what does degree of financial leverage tell you 
the higher the dfl the more volatile earnings per share eps will be dfl is invaluable in helping a company assess the amount of debt or financial leverage it should opt for in its capital structure if operating income is relatively stable then earnings and eps would be stable as well and the company can afford to take on a significant amount of debt however if the company operates in a sector where operating income is quite volatile it may be prudent to limit debt to easily manageable levels 1the use of financial leverage varies greatly by industry and by the business sector there are many industry sectors in which companies operate with a high degree of financial leverage retail stores airlines grocery stores utility companies and banking institutions are classic examples unfortunately the excessive use of financial leverage by many companies in these sectors has played a paramount role in forcing a lot of them to file for chapter 11 bankruptcy examples include r h macy 1992 trans world airlines 2001 great atlantic pacific tea co a p 2010 and midwest generation 2012 moreover excessive use of financial leverage was the primary culprit that led to the u s financial crisis between 2007 and 2009 the demise of lehman brothers 2008 and a host of other highly levered financial institutions are prime examples of the negative ramifications that are associated with the use of highly levered capital structures example of how to use dflconsider the following example to illustrate the concept assume hypothetical company bigbox inc has operating income or earnings before interest and taxes ebit of 100 million in year 1 with interest expense of 10 million and has 100 million shares outstanding for the sake of clarity let s ignore the effect of taxes for the moment eps for bigbox in year 1 would thus be operating income of 100 million 10 million interest expense 100 million shares outstanding 0 90 frac text operating income of 100 million text 10 million interest expense text 100 million shares outstanding 0 90 100 million shares outstandingoperating income of 100 million 10 million interest expense 0 90the degree of financial leverage dfl is 100 million 100 million 10 million 1 11 frac text 100 million text 100 million text 10 million 1 11 100 million 10 million 100 million 1 11this means that for every 1 change in ebit or operating income eps would change by 1 11 now assume that bigbox has a 20 increase in operating income in year 2 notably interest expenses remain unchanged at 10 million in year 2 as well eps for bigbox in year 2 would thus be operating income of 120 million 10 million interest expense 100 million shares outstanding 1 10 frac text operating income of 120 million text 10 million interest expense text 100 million shares outstanding 1 10 100 million shares outstandingoperating income of 120 million 10 million interest expense 1 10in this instance eps has increased from 90 cents in year 1 to 1 10 in year 2 which represents a change of 22 2 this could also be obtained from the dfl number 1 11 x 20 ebit change 22 2 if ebit had decreased instead to 70 million in year 2 what would have been the impact on eps eps would have declined by 33 3 i e dfl of 1 11 x 30 change in ebit this can be easily verified since eps in this case would have been 60 cents which represents a 33 3 decline 