Financial leverage

Fixed financing costs, chiefly interest, magnifying what a change in operating profit does to net income — in both directions.

Where you will meet it

Financial leverage appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Work out a firm's sustainable growth rate and explain it, showing how DuPont analysis can be used to estimate that rate
  CFA Level II · Equities

  “DuPont analysis breaks ROE into net profit margin times asset turnover times financial leverage (assets divided by equity), so g = b × margin × turnover × leverage.”

• Set out the top-down and bottom-up influences on a firm's cost of capital
  CFA Level II · Corporate Finance

  “So do financial leverage and the features of each security, such as seniority, collateral and covenants.”

See also

Operating profit

Learn it properly

• DuPont analysis explained: what is behind a return on equity Guide

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with F · Glossary