Financial Leverage

1. Financial leverage is defined as the degree to which a firm uses fixed financial costs to magnify the effects of a given percentage change in earnings before interest and taxes on the percentage change in its earnings per share. Financial leverage is an extension of operating leverage that purely focuses on one type of fixed cost, debt financing. A low financial fixed cost eliminates financial leverage as a consideration in operations. See also operating leverage. The extent to which the assets of an entity are financed with debt.