How is the degree of financial leverage (DFL) calculated?

The degree of financial leverage (DFL) is an important metric that helps assess how sensitive a company's earnings per share (EPS) are to changes in its operating income, or earnings before interest and taxes (EBIT). The DFL is calculated by dividing the percentage change in net income by the percentage change in operating income.

This approach provides insight into the relationship between operating performance and financial structure. Specifically, a higher DFL indicates that a company is using more debt for financing, which can amplify the effects of changes in operating income on net income. This amplification can lead to more significant increases in net income when operating income rises, but it can also result in steeper declines when operating income falls.

The other options do not relate to the direct calculation of DFL. For instance, simply multiplying or evaluating total revenues against total expenses does not reflect the relationship between net income and operating income, and assessing current liabilities against total assets pertains more to financial health and liquidity rather than leverage. Thus, the division of percentage changes is the correct method to determine the degree of financial leverage.