What Is a Degree of Financial Leverage?
A degree of financial leverage is a financial ratio that helps business owners and managers calculate the amount of fixed costs in their company’s operations. For this ratio, fixed costs typically represent the amount of payments companies make for construction, facilities, and equipment. Companies with a high degree of financial leverage often have more volatile income or cash flow situations. Economic downturns, such as recessions and depressions, may be harder for these companies to work through since fixed costs must be paid regardless of current income levels.
