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Financial leverage effect definition

Description

Financial leverage effect (FLE) measures a proportion between the operating income and net income. This proportion describes how debt affects business risk if revenues vary. Data to calculate this ratio is collected from the income statement.

FLE ratio shows numerical value of financial leverage effect within a company.

Norms and limitations

There are no general norms for this ratio.

It is recommended to compare this ratio with the ratios of companies working within the same industry.

Formula

Earnings before interest and taxes (EBIT, operating income) equal net income plus interest expense plus taxes.

Net income (net profit, net earnings), usually called as “the bottom line”, is a measure, which is calculated by taking revenues (sales and other incomes) and adjusting them to the cost of sales, operating cost, depreciation and amortization, interest, taxes and other expenses.