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, very often, in order to jumpstart growth or launch new directions, it is necessary to attract external capital. For a modern economy with a well-developed banking sector and exchange structures, gaining access to borrowed capital is not difficult.

Capital Balance Theory

When recruiting borrowed money It is important to maintain a balance between your payment obligations and your goals. By violating it, you can get a significant decrease in the pace of development and a deterioration in all indicators.

According to the Modigliani-Miller theory, the presence of a certain percentage of debt 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 affordable service price allow you to use them for promising directions, in this case, the money multiplier effect will work, when one invested unit will give an increase in an additional unit.

But if there is a high share of borrowed funds, the company may fail to fulfill its both internal and external obligations due to an increase in the amount of loan servicing.

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

Financial leverage (leverage), definition

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

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

Shoulder Components

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

1. Taxes, namely the tax burden that a company bears when carrying out its activities. Tax rates are set by the state, so the company this issue can regulate the level of tax deductions only by changing the selected tax regimes.
2. Financial leverage indicator. This is the debt to equity ratio. This indicator alone can give an initial idea of ​​the price of attracted capital.
3. Financial leverage differential. Also a compliance indicator, which is based on the difference in the profitability of assets and the interest paid for loans taken.

Financial leverage formula

You can calculate the financial leverage ratio, the formula of which is quite simple, as follows.

Leverage = Amount of debt capital / Amount equity

At first glance, everything is clear and simple. The formula shows that the leverage ratio is the ratio of all borrowed funds to equity capital.

Leverage, effects

Leverage (financial) is associated with borrowed funds, which are aimed at developing the company, and profitability. Having determined the capital structure and obtained the ratio, that is, by calculating the financial leverage ratio, the formula for which is presented on the balance sheet, you can assess the efficiency 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 into 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 increasing leverage is profitable and you can attract additional borrowed capital.

If the effect has a negative sign, then measures should be taken to prevent losses.

American and European interpretations of the leverage effect

Two interpretations of the leverage effect are based on which accents are taken into account to a greater extent in the calculation. This is a more in-depth look at how the financial leverage ratio shows the magnitude of the impact on a company's financial results.

American model or concept considers financial leverage through net profit and profit received after the company has made 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 them with the effect of using debt capital. In other words, the concept is based on assessing the profitability of each type of capital.

Conclusion

Any company strives, at a minimum, to achieve a break-even point, and, at a maximum, to obtain high profitability indicators. There is not always enough equity capital to achieve all the goals set. Many companies resort to borrowing funds for development. It is important to maintain a balance between your own capital and attracted capital. It is to determine how well this balance is maintained at the current time that the financial leverage indicator is used. It helps determine how much the current capital structure allows for additional debt.

Any commercial activity is associated with certain risks. If they are determined by the structure of capital sources, then they belong to the group of financial risks. Their most important characteristic is the ratio of equity to borrowed funds. After all, attracting external financing involves paying interest for its use. Therefore, in the event of negative economic indicators (for example, a decrease in sales volume, personnel problems, etc.), the company may face an unsustainable debt load. At the same time, the price for additionally attracted capital will increase.

Financial occurs when the company uses borrowed funds. A normal situation is when the payment for borrowed capital is less than the profit it brings. When this additional profit is combined with the income received from equity, an increase in profitability is observed.

In the commodity and stock markets, financial leverage represents margin requirements, i.e. the ratio of the deposit amount to the total transaction value. This ratio is called leverage.

The financial leverage ratio is directly proportional to the financial risk of the enterprise and reflects the share of borrowed funds in financing. It is calculated as the ratio of the sum of long-term and short-term liabilities to the company's own funds.

Its calculation is necessary to control the structure of sources of funds. Normal value for this indicator ranges from 0.5 to 0.8. Companies that have stable and well-predicted dynamics can afford a high ratio financial indicators, as well as enterprises with a high share of liquid assets - trading, sales, banking.

The effectiveness of debt capital largely depends on the return on assets and the lending interest rate. If the profitability is lower than the rate, then it is unprofitable to use borrowed capital.

Calculation of the effect of financial leverage

To determine the correlation between financial leverage and return on equity, an indicator called the financial leverage effect is used. Its essence is that it reflects how much interest equity capital grows when using borrowings.

The effect of financial leverage arises due to the difference between the return on assets and the cost of borrowed funds. To calculate it, a multifactor model is used.

The calculation formula is as follows: DFL = (ROAEBIT-WACLC) * (1-TRP/100) * LC/EC. In this formula, ROAEBIT is the return on assets calculated through earnings before interest and taxes (EBIT), %; WACLC - weighted average cost of borrowed capital, %; EC - average annual amount of equity capital; LC - average annual amount of borrowed capital; RP - profit tax rate, %. The recommended value for this indicator is in the range from 0.33 to 0.5.

Introduction

Today, in the modern economy, the capital of an enterprise and its effective use occupy a very important place. Correct and complete use of capital is the main source of profit for the company. Therefore, the organization must promptly identify ways to increase it and methods of effective use.

In order to determine the optimal ratio of own and borrowed funds, an indicator such as the effect of financial leverage comes to the rescue.

The relevance of this topic lies in the fact that effective and correct formation capital structure will lead to a greater increase in profits and expansion of production.

The object of study of the course work is the company OJSC Gazprom.

The subject of research in this work is to assess the effectiveness of using one’s own and borrowed capital enterprises. The purpose of the course work is to find out whether OAO Gazprom effectively uses its own and borrowed capital. To achieve this goal, it is necessary to solve the following tasks:

Study the concept and essence of financial leverage and its effect:

Consider the procedure for calculating the effect of financial leverage;

Become familiar with the concepts of the financial leverage effect and identify their differences;

Conduct an analysis of the assessment of the effect of financial leverage using the example of the OJSC Gazprom enterprise.

The main source for analysis in this course work served as the company’s financial statements, namely Form No. 1, Form No. 2 “On Comprehensive Income”, Form No. 3 “Cash Flow Statement”.

When writing this work I used educational literature in disciplines such as financial management and economic analysis. Other Internet sources were also used.

The concept and essence of the financial leverage effect

It's no secret - in order for an enterprise to be able to correctly and effectively manage the formation of its profits, certain knowledge and skills are required. In modern economics, many organizational and methodological concepts are used, as well as methods of analysis and profit planning.

Those companies that plan to use borrowed capital in their activities know that the obligations to raise funds remain unchanged throughout the duration of the loan agreement or the circulation period of the securities.

The costs that will entail the attraction of borrowed sources of financing do not change in any way with an increase/decrease in production volume and the number of products sold. At the same time, these costs directly affect the amount of profit that the company has at its disposal.

Obligations to raise loans or use debt securities are considered operating expenses, so borrowed funds are generally less expensive for a company than other sources of financing. At the same time, an increase in the share of borrowed funds in the capital structure increases the level of risk of insolvency of the company. It follows that it is necessary to determine the optimal combination between equity and debt capital.

To determine the correct and effective combination of capital elements, companies often use financial leverage.

This is called financial leverage economic phenomenon, which is caused by attracting borrowed sources of financing regardless of their cost. At the same time, the return on equity will increase faster than the economic return on assets.

Financial leverage makes it possible to manage a company's profit by changing the ratio of equity and borrowed funds.

This tool determines the impact of the capital structure on the profit of the enterprise. The size of the ratio of borrowed capital to equity also characterizes the degree of risk and financial stability. The smaller the lever, the more stable the position. When a company raises debt capital, it faces fixed costs to pay interest, which in turn increases the risk of the enterprise.

An indicator reflecting the level of additional profit when using borrowed capital is called the effect of financial leverage. This indicator is the most important factor, which influences the decision on the ratio of elements in the capital structure. If the company's borrowed funds are aimed at financing such activities that will give the company a profit greater than the cost of paying interest on the loan, the level of profitability of the company's equity will increase. It follows that in this situation, attracting borrowed funds is advisable. But if the return on assets turns out to be less than the cost of borrowed capital, profitability own funds will decrease accordingly. It follows that in this situation, attracting borrowed capital will have an adverse effect on financial position companies.

The effect of financial leverage is calculated using the following formula:

EGF = (1 - Cn) H (KR - %cr) H ZK/SK, where:

EFR - effect of financial leverage, %;

Сн -- income tax rate;

ERA - economic return on assets;

%kr - interest on the loan;

ZK - borrowed capital;

SK -- equity

This formula has three elements:

(1-Сн) - tax corrector;

(ERA - %cr) - differential;

ZK/SC - financial leverage (financial leverage)

Let's consider the first element of the formula - “(1-Сн)”, which is called “tax corrector”. It makes it possible to see to what extent the effect of financial leverage is manifested depending on the different level of income taxation. A tax adjustment when using borrowed funds arises because the amount of financial costs reduces the tax base for income tax.

The next element of the EFR formula is the financial leverage differential “(ERA - %cr)”. It shows the difference between the economic return on assets and the average calculated interest rate on borrowed funds. The financial leverage differential characterizes the boundaries of a safe increase in the financial leverage for which economic effect from the use of assets exceeds the amount of financial costs.

The third component of the formula is the financial leverage “ZK/SK”. This element characterizes the structure of financing sources, that is, the ability of borrowed capital to influence the company’s profit. By highlighting the above elements, a company can purposefully manage the effect of financial leverage in the course of economic activity.

Based on this, two conclusions can be drawn:

The efficiency of using borrowed capital depends on the relationship between return on assets and the interest rate for the loan. If the loan rate is higher than the return on assets, the use of borrowed capital is unprofitable.

Other things being equal, greater financial leverage produces a greater effect.

There are several reasons why capital structure needs to be managed:

a) If the company attracts cheaper sources of financing, then profitability can increase significantly and compensate for the risks that have arisen.

b) If you combine various elements capital, the company can increase its market value and investment attractiveness.

Search for a rational relationship between various sources financing (that is, between debt capital and equity) serves main goal capital structure management.

The optimal capital structure is a compromise between the maximum possible tax savings (when using borrowed sources of financing) and additional costs that arise with an increase in the share of borrowed capital.

The main point of using the effect of financial leverage is that it becomes possible to direct borrowed funds to those projects that could bring greater profits and compensate for the costs associated with attracting borrowed capital. For example, a company, having spent a smaller amount of money paying for interest on a loan, will be able to get a high profit on the invested funds. In simple words borrowed capital will work and bring great benefits, covering certain costs associated with its attraction. Of course, this does not always happen; you need to take into account the economic situation on the market and the profitability of the enterprise itself. At any moment, a situation may arise that the company will not be able to pay for the loans, this may have a detrimental effect on its reputation or even lead to bankruptcy.

The effect of financial leverage sets the limit of the economic feasibility of borrowing funds. That is, using this indicator, you can determine the optimal ratio of capital elements at which profits will increase. We can also add that the effect of financial leverage shows a change in the return on equity due to the use of borrowed funds. The EFR can be both positive and negative. Therefore, the company must also take into account the likelihood of a negative effect when the cost of borrowed funds exceeds economic profitability.

EGF is a fairly dynamic indicator that requires constant monitoring in the process of managing the effect of financial leverage. Debt financing costs may increase significantly during periods of deteriorating market conditions. Therefore, there is a need to timely identify negative market conditions. The generally accepted value of the financial leverage effect is 3050% of the level of return on assets.

A financial assessment of a company’s stability indicators is essential for successful organization and planning of its activities. Financial leverage is used quite often in this analysis. It allows you to assess the capital structure of an organization and optimize it.

The investment rating of the enterprise, the possibility of development, and an increase in profits depend on this. Therefore, in the process of planning the work of the analyzed object, this indicator plays an important role. The method of its calculation and interpretation of the research results deserve special attention. The information obtained during the analysis is used by the company's management, founders and investors.

General concept

Financial leverage is an indicator characterizing the degree of risk of a company at a certain ratio of its borrowed and own sources of financing. Translated from English, “leverage” means “lever.” This suggests that when one factor changes, other indicators associated with it are affected. This ratio is directly proportional to the financial risk of the organization. This is a very informative technique.

In a market economy, the indicator of financial leverage should be considered not from the point of view of the balance sheet assessment of equity capital, but from the perspective of its real assessment. For large enterprises that have been operating successfully in their industry for a long time, these indicators are quite different. When calculating the financial leverage ratio, it is very important to take into account all the nuances.

General meaning

Using a similar methodology at an enterprise, it is possible to determine the relationship between the ratio of equity and borrowed capital and financial risk. Using free sources of business support, you can minimize risks.

At the same time, the company's stability is the highest. By using paid debt capital, a company can increase its profits. The effect of financial leverage involves determining the level of accounts payable at which the return on total capital will be maximum.

On the one hand, using only its own financial sources, the company loses the opportunity to expand its production, but on the other hand, too high a level of paid resources in the overall structure of the balance sheet currency will lead to the inability to pay off its debts and will reduce the stability of the enterprise. Therefore, the leverage effect is very important when optimizing the balance sheet structure.

Calculation

Kfr = (1 - N)(KRA - K)Z/S,

where N is the income tax coefficient, KRA is return on assets, K is the rate for using a loan, Z is borrowed capital, C is equity capital.

KRA = Gross Profit/Assets

This technique combines three factors. (1 – N) – tax corrector. It is independent of the enterprise. (KRA – K) – differential. Salary is financial leverage. This technique allows you to take into account all conditions, both external and internal. The result is obtained as a relative value.

Description of components

The tax adjuster reflects the degree of impact of changes in income tax percentages on the entire system. This indicator depends on the type of activity of the company. It cannot be lower than 13.5% for any organization.

The differential determines whether it will be profitable to use the total capital, taking into account the payment of interest rates on loans. Financial leverage determines the degree of influence of paid sources of financing on the effect of financial leverage.

With the overall impact of these three elements of the system, it was found that the normatively fixed value of the coefficient is determined in the range from 0.5 to 0.7. The share of credit funds in the total structure of the balance sheet currency should not exceed 70%, otherwise the risk of debt default increases and financial stability decreases. But if its amount is less than 50%, the company loses the opportunity to increase profits.

Calculation method

Operating and financial leverage are an integral part of determining the efficiency of a company's capital. Therefore, the calculation of these quantities is mandatory. To calculate financial leverage, you can use the following formula:

FR = KRA – RSC, where RSC is return on equity.

For this calculation, it is necessary to use the data presented in the balance sheet (form No. 1) and the income statement (form No. 2). Based on this, you need to find all the components of the above formula. Return on assets is found as follows:

KRA = Net profit/Balance currency

KRA = s. 2400 (f. No. 2)/s. 1700 (f. No. 1)

To find return on equity, you need to use the following equation:

RSC = Net profit/Equity capital

RSK = s. 2400 (f. No. 2)/s. 1300 (f. No. 1)

Calculation and interpretation of the result

To understand the calculation methodology presented above, it is necessary to consider it in specific example. To do this, you can take the data from the company’s financial statements and evaluate them.

For example, the company's net profit in the reporting period amounted to 39,350 thousand rubles. At the same time, the balance sheet currency was fixed at the level of 816,265 rubles, and the equity capital in its composition reached the level of 624,376 rubles. Based on the above data, it is possible to find financial leverage:

KRA = 39,350/816,265 = 4.8%

RSC = 39,350/624,376 = 6.3%

FR = 6.3 – 4.8 = 1.5%

Based on the above calculations, we can say that the company, thanks to the use of credit funds, was able to increase profits in the reporting period by 50%. Financial leverage from return on equity is 50%, which is optimal for effective management of borrowed funds.

Having become familiar with the concept of financial leverage, we can come to the conclusion that the methodology for calculating it allows us to determine the most effective ratio of credit funds and own liabilities. This allows the organization to receive greater profits by optimizing its capital. Therefore, this technique is very important for the planning process.

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 effect of financial leverage (leverage) characterizes the feasibility and effectiveness of an enterprise’s use of borrowed funds as a source of financing economic activities.

Financial leverage effect lies in the fact that an enterprise, using borrowed funds, changes the net profitability of its own funds. This effect arises from the discrepancy between the return on 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 that there will be enough funds to pay interest on the loan and pay income taxes.

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 determined by the formula:

SP = (FIK: amount of GS) X100,

JV – average calculated rate for a loan;

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

LC amount – the total amount of borrowed funds raised in the billing period.

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

EGF = (1 – Ns) X(Ra – SP) X(ZK: SK),

EGF – effect of financial leverage;

NS – profit tax rate in fractions of a unit;

Ra – return on assets;

JV - average calculated interest rate for a loan in%;

ZK - borrowed capital;

SK - equity.

The first component of the effect is tax corrector (1 – Ns), shows to what extent 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 profit tax rate is approved by law.

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

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

By certain species activities of the enterprise use income tax benefits;

individual subsidiaries (branches) of the enterprise carry out their activities 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 shaping the positive value of the financial leverage effect. 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 dynamics of this indicator, it requires systematic monitoring in the management process. The dynamism of the differential is determined by a number of factors:

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

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

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

Thus, a negative differential leads to a decrease in the return on equity capital, which makes its use ineffective.

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

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

By combining the three components of the effect (tax adjuster, differential and debt ratio), we obtain the value of the financial leverage effect. This calculation method 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 existence of a 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 capital).

From the above, we can do the following conclusions:

if new borrowing brings the enterprise an increase in the level of financial leverage effect, 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 lender's risk is expressed by the value of the differential, because the higher the differential, the lower the bank's credit risk. Conversely, if the differential becomes less than zero, then the effect of leverage 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 company with a negative differential.

Thus, the debt of an enterprise to a commercial bank is neither good nor bad, 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 accept reasonable, pre-calculated risks, within the limits of a positive differential. This rule is also important for the bank, because a borrower with a negative differential creates distrust.

Financial leverage is a mechanism that a financial manager can master only if he has accurate information about the profitability of the enterprise’s assets. Otherwise, it is advisable for him to handle 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 considered as a percentage (index) change in net profit for each 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 = percentage change in net earnings per common share: percentage change in gross earnings per common share.

The lower the power of financial leverage, the lower the financial risk associated with a given enterprise. If borrowed funds are not involved in circulation, then the power of financial leverage is equal to 1.

The greater the power 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 an investor, the risk of a reduction in dividends on his shares of the issuing enterprise increases with high level financial risk.

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

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