Finance Formulas / July 18, 2018 / Cecelia Weiss
DFL, therefore, is invaluable in helping a company assess the amount of debt or financial leverage it should opt for in its capital structure. If operating income is relatively stable, then earnings and EPS would be stable as well, and the company can afford to take on a significant amount of debt. However, if the company operates in a sector where operating income is quite volatile, it may be prudent to limit debt to easily manageable levels.
Stockholders' equity is often referred to as the book value of the company, and it comes from two main sources. The first source is the money originally and subsequently invested in the company. The second source consists of the retained earnings the company accumulates over time through its operations. In most cases, especially when dealing with companies that have been in business for many years, retained earnings is the largest component.
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