Parting

The effect of financial leverage and its significance in the analysis. Financial Leverage: Calculation Formula and Its Interpretation to Increase Return on Capital

Any company strives to increase its market share. In the process of formation and development, the company creates and increases its own capital. At the same time, it is very often necessary to attract external capital to boost growth or launch new areas. For a modern economy with a well-developed banking sector and exchange structures, it is not difficult to get access to borrowed capital.

Theory about the balance of capital

When attracting borrowed funds, it is important to strike a balance between the commitments made to repay and the goals set. Violating it, you can get a significant decrease in the pace of development and the deterioration of all indicators.

According to the Modigliani-Miller theory, the presence of a certain percentage of borrowed capital in the structure of the total capital that a company has is beneficial for the current and future development of the company. Borrowed funds at an acceptable service price allow you to direct them to promising areas, in this case, the effect of a money multiplier will work when one invested unit gives an increase in an additional unit.

But in the presence of a high proportion of borrowed funds, the company may not meet its internal and external obligations by increasing the amount of loan servicing.

Thus, the main task of a company that attracts third-party capital is to calculate the optimal financial leverage ratio and create an equilibrium in overall structure capital. It is very important.

Financial leverage (lever), definition

The leverage represents the existing ratio between the two capitals in the company: own and attracted. For a better understanding, the definition can be formulated differently. The financial leverage ratio is an indicator of the risk that a company takes on by creating a certain structure of funding sources, that is, using both its own and borrowed funds as them.

For understanding: the word "leverage" is in English, meaning "lever" in translation, therefore, the leverage of financial leverage is often called "financial leverage". It is important to understand this and not to think that these words are different.

Components of the "shoulder"

The financial leverage ratio takes into account several components that will affect its indicator and effects. Among them are:

Taxes, namely the tax burden that the company bears in carrying out its activities. Tax rates are set by the state, so the company on this issue can regulate the level of tax deductions only by changing the selected tax regimes.
Indicator of financial leverage. This is the ratio of borrowed funds to equity. Already this indicator can give an initial idea of the price of capital raised.
Financial leverage differential. Also an indicator of compliance, which is based on the difference between the profitability of assets and the interest that is paid for loans taken.

Financial Leverage Formula

Calculate the coefficient of financial leverage, the formula of which is quite simple, you can in the following way.

Leverage = Amount of debt / Amount of equity

At first glance, everything is clear and simple. It can be seen from the formula that the leverage ratio of financial leverage is the ratio of all borrowed funds to equity capital.

Shoulder of financial leverage, effects

Leverage (financial) is associated with borrowed funds, which are aimed at the development of the company, and profitability. Having determined the capital structure and obtained the ratio, that is, by calculating the coefficient of financial leverage, the formula for the balance sheet of which is presented, one can evaluate the effectiveness of capital (that is, its profitability).

The leverage effect gives an understanding of how much the efficiency of equity capital will change due to the fact that external capital has been attracted to the company's turnover. To calculate the effect, there is an additional formula that takes into account the indicator calculated above.

There are positive and negative effects of financial leverage.

The first is when the difference between the return on total capital after all taxes have been paid exceeds the interest rate for the loan provided. If the effect is greater than zero, that is, positive, then it is profitable to increase the leverage and it is possible to attract additional borrowed capital.

If the effect has a minus sign, then measures should be taken to prevent a loss.

American and European interpretations of the leverage effect

The two interpretations of the leverage effect are based on which accents in more taken into account in the calculation. This is a more in-depth consideration of how the financial leverage ratio shows the magnitude of the impact on the company's financial results.

The American model or concept considers financial leverage through net profit and profit received after the company has completed all tax payments. This model takes into account the tax component.

The European concept is based on the efficiency of using borrowed capital. It examines the effects of using equity capital and compares it with the effect of using borrowed capital. In other words, the concept is based on assessing the profitability of each type of capital.

Conclusion

Any company strives at least to achieve a break-even point, and as a maximum - to obtain high profitability. To achieve all the goals, there is not always enough own capital. A lot of companies resort to attracting borrowed funds for development. It is important to maintain a balance between own capital and borrowed capital. It is to determine how this balance is observed in the current time, and the indicator of financial leverage is used. It helps to determine how much the current capital structure allows you to work with additional borrowed funds.

Financial leverage is considered to be the potential opportunity to manage the profit of the organization by changing the amount and components of capital

own and borrowed.
Financial leverage (leverage) is used by entrepreneurs when the goal arises to increase the income of the enterprise. After all, it is financial leverage that is considered one of the main mechanisms for managing the profitability of an enterprise.
In the case of using such a financial instrument, the company attracts borrowed money by making credit transactions, this capital replaces its own capital and all financial activities are carried out only with the use of credit money.
But it should be remembered that in this way the enterprise significantly increases its own risks, because regardless of whether the invested funds brought profit or not, it is necessary to pay on debt obligations.
When using financial leverage, one cannot ignore the effect of financial leverage. This indicator is a reflection of the level of additional profit on the equity capital of the enterprise, taking into account the different share of the use of credit funds. Often, when calculating it, the formula is used:

EFL \u003d (1 - Cnp) x (KBRa - PC) x ZK / SK,
where

EFL- effect of financial leverage, %;
Cnp- income tax rate, which is expressed as a decimal fraction;
KBPa- coefficient of gross profitability of assets (characterized by the ratio of gross profit to the average value of assets),%;
PC- the average amount of interest on the loan, which the company pays for the use of attracted capital,%;
ZK- the average amount of attracted capital used;
SC- the average amount of own capital of the enterprise.

Components of financial leverage

This formula has three main components:
1. Tax corrector (1-Cnp)- a value indicating how the EFL will change when the level of taxation changes. The enterprise has practically no effect on this value, tax rates are set by the state. But financial managers can use the change in the tax corrector to obtain the desired effect if some branches (subsidiaries) of the enterprise are subject to different tax policies due to the territorial location, types of activities.
2.Financial leverage differential (KBRa-PC). Its value fully reveals the difference between the gross return on assets and the average interest rate on a loan. The higher the value of the differential, the greater the likelihood of a positive effect from the financial impact on the enterprise. This indicator is very dynamic, constant monitoring of the differential will allow you to control the financial situation and not miss the moment of reducing the profitability of assets.
3. Financial leverage ratio (LC/LC), which characterizes the amount of credit capital attracted by the enterprise, per unit of equity. It is this value that causes the effect of financial leverage: positive or negative, which is obtained due to the differential. That is, a positive or negative increase in this coefficient causes an increase in the effect.
The combination of all the components of the effect of financial leverage will allow you to determine exactly the amount of borrowed funds that will be safe for the enterprise and will allow you to get the desired increase in profits.

Financial leverage ratio

The financial leverage ratio shows the percentage of borrowed funds in relation to own funds am company.
Net borrowings are bank loans and overdrafts minus cash and other liquid resources.
Equity is represented by the balance sheet value of shareholders' funds invested in the company. This is the issued and paid-in authorized capital, accounted for at the nominal value of shares, plus accumulated reserves. The reserves are the retained earnings of the company since incorporation, as well as any increment resulting from the revaluation of property and additional capital, where available.
It happens that even listed companies have a leverage ratio of more than 100%. This means that creditors provide more financial resources for the operation of the company than shareholders. In fact, there have been exceptional cases where listed companies had a leverage ratio of around 250% - temporarily! This may have been the result of a major takeover that required significant borrowing to pay for the acquisition.

In such circumstances, however, it is highly likely that the report of the chairman of the board presented in the annual report contains information on what has already been done and what remains to be done in order to significantly reduce the level of financial leverage. In fact, it may even be necessary to sell some lines of business in order to reduce leverage to an acceptable level in a timely manner.
The consequence of high financial leverage is a heavy burden of interest on loans and overdrafts, which are charged to the profit and loss account. In the face of deteriorating economic conditions, profits may well be under a double yoke. There may be not only a reduction trading revenue but also rising interest rates.
One way to determine the impact of financial leverage on profits is to calculate the interest coverage ratio.
The rule of thumb is that the interest coverage ratio should be at least 4.0, and preferably 5.0 or more. This rule should not be neglected, because the loss of financial well-being can become a retribution.

Leverage ratio (Debt ratio)

Leverage ratio (debt ratio, debt-to-equity ratio)- an indicator of the financial position of the enterprise, characterizing the ratio of borrowed capital and all assets of the organization.
The term "financial leverage" is also used to characterize a principled approach to business financing, when, with the help of borrowed funds, an enterprise forms a financial leverage to increase the return on its own funds invested in a business.
Leverage(Leverage - “lever” or “lever action”) is a long-term factor, the change of which can lead to a significant change in a number of performance indicators. This term is used in financial management to characterize a relationship showing how an increase or decrease in the share of any group of semi-fixed costs affects the dynamics of the income of the company's owners.
The following term names are also used: autonomy coefficient, financial dependence coefficient, financial leverage coefficient, debt load.
The essence of the debt burden is as follows. Using borrowed funds, the company increases or decreases the return on equity. In turn, the decrease or increase in ROE depends on the average cost of borrowed capital (average interest rate) and makes it possible to judge the effectiveness of the company in choosing sources of financing.

Method for calculating the coefficient of financial dependence

This indicator describes the company's capital structure and characterizes its dependence on . It is assumed that the amount of all debts should not exceed the amount of equity capital.
The calculation formula for the financial dependency ratio is as follows:
Liabilities / Assets
Liabilities are considered both long-term and short-term (whatever is left after subtracting from the equity balance). Both components of the formula are taken from balance sheet organizations. However, it is recommended to make calculations based on the market valuation of assets, and not data. financial statements. Since a successfully operating enterprise, the market value of equity capital may exceed the book value, which means a lower value of the indicator and more low level financial risk.
As a result normal value coefficient should be equal to 0.5-0.7.

Coefficient 0.5 is optimal (equal ratio of own and borrowed capital).
0.6-0.7 - is considered a normal coefficient of financial dependence.
A coefficient below 0.5 indicates an organization's too cautious approach to raising debt capital and missed opportunities to increase the return on equity through the use of the effect of financial leverage.
If the level of this indicator exceeds the recommended number, then the company has a high dependence on creditors, which indicates a deterioration in financial stability. The higher the ratio, the greater the company's risks regarding the potential for bankruptcy or a shortage of cash.

Conclusions from the value of the Debt ratio
The financial leverage ratio is used to:
1) Comparisons with the average level in the industry, as well as with indicators from other firms. The value of the financial leverage ratio is influenced by the industry, the scale of the enterprise, as well as the method of organizing production (capital-intensive or labor-intensive production). Therefore, the final results should be evaluated in dynamics and compared with the indicator of similar enterprises.
2) Analysis of the possibility of using additional borrowed sources of financing, the efficiency of production and marketing activities, the optimal decisions of financial managers in matters of choosing objects and sources of investment.
3) Analysis of the debt structure, namely: the share of short-term debts in it, as well as arrears in paying taxes, wages, and various deductions.
4) Determination by creditors of financial independence, stability of the financial position of an organization that plans to attract additional loans.

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For any enterprise, the priority is the rule that both own and borrowed funds must provide a return in the form of profit (income). The action of financial leverage (leverage) characterizes the expediency and efficiency of the use of borrowed funds by the enterprise as a source of financing of economic activity.

The effect of financial leverage is that the company, using borrowed funds, changes the net profitability of own funds. This effect arises from the discrepancy between the profitability of assets (property) and the "price" of borrowed capital, i.e. average bank rate. At the same time, the enterprise must provide for such a return on assets so that the funds are sufficient to pay interest on the loan and pay income tax.

It should be borne in mind that the average calculated interest rate does not coincide with the interest rate accepted under the terms of the loan agreement. The average settlement rate is set according to the formula:

SP \u003d (FIk: amount of AP) X100,

joint venture - the average settlement rate for a loan;

Fick - actual financial costs for all loans received for the billing period (the amount of interest paid);

AP amount - the total amount of borrowed funds attracted in the billing period.

The general formula for calculating the effect of financial leverage can be expressed as:

EGF \u003d (1 - Ns) X(Ra - SP) X(GK:SK),

EGF - the effect of financial leverage;

Ns – income tax rate in fractions of a unit;

Ra – return on assets;

joint venture - average calculated interest rate for a loan in %;

ZK - borrowed capital;

SC - equity.

The first component of the effect is tax corrector (1 - Hs), shows the extent to which the effect of financial leverage is manifested in connection with different levels of taxation. It does not depend on the activities of the enterprise, since the income tax rate is approved by law.

In the process of managing financial leverage, a differentiated tax corrector can be used in cases where:

differentiated tax rates have been established for various types of enterprise activities;

for certain types of activities, enterprises use income tax benefits;

individual subsidiaries (branches) of the enterprise operate in free economic zones, both in their own country and abroad.

The second component of the effect is differential (Ra - SP), is the main factor that forms the positive value of the effect of financial leverage. Condition: Ra > SP. The higher the positive value of the differential, the more significant, other things being equal, the value of the effect of financial leverage.

Due to the high dynamism of this indicator, it requires systematic monitoring in the management process. The dynamism of the differential is due to a number of factors:

during a period of deterioration in the financial market, the cost of borrowing funds may increase sharply and exceed the level accounting profit generated by the assets of the enterprise;

the decrease in financial stability, in the process of intensive attraction of borrowed capital, leads to an increase in the risk of bankruptcy of the enterprise, which makes it necessary to increase interest rates for a loan, taking into account the premium for additional risk. The financial leverage differential can then be reduced to zero or even to a negative value. As a result, the return on equity will decrease, as part of the profit it generates will be used to service the debt received at high interest rates;

during the worsening of the situation commodity market, reduction in sales and accounting profit, a negative value of the differential can be formed even at stable interest rates due to a decrease in the return on assets.

Thus, the negative value of the differential leads to a decrease in the return on equity, which makes its use inefficient.

The third component of the effect is debt ratio or financial leverage (GK: SK) . It is a multiplier that changes the positive or negative value of the differential. With a positive value of the differential, any increase in the debt ratio will lead to an even greater increase in the return on equity. At negative value differential, the increase in the debt ratio will lead to an even greater drop in the return on equity.

So, with a stable differential, the debt ratio is the main factor affecting the return on equity, i.e. it generates financial risk. Similarly, with the debt ratio unchanged, a positive or negative value of the differential generates both an increase in the amount and level of return on equity, and the financial risk of losing it.

Combining the three components of the effect (tax corrector, differential and debt ratio), we obtain the value of the effect of financial leverage. This method of calculation allows the company to determine the safe amount of borrowed funds, that is, acceptable lending conditions.

To realize these favorable opportunities, it is necessary to establish the relationship and contradiction between the differential and the debt ratio. The fact is that with an increase in the volume of borrowed funds, the financial costs of servicing the debt increase, which, in turn, leads to a decrease in the positive value of the differential (with a constant return on equity).

From the above, the following can be done conclusions:

if new borrowing brings to the enterprise an increase in the level of the effect of financial leverage, then it is beneficial for the enterprise. At the same time, it is necessary to control the state of the differential, since with an increase in the debt ratio, a commercial bank is forced to compensate for the increase in credit risk by increasing the “price” of borrowed funds;

the creditor's risk is expressed by the value of the differential, since the higher the differential, the lower the bank's credit risk. Conversely, if the differential becomes less than zero, then the leverage effect will act to the detriment of the enterprise, that is, there will be a deduction from the return on equity, and investors will not be willing to buy shares of the issuing enterprise with a negative differential.

Thus, an enterprise's debt to a commercial bank is neither good nor evil, but it is its financial risk. By attracting borrowed funds, an enterprise can more successfully fulfill its tasks if it invests them in highly profitable assets or real investment projects with a quick return on investment.

The main task for a financial manager is not to eliminate all risks, but to take reasonable, pre-calculated risks, within the positive value of the differential. This rule is also important for the bank, because a borrower with a negative differential is distrustful.

Financial leverage is a mechanism that a financial manager can master only if he has accurate information about the profitability of the company's assets. Otherwise, it is advisable for him to treat the debt ratio very carefully, weighing the consequences of new borrowings in the loan capital market.

The second way to calculate the effect of financial leverage can be viewed as a percentage (index) change in net profit per ordinary share, and the fluctuation in gross profit caused by this percentage change. In other words, the effect of financial leverage is determined by the following formula:

leverage strength = percentage change in net income per ordinary share: percentage change in gross income per ordinary share.

The smaller the impact of financial leverage, the lower the financial risk associated with this enterprise. If borrowed funds are not involved in circulation, then the force of the financial leverage is equal to 1.

The greater the force of financial leverage, the higher the company's level of financial risk in this case:

for a commercial bank, the risk of non-repayment of the loan and interest on it increases;

for the investor, the risk of reducing dividends on the shares of the issuing enterprise with a high level of financial risk that he owns increases.

The second method of measuring the effect of financial leverage makes it possible to perform an associated calculation of the strength of the impact of financial leverage and establish the total (general) risk associated with the enterprise.

In terms of inflation if the debt and interest on it are not indexed, the effect of financial leverage increases, since debt servicing and the debt itself are paid for with already depreciated money. It follows that in an inflationary environment, even with a negative value of the differential of financial leverage, the effect of the latter can be positive due to non-indexation of debt obligations, which creates additional income from the use of borrowed funds and increases the amount of equity capital.

Ural Socio-Economic Institute

Academy of Labor and social relations

Department of Financial Management

Course work

Course: Financial Management

Topic: The effect of financial leverage: financial and economic content, calculation methods and scope in making managerial decisions.

Form of study: Correspondence

Specialty: Finance and Credit

Course: 3, Group: FSZ-302B

Completed by: Mingaleev Dmitry Rafailovich

Chelyabinsk 2009

Introduction

1. The essence of the effect of financial leverage and calculation methods

1.1 The first way to calculate financial leverage

1.2 The second method of calculating financial leverage

1.3 The third method of calculating financial leverage

2. Coupled effect of operational and financial leverage

3. Strength of financial leverage in Russia

3.1 Controllable factors

3.2 Business size matters

3.3 Structure of external factors influencing the effect of financial leverage

Conclusion

Bibliography

Introduction

Profit is the simplest and at the same time the most complex economic category. It received a new content in the conditions of the modern economic development of the country, the formation of real independence of business entities. Being the main driving force market economy, it ensures the interests of the state, owners and personnel of the enterprise. Therefore, one of the urgent tasks of the current stage is the mastery of managers and financial managers with modern methods of effective management of profit formation in the process of production, investment and financial activities of the enterprise. The creation and operation of any enterprise is simply a process of investing financial resources on a long-term basis in order to make a profit. Of priority importance is the rule that both own and borrowed funds must provide a return in the form of profit. Competent, effective management of profit formation provides for the construction at the enterprise of appropriate organizational and methodological systems for ensuring this management, knowledge of the main mechanisms for generating profit, the use of modern methods of its analysis and planning. One of the main mechanisms for the implementation of this task is the financial lever

The purpose of this work is to study the essence of the effect of financial leverage.

Tasks include:

Consider the financial and economic content

Consider calculation methods

Consider the scope

1. The essence of the effect of financial leverage and calculation methods

Profit formation management involves the use of appropriate organizational and methodological systems, knowledge of the main mechanisms of profit formation and modern methods of its analysis and planning. When using a bank loan or issuing debt securities, interest rates and the amount of debt remain constant during the term of the loan agreement or the term of circulation of securities. The costs associated with servicing the debt do not depend on the volume of production and sales of products, but directly affect the amount of profit remaining at the disposal of the enterprise. Since interest on bank loans and debt securities is charged to enterprises (operating expenses), using debt as a source of financing is cheaper for the enterprise than other sources that are paid out of net profit (for example, dividends on shares). However, an increase in the share of borrowed funds in the capital structure increases the risk of insolvency of the enterprise. This should be taken into account when choosing funding sources. It is necessary to determine the rational combination between own and borrowed funds and the degree of its impact on the profit of the enterprise. One of the main mechanisms for achieving this goal is financial leverage.

Financial leverage (leverage) characterizes the use of borrowed funds by the enterprise, which affects the value of return on equity. Financial leverage is an objective factor that arises with the advent of borrowed funds in the amount of capital used by the enterprise, allowing it to receive additional profit on equity.

The idea of financial leverage American concept consists in assessing the level of risk for fluctuations in net profit caused by the constant value of the company's debt service costs. Its action is manifested in the fact that any change in operating profit (earnings before interest and taxes) generates a more significant change in net profit. Quantitatively, this dependence is characterized by the indicator of the strength of the impact of financial leverage (SVFR):

Interpretation of the financial leverage ratio: it shows how many times earnings before interest and taxes exceed net income. The lower limit of the coefficient is one. The greater the relative amount of borrowed funds attracted by the enterprise, the greater the amount of interest paid on them, the higher the impact of financial leverage, the more variable the net profit. Thus, an increase in the share of borrowed financial resources in the total amount of long-term sources of funds, which, by definition, is equivalent to an increase in the strength of the impact of financial leverage, ceteris paribus, leads to greater financial instability, expressed in less predictable net profit. Since the payment of interest, unlike, for example, the payment of dividends, is mandatory, then with relatively high level financial leverage, even a slight decrease in profits may have adverse consequences compared to a situation where the level of financial leverage is low.

The higher the force of financial leverage, the more non-linear the relationship between net income and earnings before interest and taxes becomes. minor change(increase or decrease) in earnings before interest and taxes in conditions of high financial leverage can lead to a significant change in net income.

The increase in financial leverage is accompanied by an increase in the degree of financial risk of the enterprise associated with a possible lack of funds to pay interest on loans and borrowings. For two enterprises with the same volume of production, but different levels of financial leverage, the variation in net profit due to changes in the volume of production is not the same - it is greater for the enterprise with a higher value of the level of financial leverage.

European concept of financial leverage characterized by an indicator of the effect of financial leverage, reflecting the level of additionally generated profit on equity with a different share of the use of borrowed funds. This method of calculation is widely used in the countries of continental Europe (France, Germany, etc.).

The effect of financial leverage(EFF) shows by what percentage the return on equity increases by attracting borrowed funds into the turnover of the enterprise and is calculated by the formula:

EGF \u003d (1-Np) * (Ra-Tszk) * ZK / SK

where N p - the rate of income tax, in fractions of units;

Rp - return on assets (the ratio of the amount of profit before interest and taxes to the average annual amount of assets), in fractions of units;

C zk - weighted average price of borrowed capital, in fractions of units;

ZK - the average annual cost of borrowed capital; SC is the average annual cost of equity capital.

There are three components in the above formula for calculating the effect of financial leverage:

♦ financial leverage tax corrector(l-Np), which shows the extent to which the effect of financial leverage is manifested in connection with different levels of taxation of profits;

♦ leverage differential(ra -C, k), which characterizes the difference between the profitability of the enterprise's assets and the weighted average calculated interest rate on loans and borrowings;

♦ financial leverage ZK/SK

the amount of borrowed capital per ruble of the company's own capital. In terms of inflation, the formation of the effect of financial leverage is proposed to be considered depending on the rate of inflation. If the amount of the company's debt and interest on loans and borrowings are not indexed, the effect of financial leverage increases, since debt servicing and the debt itself are paid for with already depreciated money:

EGF \u003d ((1-Np) * (Ra - Tsk / 1 + i) * ZK / SK,

where i - characteristic of inflation (inflationary rate of price growth), in fractions of units.

In the process of managing financial leverage, a tax corrector can be used in the following cases:

♦ if differentiated tax rates are established for various types of enterprise activities;

♦ if the enterprise uses income tax benefits for certain types of activities;

♦ if individual subsidiaries of the enterprise operate in the free economic zones of their country, where there is a preferential income tax regime, as well as in foreign countries.

In these cases, by influencing the sectoral or regional structure of production and, accordingly, the composition of profit in terms of its taxation level, it is possible, by reducing the average profit tax rate, to reduce the impact of the financial leverage tax corrector on its effect (ceteris paribus).

The financial leverage differential is a condition for the emergence of the effect of financial leverage. A positive EGF occurs in cases where the return on total capital (Ra) exceeds the weighted average price of borrowed resources (Czk)

The difference between the return on total capital and the cost of borrowed funds will increase the return on equity. Under such conditions, it is beneficial to increase the financial leverage, i.e. the share of borrowed funds in the capital structure of the enterprise. If R a< Ц зк, создается отрицательный ЭФР, в результате чего происходит уменьшение рентабельности собственного капитала, что в конечном итоге может стать причиной банкротства предприятия.

The higher the positive value of the differential of financial leverage, the higher, other things being equal, its effect.

Due to the high dynamism of this indicator, it requires constant monitoring in the process of profit management. This dynamism is driven by a number of factors:

♦ in the period of deterioration of the financial market (decrease in the supply of loan capital) the cost of raising borrowed funds may increase sharply, exceeding the level of accounting profit generated by the company's assets;

♦ Decrease in financial stability in the process of intensive attraction of borrowed capital leads to an increase in the risk of its bankruptcy, which forces lenders to raise interest rates for a loan, taking into account the inclusion of a premium for additional financial risk in them. As a result, the financial leverage differential can be reduced to zero or even to a negative value. As a result, the return on equity will decrease, as part of the profit it generates will be directed to servicing debt at high interest rates;

♦ in addition, in the period of deterioration of the situation on the commodity market and reduction in sales, the amount of accounting profit also falls. Under such conditions, a negative value of the differential can form even with stable interest rates due to a decrease in the return on assets.

It can be concluded that the negative value of the financial leverage differential for any of the above reasons leads to a decrease in the return on equity, the use of borrowed capital by an enterprise has a negative effect.

Financial Leverage characterizes the strength of the impact of financial leverage. This coefficient multiplies the positive or negative effect obtained due to the differential. At positive value differential, any increase in the coefficient of financial leverage causes an even greater increase in its effect and return on equity, and with a negative value of the differential, an increase in the coefficient of financial leverage leads to an even greater decrease in its effect and return on equity.

Thus, with a constant differential, the coefficient of financial leverage is the main generator of both the increase in the amount and level of return on equity, and the financial risk of losing this profit.

Knowledge of the mechanism of the impact of financial leverage on the level of financial risk and profitability of equity capital allows you to purposefully manage both the cost and the capital structure of the enterprise.

1.1 The first way to calculate financial leverage

The essence of financial leverage is manifested in the impact of debt on the profitability of the enterprise.

As mentioned above, the grouping of expenses in the income statement into production and financial expenses allows us to identify two main groups of factors affecting profit:

1) the volume, structure and efficiency of managing the costs associated with the financing of current and non-current assets;

2) the volume, structure and cost of funding sources [enterprise funds.

Based on the profit indicators, the profitability indicators of the enterprise are calculated. Thus, the volume, structure and cost of funding sources affect the profitability of the enterprise.

Businesses resort to various sources financing, including through the placement of shares or attraction of credits and loans. Attracting equity capital is not limited by any timeframe, so a joint-stock company considers the attracted funds of shareholders to be its own capital.

Raising funds through loans and borrowings is limited to certain periods. However, their use helps to maintain control over the management of a joint stock company, which can be lost due to the emergence of new shareholders.

An enterprise can operate by financing its expenses only from its own capital, but no enterprise can operate only on borrowed funds. As a rule, the enterprise uses both sources, the ratio between which forms the structure of the liability. The structure of liabilities is called the financial structure, the structure of long-term liabilities is called the capital structure. So the capital structure is integral part financial structure. Long-term liabilities that make up the capital structure and include equity and a share of term debt capital are called permanent capital

Capital structure= financial structure - short-term debt = long-term liabilities (fixed capital)

When forming the financial structure (the structure of liabilities in general), it is important to determine:

1) the ratio between long-term and short-term borrowed funds;

2) the share of each of the long-term sources (own and borrowed capital) as a result of liabilities.

The use of borrowed funds as a source of asset financing creates the effect of financial leverage.

The effect of financial leverage: the use of long-term borrowed funds, despite their payment, leads to an increase in the return on equity.

Recall that the profitability of an enterprise is assessed using profitability ratios, including sales profitability ratios, asset profitability (profit/asset) and equity return (profit/equity).

The relationship between the return on equity and the return on assets indicates the importance of the company's debt.

Return on equity ratio (in the case of using borrowed funds) = profit - interest on debt repayment debt capital / equity capital

We remind you that the cost of debt can be expressed in relative and absolute terms, i.e. directly in interest accrued on a loan or loan, and in monetary terms - the amount of interest payments, which is calculated by multiplying the remaining amount of debt by the interest rate reduced to the period of use.

Return on assets ratio- profit/assets

Let's transform this formula to get the profit value:

assets

Assets can be expressed in terms of the value of their funding sources, i.e. through long-term liabilities (the sum of own and borrowed capital):

Assets = equity+ borrowed capital

Substitute the resulting expression of assets into the profit formula:

Profit = return on assets(own capital + debt capital)

And finally, we substitute the resulting expression of profit into the previously converted formula for return on equity:

Return on equity = return on assets (equity+ borrowed capital) - interest on debt repayment borrowed capital / equity capital

Return on equity= return on assets equity + return on assets debt capital - interest on debt repayment debt capital / equity capital

Return on equity = return on assets equity + borrowed capital (return on assets - interest on debt repayment) / equity

Thus, the value of the return on equity ratio increases with the growth of debt as long as the value of the return on assets is higher than the interest rate on long-term borrowed funds. This phenomenon has been named effect of financial leverage.

An enterprise that finances its activities only from its own funds, the return on equity is approximately 2/3 of the return on assets; an enterprise using borrowed funds has 2/3 of the return on assets plus the effect of financial leverage. At the same time, the return on equity increases or decreases depending on the change in the capital structure (the ratio of own and long-term borrowed funds) and the interest rate, which is the cost of attracting long-term borrowed funds. This manifests itself financial leverage.

Quantitative assessment of the impact of financial leverage is carried out using the following formula:

Strength of financial leverage = 2/3 (return on assets - interest rate on loans and borrowings)(long-term debt / equity)

It follows from the above formula that the effect of financial leverage occurs when there is a discrepancy between the return on assets and the interest rate, which is the price (cost) of long-term borrowed funds. In this case, the annual interest rate is reduced to the period of use of the loan and is called the average interest rate.

Average interest rate- the amount of interest on all long-term loans and borrowings for the analyzed period / the total amount of attracted loans and borrowings in the analyzed period 100%

The formula for the effect of financial leverage includes two main indicators:

1) the difference between the return on assets and the average interest rate, called the differential;

2) the ratio of long-term debt and equity, called the leverage.

Based on this, the formula for the effect of financial leverage can be written as follows.

Strength of financial leverage = 2/3 of the differentiallever arm

After taxes are paid, 2/3 of the differential remains. The formula for the impact of financial leverage, taking into account taxes paid, can be represented as follows:

(1 - profit tax rate) 2/3 differential * leverage

It is possible to increase the profitability of own funds through new borrowings only by controlling the state of the differential, the value of which can be:

1) positive if the return on assets is higher than the average interest rate (the effect of financial leverage is positive);

2) zero, if the return on assets is equal to the average interest rate (the effect of financial leverage is zero);

3) negative, if the return on assets is below the average interest rate (the effect of financial leverage is negative).

Thus, the value of the return on equity will increase as borrowed funds increase until the average interest rate becomes equal to the value of the return on assets. At the moment of equality of the average interest rate and the return on assets, the leverage effect will “turn over”, and with a further increase in borrowed funds, instead of increasing profits and increasing profitability, there will be real losses and unprofitability of the enterprise.

Like any other indicator, the level of financial leverage effect should have an optimal value. It is believed that the optimal level is 1/3-1/3 of the value of return on assets.

1.2 The second method of calculating financial leverage

By analogy with the production (operational) leverage, the impact of financial leverage can be defined as the ratio of the rate of change in net and gross profit.

= rate of change in net profit / rate of change in gross profit

In this case, the strength of the impact of financial leverage implies the degree of sensitivity of net profit to changes in gross profit.

1.3 The third method of calculating financial leverage

Leverage can also be defined as the percentage change in net income per ordinary share outstanding due to a change in the net operating result of the investment (earnings before interest and taxes).

The power of financial leverage= percentage change in net income per common share outstanding / percentage change in net investment operating result

Consider the indicators included in the formula of financial leverage.

The concept of earnings per ordinary share in circulation.

Net income ratio per share outstanding = net income - amount of dividends on preferred shares / number of ordinary shares outstanding

Number of common shares outstanding = total amount issued ordinary shares - own ordinary shares in the company's portfolio

Recall that the earnings per share ratio is one of the most important indicators that affect the market value of the company's shares. However, it must be remembered that:

1) profit is an object of manipulation and, depending on the methods used accounting can be artificially overestimated (FIFO method) or underestimated (LIFO method);

2) the immediate source of payment of dividends is not profit, but cash;

3) buying its own shares, the company reduces their number in circulation, and therefore increases the amount of profit per share.

The concept of the net result of the operation of the investment. Western financial management uses four main indicators that characterize the financial performance of an enterprise:

1) added value;

2) gross result of exploitation of investments;

3) net result of exploitation of investments;

4) return on assets.

1. Value Added (NA) represents the difference between the cost of goods produced and the cost of consumed raw materials, materials and services.

Value added - the value of manufactured products - the cost of consumed raw materials, materials and services

In its economic essence, added value. represents that part of the value of the social product which is newly created in the process of production. Another part of the value of the social product is the cost of raw materials, materials, electricity, labor, etc. used.

2. Gross Result of Exploitation of Investments (BREI) is the difference between value added and labor costs (direct and indirect). A tax on wage overruns may also be deducted from the gross result.

Gross return on investment =value added - expenses (direct and indirect) for wages - tax on wage overruns

The gross result of investment exploitation (BREI) is an intermediate indicator of the financial performance of an enterprise, namely, an indicator of the sufficiency of funds to cover the costs taken into account in its calculation.

3. Net result of exploitation of investments (NREI) is the difference between the gross operating result of the investment and the cost of restoring fixed assets. In its economic essence, the gross result of the exploitation of investments is nothing more than profit before interest and taxes. In practice, the balance sheet profit is often taken as the net result of the operation of investments, which is wrong, since the balance sheet profit (profit transferred to the balance sheet) is profit after paying not only interest and taxes, but also dividends.

Net result of exploitation of investments= gross result of operating the investment - the cost of restoring fixed assets (depreciation)

4. Return on assets (RA). Profitability is the ratio of the result to the funds spent. Return on assets refers to the ratio of profit to

payment of interest and taxes on assets - funds spent on production.

Return on assets= (net operating result of investments / assets) 100%

Transforming the formula for return on assets will allow you to obtain formulas for the profitability of sales and asset turnover. To do this, we use a simple mathematical rule: Multiplying the numerator and denominator of a fraction by the same number will not change the value of the fraction. Multiply the numerator and denominator of the fraction (return on assets) by the volume of sales and divide the resulting figure into two fractions:

Return on assets= (net result of operation of investments sales volume / assets sales volume) 100%= (net result of operation of investments / sales volume) (sales volume / assets) 100%

The resulting formula for return on assets as a whole is called the Dupont formula. The indicators included in this formula have their names and their meaning.

The ratio of the net result of the operation of investments to the volume of sales is called commercial margin. In essence, this coefficient is nothing but the coefficient of profitability of the implementation.

The indicator "sales volume / assets" is called the transformation ratio, in essence, this ratio is nothing but the asset turnover ratio.

Thus, the regulation of the return on assets is reduced to the regulation of the commercial margin (sales profitability) and the transformation ratio (asset turnover).

But back to financial leverage. Let us substitute the formulas for net profit per ordinary share in circulation and the net result of the operation of investments into the formula for the force of financial leverage

Strength of financial leverage =% change in net income per common share outstanding / % change in net operating result of investments = (net profit - amount of dividends on preferred shares / number of ordinary shares outstanding) / (net operating result of investments / assets) 100%

This formula makes it possible to estimate by what percentage the net profit per one ordinary share in circulation will change if the net result of investment operation changes by one percent.

2. Coupled effect of operational and financial leverage

The effect of production (operational) leverage can be combined with the effect of financial leverage and obtain the conjugated effect of production (operational) and financial leverage, i.e. production-financial, or general, leverage.

At the same time, the effect of synergy is manifested, which consists in the fact that the value of the aggregate indicator is greater than the arithmetic sum of the values of individual indicators.

Thus, the value of the production-financial (general) leverage is greater than the arithmetic sum of the values of the production (operational) and financial leverage indicators.

Leverage as a measure of risk

Leverage is not only a method of asset management aimed at increasing profits, but also a measure of the risk associated with investments in the activities of the enterprise. At the same time, there are:

1) entrepreneurial risk, measured by the production (operational) leverage;

2) financial risk measured by financial leverage;

3) total risk, measured by the general (production-financial) leverage.

Financial leverage is not only a method of managing the profit and profitability of an enterprise, but also a measure of risk.

The greater the force of the impact of the financial lever, the greater, and, conversely, the smaller the force of the impact of the financial lever, the less:

1) for shareholders - the risk of a fall in the level of dividends and the share price;

2) for creditors - the risk of non-repayment of the loan and non-payment of interest.

Combining the actions of production (operational) I and financial levers means an increase in the overall risk, the risk associated with the enterprise. In this case, the effect of synergy is manifested, i.e. the value of the total risk is greater than the arithmetic sum of indicators of production (operational) and financial risks.

3. Strength of financial leverage in Russia

In the course of a large-scale study of the possibilities of domestic business in managing the capital structure, at the first stage, the question was investigated: do Russian companies manage their capital structure and are they aware, building appropriate financial strategies, of the financial risk that grows with an increase in borrowed capital? At the second stage, it was studied whether domestic business itself is a real subject of capital structure management and to what extent the effect of financial leverage depends on external factors?

Who determines the structure of capital in Russia - the domestic business itself or, perhaps, it spontaneously develops under the influence of external circumstances? It is obvious that the business is trying to play in the financial market, using different strategies financing. The differences in the implemented strategies are determined, first of all, by the scale of the business. In general, it can be stated that Russian companies and corporations have sufficiently mastered financial strategies, including capital structure management, but after 2003, the interests of large business focused on external borrowing, while small and medium-sized businesses maintained and strengthened their positions in the domestic financial market.

The mechanisms for raising capital by large businesses differ from those available to medium and small businesses. If representatives of the former bring their financial assets to international stock exchanges and receive cheap loans from the largest European and American banks, then small businesses are content with very expensive loans from domestic banks. The picture emerges as follows: today big business and banks are faced with a liquidity crisis that began in the world in the second half of 2007, and finally realized the growing financial risk. The price for underestimating the risk will apparently have to be paid by medium and small businesses, and, ultimately, by the population of Russia. Terms of long-term lending in the domestic financial market have tightened - the cost of loans after a long period of decline has risen sharply, the volumes have declined.

The observed differentiation of financial strategies, depending on the scale of domestic business entities, is associated with the degree of influence of factors on them. external environment. The more resistant a company is to external factors, the more independent it is in managing its capital structure. Therefore, to begin with, we will determine which of the factors of the external and internal environment the domestic business can use (and really uses) to increase the effect and strength of the impact of financial leverage.

3.1 Controllable factors

The EGF is positive if the leverage differential is positive, the return on the company's assets exceeds the cost of borrowed capital. The company can influence the value of the differential, but to a limited extent: on the one hand, increasing the efficiency of production (scale effect), and on the other hand, through access to sources of cheap borrowed capital. The financial leverage differential is an important information impulse not only for business, but also for potential creditors, as it allows you to determine the risk level of providing new loans to a company. The larger the differential, the lower the risk for the lender and vice versa. Large financial leverage means significant risk for both the borrower and the lender.

The magnitude of the impact of financial leverage quite accurately shows the degree of financial risk associated with the firm. The greater the share of costs in taxable income (before paying interest on servicing borrowed capital), the greater the impact of financial leverage and the higher the risk of default on the loan.

The financial risk generated by financial leverage consists of the risk of the company's return on assets falling below the cost of borrowed capital (the differential becomes negative) and the risk of reaching such a leverage value when the company is no longer able to service the borrowed capital (the borrower defaults).

Among the parameters influencing the EFR and SVFR, we single out those that companies can manage to some extent, and uncontrollable ones related to external factors. The parameter of return on assets can be attributed to the managed, although not to the full extent, since its value is determined by the qualifications of management, the ability of managers to use favorable market conditions for the benefit of the company, not only in the sale of products, but also by attracting external capital. The average cost of borrowed capital is also one of the controllable factors, albeit indirectly: the price and other parameters of the availability of loans for a company are largely determined by its credit rating, credit history, growth dynamics, sometimes - scale and industry affiliation. Finally, the leverage of the financial lever, that is, the ratio of debt and equity capital (its structure) is determined by the company itself.

The parameters of the effect of financial leverage not controlled by companies include the income tax rate.

Is it possible, by varying these parameters, to increase the EGF? Does the size of the company's business affect its ability to manage, for example, return on assets?

It is obvious that the profitability of assets of companies supplying products for export, under favorable market conditions, is far from always the result of a single control action. Today, companies engaged in the extraction of fuel and energy and other minerals, the production of coke, oil products, chemical, metallurgical production and the production of finished metal products or providing communication services receive and consume rent in favorable market conditions. Almost all business in these areas of activity is represented by large and large corporations, often with solid state participation.

The exceptionally favorable market situation prevailing in the world markets contributes to the increase in the profitability of exporting companies not only when selling products, but also when attracting inexpensive capital in external financial markets. Indeed, until recently these corporations had access to external long-term loans at a rate of 6-7%, while in Russian banks the cost of loans is 2-2.5 times higher. It was often difficult for the largest Russian companies to refuse loans, as they were presented to them, one might say, on a silver platter: “Foreigners literally ran after Russian banks, primarily with state capital, offering them money ... There are many free money, and Russia remains an attractive country for investment - a solid trade surplus, a budget surplus, huge reserves, not too high inflation" 1

Finally, the possibilities of the largest corporations to manage the capital structure are maximum, since favorable market conditions, cheap borrowed capital, until some time, significantly reduced not only financial, but also general market risk for them.

3.2 Business size matters

Large Russian business has already lost the opportunity to refinance and build up new foreign debt. In this regard, there has been a significant increase in the number and scope of mergers and acquisitions in the financial sector.

But let's return to the calculation of the effect of financial leverage: the last of the above parameters that determine the effect and strength of the impact of financial leverage is income tax - a factor not controlled by business. It "works" in favor of domestic corporations, because, as the formula shows, the higher the tax rate, the lower the effect of financial leverage. Russia boasts one of the lowest income taxes in the world, the rate of which is 24%. Having gained access to cheap Western loans, the domestic big business "skimmed the cream" also in this direction.

Well, medium and small businesses, involuntarily remaining faithful to the domestic financial market, had to be content with the sources that this market offered. It must be admitted that the flow of "hot" Western money that spilled over into the Russian market contributed to a gradual reduction in the cost of domestic loans for corporations. Banking margins, which peaked in 2004, when the largest banks entered the external debt capital market, gradually decreased, as a result, the price of loans on the domestic market also decreased markedly. It was during that period that the scale of mortgage lending to the population grew, housing construction. Cheaper, though still expensive compared to Western ones, domestic loans still found a use for themselves, working for Russia.

Medium business searched and found new ways to cheaper debt capital. Thus, since 2003, the scale of borrowing through the issuance of corporate bonds by medium-sized companies has been noticeably expanding. Moreover, bonds were often placed by closed subscription, which, as you know, significantly reduces the issuer's costs for issuance. Indeed, the closed way of placing bonds, practiced with a relatively small (but sufficient for medium-sized businesses) issue scale, on the one hand, provides the issuer not only with capital, but also with a good credit history for future possible IPOs, and on the other hand, allows him to receive borrowed capital at a cost below the bank.

Why do private subscription participants settle for low returns? The fact is that those who are interested in the implementation of the invested project are involved in the closed subscription - suppliers of equipment, raw materials, buyers of products, local authorities, who are interested in the emergence of new jobs and the investment attractiveness of their city, district. Ultimately, in addition to profitability, subscription participants receive other benefits: suppliers of raw materials - a reliable market, buyers - a reliable supplier, and local authorities - new jobs, increased tax revenues, etc.

For small businesses, such sources of borrowed capital are practically inaccessible. Those companies that did not join government programs to support small businesses and did not get access to cheap loans through them had to attract expensive bank loans, look for partners with capital, turning them into co-owners, losing their independence, or go into the shadows and develop by reducing tax and extrabudgetary payments.

Does (and to what extent) financial risk affect the formation of financial strategies of entities of different scale Russian business? The minimum financial risk in favorable market conditions was borne by the largest corporations exporting raw materials and low value-added products, which gained access to cheap Western debt markets. But small and medium-sized businesses that borrowed in the domestic, more expensive market, also faced higher financial risk.

The same situation is observed with regard to domestic banks that have not been able to get access to cheap Western loans. Since the rates on interbank loans, although they were declining, but to a lesser extent than for banks of the first (6-7%) and second round (7-8%), medium and small domestic banks had to be content with a lower margin, which was established at the level of 8- nine%. Under the influence of the liquidity crisis, by the end of 2007 the rates on interbank credits rose again by 1.5-2%, less for the first-tier banks and more for the third-tier ones.

No less significant for domestic business entities are other internal factors that affect financial strategies in different ways. Without going into detail here, let's list them:

* the level of the required rate of return, profitability ("appetites" of companies are not the same, respectively, their financial strategies and risks differ);

* cost structure (the level of operating leverage correlates with industry affiliation and depends on the capital intensity of the technologies used);

* industry affiliation of the company, its organizational and legal form, stage of the life cycle, age, place in the market, etc.

Since in an open economy, and the Russian economy is approaching its standards, the impact of the external environment on the company's activities is large, it can be assumed that external factors also affect the effect of financial leverage in a wider range of areas than internal ones, and, consequently, their influence may turn out to be big. Factors external to business are such factors as the dynamics of the bank margin, the average market value of bank loans and non-bank sources for the corporate sector.

Taking into account changes in the external environment brought by state policy to different areas economy, we will expand the list of considered internal and external factors that affect the effect of financial leverage and the strength of its impact. Let us focus on those environmental factors that are regulated by the market and the state.

3.3 Structure of external factors influencing the effect of financial leverage

Changes in public policy and market conditions in the world markets. The influence of market conditions on the world markets for raw materials, metals and other low-added products, as well as on financial markets by the end of 2007 has already been largely considered. We only add that the volatility of the ruble exchange rates and the main currencies used for international settlements also significantly change the financial behavior Russian companies and banks, primarily those with access to foreign markets.

Exchange rate and interest rates

The peculiarity of the current situation is that in the last two years the exchange rate of the US dollar, which is still the main currency of international settlements, has been falling against the ruble and a number of other national currencies, but primarily against the euro. Although the exchange rate of the ruble against the European currency is declining, in the last 3-4 years the rate of this decline has been slowing down, which forces major exporters, including Russian ones, to switch to the euro.

As you know, the dependence of the course national currency the rate of inflation is especially high in countries with a large volume of international exchange of goods, services and capital, and the relationship between the dynamics of currencies and the relative rate of inflation is most pronounced when calculating the exchange rate based on export prices. In this regard, both Russia and the United States are approximately on an equal footing, with the only exception that Russian export oil and gas is accompanied by a long and high growth in world prices for these products, which has a positive effect on the balance of payments of Russia, and the United States, in the context of an expensive and unsuccessful military operation in the Middle East, has a balance of payments deficit.

Just like other exporting countries, Russia uses a wide arsenal of means of regulating international credit relations - these are tax and customs benefits, state guarantees and subsidizing interest rates, subsidies and loans. However, to a greater extent Russian state supports large corporations and banks, as a rule, with a solid state participation, that is, itself. But medium and small businesses get little from the flow of benefits that spills onto large businesses. On the contrary, loans for the purchase of imported equipment are provided to small and medium-sized companies that are not included in small business support programs on conditions that are significantly more stringent than for large businesses.

On the exchange rate and the direction of movement of world capital is also affected by the difference in interest rates in different countries. An increase in interest rates stimulates the inflow of foreign capital into the country and vice versa, and the movement of speculative, "hot" money increases the instability of the balance of payments. But it is unlikely that the regulation of interest rates is productive due to the need to control liquidity, which means that it can hinder economic growth. At the same time, the Central Bank reduced the rate of deductions to the Mandatory Reserve Fund for ruble deposits. This measure is justified by the fact that reserve requirements are lower in Europe, and Russian banks find themselves in unequal conditions.

Conclusion

In general, the above allows us to draw the following conclusions.

1. External and internal factors in relation to business affect the effect of financial leverage and the strength of its impact, and this affects the financial behavior of domestic companies and banks of various sizes in different ways.

2. External factors related to state regulation of certain areas of business activity (taxation, dynamics of the cost of bank loans, government financing of business support programs, etc.), as well as market influence (bond and stock yields, price dynamics in the world market, exchange rate dynamics currencies, etc.), have on the effect of financial leverage more strong influence than internal factors controlled by the business itself.

3. An assessment of the degree of influence of external factors, primarily state regulation, on the financial behavior of business entities of various sizes shows that it is focused on supporting, first of all, banks and large businesses, sometimes to the detriment of the interests of medium and small businesses.

4. A feature of large Russian business, which makes maximum use of the effect of financial leverage in its financial strategies, is the significant participation of the state in these largest corporations and banks. Thus, for the latter, state regulation is not absolutely external factor.

5. Really manages the capital structure in a changing external environment and, due to its capabilities, only business in which the state does not participate, that is, medium and small companies. The state does this for big business, creating the most favored nation treatment for it.

6. Management of the capital structure and the formation of appropriate financial strategies by medium and small businesses pushes them beyond the legal field, since the Russian financial market today is built and adjusted to the interests of large business with state participation.

7. global crisis liquidity, in which the Russian economy is also involved through large-scale loans to large businesses in the external financial market, may further weaken financial opportunities medium and small businesses and lead to mass bankruptcies of enterprises in these categories, while large businesses will be protected by the state.

Summing up, it should be noted that such a concept as accounts payable cannot be given an unambiguous assessment. Borrowed funds are necessary for the development of the enterprise. However, illiterate management can lead to an increase in debt and the inability to pay off debts. On the other hand, with skillful management, with the help of borrowed funds, you can save and increase your own funds. Therefore, borrowing money can be both beneficial and harmful.

Bibliography

1. Galitskaya S.V. Financial management. The financial analysis. Enterprise finance: textbook. allowance / S.V. Galician. - M. : Eksmo, 2008. - 651 p. - (Higher economic education)

2. Rumyantseva E.E. Financial management: textbook / E.E. Rumyantsev. - M. : RAGS, 2009. - 304 p.

3. Financial management [Electronic resource]: electron. textbook / A.N. Gavrilova [i dr.]. - M. : KnoRus, 2009. - 1 p.

4. Financial management: textbook. allowance for universities / A.N. Gavrilova [i dr.]. - 5th ed., erased. - M. : KnoRus, 2009. - 432 p.

5. Financial management: textbook. allowance for universities / A.N. Gavrilova [i dr.]. - 5th ed., erased. - M. : KnoRus, 2008. - 432 p.

6. Galitskaya S.V. Financial management. The financial analysis. Enterprise finance: textbook. allowance / S.V. Galician. - M. : Eksmo, 2009. - 651 p. - (Higher economic education)

7. Surovtsev M.E. Financial management: workshop; textbook allowance / M.E. Surovtsev, L.V. Voronova. - M.: Eksmo, 2009. - 140 p. - (Higher economic education)

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The coefficient of financial leverage (financial leverage) gives an idea of the real ratio of own and borrowed funds in the enterprise. Based on the data on the financial leverage ratio, one can judge the stability of the economic entity, the level of its profitability.

What does financial leverage mean

The financial leverage ratio is often called financial leverage, which is able to influence the profit level of the organization by changing the ratio of own and borrowed funds. It is used in the process of subject analysis economic relations to determine the level of its financial stability in the long term.

The values of the financial leverage ratio help the company's analysts to identify additional potential for profitability growth, assess the degree of possible risks and determine the dependence of the level of profit on external and internal factors. With the help of financial leverage, it is possible to influence the net profit of the organization by managing financial liabilities, and there is also a clear idea of the appropriateness of using credit funds.

Types of financial leverage

According to the efficiency of use, there are several types of financial leverage:

Positive. It is formed when the benefit from raising borrowed funds exceeds the fee (interest) for using the loan.
Negative. It is typical for a situation where the assets acquired by obtaining a loan do not pay off, and the profit is either absent or below the listed percentages.
Neutral. Financial leverage, in which the income from investments is equivalent to the costs of obtaining borrowed funds.

Financial Leverage Formulas

The financial leverage ratio is the ratio of debt to equity. The calculation formula is as follows:

FL = ZK / SK,

where: FL is the financial leverage ratio;

ZK - borrowed capital (long-term and short-term);

SC is equity capital.

This formula also reflects the financial risks of the enterprise. The optimal value of the coefficient ranges from 0.5-0.8. With such indicators, it is possible to maximize profits with minimal risks.

For some organizations (trading, banking), a higher value is acceptable, provided that they have a guaranteed cash flow.

Most often, when determining the level of the coefficient value, they use not the book (accounting) cost of equity, but the market value. The indicators obtained in this case will most accurately reflect the current situation.

More detailed version formula for the financial leverage ratio is as follows:

FL \u003d (GK / SA) / (IK / SA) / (OA / IK) / (OK / OA) × (OK / SK),

where: ZK is borrowed capital;

SA is the sum of assets;

IC is invested capital;

ОА is current assets;

OK is working capital;

SC is equity capital.

The ratio of indicators presented in brackets has the following characteristics:

(ZK / SA) is the coefficient of financial dependence. The lower the ratio of borrowed capital to total assets, the more stable the company financially.
(IC / SA) is a coefficient that determines the financial independence of a long-term nature. The higher the score, the more stable the organization.
(OA / IC) is the coefficient of maneuverability of the IC. Preferably, its lower value, which determines financial stability.
(OK / ОА) is the coefficient of provision with working capital. High rates characterize the greater reliability of the company.
(OK / SC) is the SC maneuverability coefficient. Financial stability increases with decreasing coefficient.

Example 1

The company at the beginning of the year has the following indicators:

ZK - 101 million rubles;
SA - 265 million rubles;
OK - 199 million rubles;
OA - 215 million rubles;
SK - 115 million rubles;
IC - 118 million rubles.

Calculate the financial leverage ratio:

FL = (101 / 265) / (118 / 265) / (215 / 118) / (199 / 215) × (199 / 115) = 0.878.

Or FL \u003d ZK / SK \u003d 101 / 115 \u003d 0.878.

The conditions characterizing the profitability of IC (equity capital) are greatly influenced by the amount of borrowed funds. The value of the profitability of the equity capital (equity) is determined by the formula:

RSK = CHP / SK,

NP is net profit;

For a detailed analysis of the financial leverage ratio and the reasons for its changes, all 5 indicators included in the considered formula for its calculation should be considered. As a result, the sources will be clear due to which the indicator of financial leverage has increased or decreased.

The effect of financial leverage

Comparison of indicators of the financial leverage ratio and profitability as a result of the use of SC (own capital) is called the effect of financial leverage. As a result, you can get an idea of how the profitability of the insurance company depends on the level of borrowed funds. The difference between the cost of return on assets and the level of receipt of funds from the outside (that is, borrowed) is determined.

IA is gross income or profit before tax and interest;
PSP - profit before taxes, reduced by the amount of interest on loans.

The PD indicator is calculated as follows:

VD \u003d C × O - I × O - PR,

where: C is the average price of manufactured products;

O is the output volume;

And - costs based on 1 unit of goods;

PR is fixed costs of production.

The effect of financial leverage (EFL) is considered as the ratio of profit indicators before and after interest payments, that is:

EFL \u003d VD / PSP.

In more detail, EFL is calculated based on the following values:

EFL \u003d (RA - CZK) × (1 - SNP / 100) × ZK / SK,

where: RA - return on assets (measured as a percentage excluding taxes and interest on the loan payable);

CPC is the cost of borrowed funds, expressed as a percentage;

SNP is the current income tax rate;

ZK is borrowed capital;

SC is equity capital.

Return on assets (RA) as a percentage, in turn, is equal to:

RA = IA / (SC + SC) × 100%.

Example 2

Calculate the effect of financial leverage using the following data:

IA \u003d 202 million rubles;
SC = 122 million rubles;
ZK = 94 million rubles;
CZK = 14%;
SNP = 20%.

Using the formula EFL \u003d EFL \u003d (RA - CZK)× (1 - SNP / 100)× ZK / SK, we get the following result:

EFL = (202 / (122 + 94)× 100) - 14,00)% × (1 - 20 / 100) × 94 / 122= (93,52% - 14,00%) × (1 - 0,2) × 94 / 122 =79,52% × 0,8 × 94 / 122 = 49,01%.

Example 3

If, under the same conditions, there is an increase in borrowed funds by 20% (up to 112.8 million rubles), then the EFL indicator will be equal to:

EFL = (202 / (122 + 112.8)× 100 - 14,00)% × (1 - 20 / 100) × 112,8 / 122 = (86,03% - 14,00%) × 0,8 × 112,8 / 122 = 72,03% × 0,8 × 112,8 / 122 = 53,28%.

Thus, by increasing the level of borrowed funds, it is possible to achieve a higher EFL, that is, to increase the return on equity by attracting borrowed funds. At the same time, each company conducts its own assessment of financial risks associated with difficulties in repaying credit obligations.

The factors characterizing the return on equity are also affected by the factors of attracting borrowed funds. The formula for determining the return on equity will be:

RSK = CHP / SK,

where: RSK - return on equity;

NP is net profit;

SC is the amount of own capital.

Example 4

The balance sheet profit of the organization amounted to 18 million rubles. The current income tax rate is 20%, the size of the equity capital is 22 million rubles, the credit card (attracted) is 15 million rubles, the amount of interest on the loan is 14% (2.1 million rubles). What is the profitability of the IC with and without borrowed funds?

Solution 1 . Net profit (NP) is equal to the sum of balance sheet profit minus the cost of borrowed funds (interest equal to 2.1 million rubles) and income tax from the remaining amount: (18 - 2.1)× 20% = 3.18 million rubles.

PE \u003d 18 - 2.1 - 3.18 \u003d 12.72 million rubles.

The profitability of the IC in this case will have next value: 12,72 / 22 × 100% = 57,8%.

Solution 2 The same indicator without attracting funds from outside will be equal to 14.4 / 22 = 65.5%, where:

NP = 18 - (18× 0.2) = 14.4 million rubles.

Results

Analyzing the data of indicators of the financial leverage ratio and the effect of financial leverage, it is possible to manage the enterprise more efficiently, based on attracting a sufficient amount of borrowed funds, without going beyond conditional financial risks. The formulas and examples given in our article will help you calculate the indicators.