changes in its operating income.
Formula: \( \text{Degree of Financial Leverage} = \frac{\text{Percentage Change in EPS}}{\text{Percentage Change in EBIT}} \)
Example: \( \text{Degree of Financial Leverage} = \frac{20}{10} \)
