A decrease in financial leverage indicates... Financial leverage (financial leverage)

Financial leverage characterizes the ratio of all assets to equity capital, and the effect financial leverage is calculated accordingly by multiplying it by the indicator of economic profitability, that is, it characterizes profitability equity(ratio of profit to equity capital).

The effect of financial leverage is an increase in the profitability of equity capital obtained through the use of a loan, despite the payment of the latter.

An enterprise using only its own funds limits its profitability to approximately two-thirds of economic profitability.

РСС – net return on equity;

ER – economic profitability.

An enterprise using a loan increases or decreases the profitability of its own funds, depending on the ratio of its own and borrowed funds in liabilities and on the interest rate. Then the financial leverage effect (FLE) arises:

(3)

Let's consider the mechanism of financial leverage. The mechanism includes differential and leverage.

Differential - the difference between the economic profitability of assets and the average calculated interest rate (ASRP) for borrowed funds.

Due to taxation, unfortunately, only two thirds remain of the differential (1/3 is the profit tax rate).

Leverage of financial leverage – characterizes the strength of the influence of financial leverage.

(4)

Let's combine both components of the financial leverage effect and get:

(5)

(6)

Thus, the first way to calculate the level of financial leverage effect is:

(7)

The loan should lead to an increase in financial leverage. In the absence of such an increase, it is better not to take out a loan at all, or at least calculate the maximum maximum amount of loan that leads to growth.

If the loan rate is higher than the level of economic profitability of the tourism enterprise, then increasing the volume of production due to this loan will not lead to the repayment of the loan, but to the transformation of the enterprise’s activities from profitable to unprofitable.

Here we should highlight two important rules:

1. If new borrowing brings the enterprise an increase in the level of financial leverage effect, then such borrowing is profitable. But at the same time, it is necessary to monitor the state of the differential: when increasing the leverage of financial leverage, the banker is inclined to compensate for the increase in his risk by increasing the price of his “product” - a loan.

2. The lender’s risk is expressed by the value of the differential: the larger the differential, the lower the risk; the smaller the differential, the greater the risk.

You should not increase your financial leverage at any cost; you need to adjust it depending on the differential. The differential must not be negative. And the effect of financial leverage in world practice should be equal to 0.3 - 0.5 of the level of economic return on assets.

Financial leverage allows you to assess the impact of an enterprise's capital structure on profit. The calculation of this indicator is appropriate from the point of view of assessing past effectiveness and planning future financial activities enterprises.

Advantage rational use financial leverage is the ability to generate income from the use of capital borrowed at a fixed interest rate in investment activities that generate a higher interest rate than the one paid. In practice, the value of financial leverage is influenced by the field of activity of the enterprise, legal and credit restrictions, and so on. Too high a value of financial leverage is dangerous for shareholders, as it is associated with a significant amount of risk.

Commercial risk means uncertainty in a possible result, the uncertainty of this result of activity. Let us remind you that risks are divided into two types: pure and speculative.

Financial risks are speculative risks. An investor, making a venture capital investment, knows in advance that only two types of results are possible for him: income or loss. A feature of financial risk is the likelihood of damage as a result of any operations in the financial, credit and exchange spheres, transactions with stock securities, that is, the risk that arises from the nature of these operations. Financial risks include credit risk, interest rate risk, currency risk, and the risk of lost financial profits.

The concept of financial risk is closely related to the category of financial leverage. Financial risk is the risk associated with a possible lack of funds to pay interest on long-term loans. An increase in financial leverage is accompanied by an increase in riskiness of this enterprise. This is manifested in the fact that for two tourism enterprises with the same production volume, but different levels of financial leverage, the variation in net profit due to changes in production volume will not be the same - it will be greater for the enterprise with a higher level of financial leverage.

The effect of financial leverage can also be interpreted as the change in net profit per each ordinary share (as a percentage) generated by a given change in the net result of operating an investment (also as a percentage). This perception of the effect of financial leverage is typical mainly for the American school of financial management.

Using this formula, they answer the question by how many percent the net profit for each ordinary share will change if the net result of operating the investment (profitability) changes by one percent.

After a series of transformations, you can go to the formula the following type:

Hence the conclusion: the higher the interest and the lower the profit, the more strength financial leverage and the higher the financial risk.

When forming a rational structure of sources of funds, one must proceed from the following fact: find such a ratio between borrowed and own funds, at which the value of the company's shares will be the highest. This, in turn, becomes possible with a sufficiently high, but not excessive, effect of financial leverage. The level of debt is a market indicator for the investor of the well-being of the enterprise. Extremely high specific gravity borrowed funds in liabilities indicates an increased risk of bankruptcy. If a tourist enterprise prefers to make do with its own funds, then the risk of bankruptcy is limited, but investors, receiving relatively modest dividends, believe that the enterprise does not pursue the goal of maximizing profits, and begin to dump shares, reducing the market value of the enterprise.

There are two important rules:

1. If the net result of operating investments per share is small (and the differential of financial leverage is usually negative, the net return on equity and the level of dividends are reduced), then it is more profitable to increase own funds by issuing shares than to take out a loan: attracting borrowed funds funds are more expensive for the enterprise than raising its own funds. However, there may be difficulties in the initial public offering process.

2. If the net result of operating investments per share is large (and the differential of financial leverage is most often positive, the net return on equity and the level of dividends are increased), then it is more profitable to take out a loan than to increase equity: raising borrowed funds costs the enterprise cheaper than raising your own funds. It is very important: control over the power of influence of financial and operating leverage is necessary in case of their possible simultaneous increase.

Therefore, you should start by calculating net return on equity and net earnings per share.

(10)

1. The rate of increase in the enterprise’s turnover. Increased turnover growth rates also require increased financing. This is due to an increase in variable and often fixed costs, the almost inevitable swelling of accounts receivable, as well as many other very various reasons, including cost inflation. Therefore, during a steep rise in turnover, firms tend to rely not on internal, but on external financing, with an emphasis on increasing the share of borrowed funds in it, since issue costs, costs of initial public offerings and subsequent dividend payments most often exceed the cost of debt instruments;

2. Stability of turnover dynamics. An enterprise with a stable turnover can afford a relatively larger share of borrowed funds in liabilities and more significant fixed costs;

3. Level and dynamics of profitability. It has been noted that the most profitable enterprises have a relatively low share of debt financing on average over a long period. The enterprise generates sufficient profit to finance development and pay dividends and operates increasingly with its own funds;

4. Asset structure. If the company has significant assets general purpose, which by their very nature can serve as collateral for loans, then an increase in the share of borrowed funds in the liability structure is quite logical;

5. The severity of taxation. The higher the income tax, the fewer tax benefits and opportunities to use accelerated depreciation, the more attractive debt financing is for the enterprise due to the attribution of at least part of the interest on the loan to the cost price;

6. Attitude of creditors to the enterprise. The play of supply and demand in the money and financial markets determines the average conditions for credit financing. But the specific conditions for providing this loan may deviate from the average depending on the financial and economic situation of the enterprise. Do bankers compete for the right to provide a loan to an enterprise, or do they have to beg money from lenders - that is the question. The real capabilities of the enterprise to form the desired structure of funds largely depend on the answer to it;

8. Acceptable degree of risk for enterprise managers. People at the helm may be more or less conservative in their determination of acceptable risk when making financial decisions;

9. Strategic target financial guidelines of the enterprise in the context of its actually achieved financial and economic position;

10. State of the short- and long-term capital market. In unfavorable conditions on the money and capital markets, one often has to simply submit to circumstances, postponing until better times the formation of a rational structure of sources of funds;

11. Financial flexibility of the enterprise.

Example.

Determining the amount of financial leverage economic activity enterprises using the example of the Rus Hotel. Let us determine the feasibility of the amount of the loan attracted. The structure of the enterprise's funds is presented in Table 1.

Table 1

Structure of financial assets of the Rus Hotel enterprise

Based on these data, we can draw the following conclusion: the Rus Hotel can take out loans, but the differential is close to zero. Minor changes V production process or rising interest rates may reverse the leverage effect. There may come a time when the differential becomes less than zero. Then the effect of financial leverage will act to the detriment of the hotel.

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. Using paid borrowed capital, the 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 rule is that both own and borrowed funds must provide a return in the form of profit. The effect of financial leverage (leverage) characterizes the feasibility and efficiency of an enterprise's use of borrowed funds as a source of financing business activities.

Financial leverage effect (E.F.R.) 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 such return on assets that Money was enough 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. Average settlement rate set according to the formula:

Where: JV– average calculated rate for a loan; FI k– 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.

General formula to calculate the effect of financial leverage (EFF) can be expressed:

Where: N– profit tax rate in fractions of a unit; R A– economic profitability of assets (based on the amount of profit before taxes and interest on loans); JV- average calculated interest rate for a loan in%; ZK- borrowed capital; SK- equity.

1. Tax proofreader (1–H), shows to what extent E.F.R. is manifested. due to different levels of taxation. It does not depend on the activities of the enterprise, because The income tax rate is approved by law.

In the process of managing F.R. a differentiated tax corrector can be used in cases where: 1) by various types differentiated tax rates have been established for the activities of the enterprise; 2) by certain species activities of the enterprise use income tax benefits; 3) individual subsidiaries (branches) of the enterprise carry out their activities in free economic zones both in their own country and abroad.

2. Lever differential (R A–SP) characterizes the difference between economic profitability and the average interest rate for a loan, i.e. it is the main factor that forms the positive value of E.F.R. Condition R A >SP specifies a positive E.F.R., i.e. the use of borrowed capital will be beneficial for the enterprise. The higher the positive value of the differential, the more significant, other things being equal, the value of E.F.R.

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: (1) during the 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; (2) a 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 forces an increase in interest rates for loans, taking into account the premium for additional risk. Differential F.R. then it can be reduced to zero or even to 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; (3) 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.

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

3. Financial leverage (financial dependence ratio K.F.Z.) reflects the amount of borrowed capital used by the organization per unit of equity capital. It is a multiplier that changes the positive or negative value of the differential.

If positive at the nominal value of the differential, any increase in K.F.Z. will lead to an even greater increase in return on equity. At negative value differential increase K.F.Z. will lead to an even greater drop in return on equity.

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

Combining the three components of the effect (tax corrector, differential and K.F.Z.), we obtain the value of E.F.R. 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 coefficient of financial dependence. 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 positive value differential (with a constant return on equity capital).

From the above, we can draw the following conclusions: (1) if new borrowing brings the enterprise an increase in the level of E.F., R, 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; (2) the lender’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 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.

The second method of calculating E.F.R. 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, E.F.R. determined by the following formula:

Where ∆P H A- percentage change in net profit per ordinary share; ∆P V A- percentage change in gross profit per ordinary 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 impact of financial leverage, the higher the level of financial risk of the enterprise in this case: (1) for a commercial bank, the risk of non-repayment of the loan and interest on it increases; (2) for the investor, the risk of a reduction in dividends on shares of the issuing enterprise that he owns 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 interest on it are not indexed, E.F.R. increases because debt service 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 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.

Leverage (from the English leverage) has the following meanings:

proportion, the ratio of capital investments in fixed income securities, for example, bonds, preferred shares, and investments in non-fixed income securities, for example, ordinary shares;

the ratio of the stock of goods and the amount of capital;

A company's equity to debt ratio.

Possible spelling of the term - leverage, leverage - Lozovsky L.Sh., Raizberg B.A., Ratnovsky A.A. Universal business dictionary. - M.: INFRA - M., 1997. - p. 190.

Leverage- the use of borrowed funds at a fixed interest rate to increase profits for common stockholders. Also known as the “leverage principle” and generally describes the lending process - Van Horne J.K. Fundamentals of financial management.: Per. from English / Ch. ed. series by Ya.V. Sokolov. - M.: Finance and Statistics, 1996. - p. 449.

Financial leverage effect- This is an increase in the profitability of equity capital obtained through the use of a loan, despite the payment of the latter. - Financial management: theory and practice. Textbook / Under. ed. E.S. Stoyanova. - M.: Publishing house "Perspective", 1998. - p. 150.

From different definitions Financial leverage (leverage) shows that an additional effect from investing and operating funds in the course of the enterprise’s activities can be obtained by using borrowed funds with a fixed interest rate. Such funds also include funds raised through the issuance of bonds and preferred shares, which also provide for the payment of fixed interest.

Let's consider an example of the effect of financial leverage.

Background information:

Based on the results of its activities in 1999, the American stationery company called Red Tape was successful in the market of Eastern Europe. Her self-sharpening pencils were especially popular. The Eastern European market was not yet saturated with them and, trying to expand its influence in this sector as quickly as possible before the arrival of competitors, the Red Tape company, represented by the administration, planned to purchase additional equipment for the production of self-sharpening pencils, which will double production capacity. This required an additional $1 million. Heated disputes broke out between the company's president, Walter, and the chairman of the board of directors, Stevens, over the sources of financing. The essence of the disagreement was as follows:

Walter proposed issuing $1 million worth of common stock in the amount of 10,000 shares with a face value of $100, which aroused the concerns of Stevens, who had a controlling stake in the Red Tape company. Stevens feared losing control of the company, whose authorized capital at the time of the dispute was $1 million, and Stevens's share in it was 52 percent (i.e., a total of $520 thousand). He understood that after issuing additional shares worth $1 million, the company's authorized capital would be $2 million, and his $520,000 would give him a 26 percent stake, which is not at all enough for a controlling stake.

Stevens proposed organizing the issue of corporate bonds in the amount of $1 million in the amount of 10 thousand pieces with a par value of $100, since in this case the value authorized capital doesn't change, which suits Stevens just fine. This proposal outraged Walter, because, in his opinion, the issue of bonds, increasing the level of debt of the company as a whole, worsens the indicator of financial stability. Even Stevens's proposal to lower the dividend rate to the level of the interest rate on bonds (up to 10 percent per annum) did not affect Walter's opinion, who believes that this does not provide any gain for the company.

It is necessary, taking the position of Chairman of the Board of Directors Stevens, to prove that the issue increases the sources of financing for the Red Tape company compared to the issue of ordinary shares, taking into account that:

1. The income tax rate is 0.5;

2. The total profitability of production (before interest and taxes) is 20 percent per annum.

The company's performance results various sources financing subject to an income tax rate of 0.5 and the total profitability of production (before interest and tax) is 20 percent per annum, are presented in Table 7.

Table 7. Financial results of the company

As can be seen from the above calculation, according to Stevens’ option, the company at the end of the year will have additional financing of 50 thousand dollars of retained earnings. This, in turn, increases the stock's yield to 15 percent, which Stevens is naturally interested in as well. The effect of financial leverage is evident.

How does financial leverage work?

It is easy to see that this effect arises from the discrepancy between economic profitability and the “price” of borrowed funds - the average interest rate (AR). In other words, the enterprise must achieve such economic profitability (ER) that there are enough funds at least to pay interest on the loan. The average interest rate, as a rule, does not coincide with the interest rate mechanically taken from the loan agreement. A loan at 60 percent per annum for a period of 3 months (1/4 year) actually costs 15 percent.

Interest payments on loans can come from two main sources. First, they can be written off against the cost of products manufactured by the enterprise, within the limits of the Central Bank rate plus 3 percent. Taxes do not affect this part of financial costs. The second source is profit after taxes. In this case, when analyzing to obtain actual financial costs, the corresponding interest amounts must be increased by the amounts transferred to the state budget in the form of taxes.

For example: the amount of interest paid from the profit remaining at the disposal of the enterprise is 100 thousand rubles.

The profit tax rate is 35 percent.

Actual financial costs in terms of interest paid from the profit remaining at the disposal of the enterprise - 135 thousand rubles.

In addition to formula (62), you can calculate the average interest rate not from the arithmetic mean, but from the weighted average cost of various loans and borrowings. You can also count as borrowed funds the money received by the enterprise from the issue of preferred shares. Some economists insist on this because preferred shares pay a guaranteed dividend, which makes this method of raising capital similar to borrowing funds and, in addition, when an enterprise is liquidated, the owners of preferred shares have almost equal rights to what is owed to them as creditors. But in this case, the financial costs should include the amount of dividends, as well as expenses for the issue and placement of these shares.

And if, for example, the standard for attributing interest to cost at the end of 1998 was (60% + 3%) = 63%, and the loan was provided to the enterprise at 70% per annum, then, taking into account tax savings, such a loan would cost the borrower (1 - 0. 35) 63% + (1 + 0.35) (70% - 63%) = 50.40%.

To calculate the effect of financial leverage, we highlight the first component - this is the so-called differential, those. the difference between the economic return on assets (ER) and the average calculated interest rate (AS). Taking into account taxation, the differential is equal to or approximately 2/3 (ER-SP).

The second component is lever arm- characterizes the force of the lever. This is the ratio between debt and equity. Let's combine both components of the lever effect and get:

Let's take enterprise A, which has 250 thousand rubles. own and 750 thousand rubles. borrowed money. The economic return on assets for enterprise A is 20 percent.

Borrowing costs, say, 18 percent. For such an enterprise, the leverage effect will be

The first way to calculate the level of financial leverage effect:

Based on the basic definition of the effect of financial leverage, return on equity (ROC) will be determined by formula 65:

When using borrowed funds, you should remember two important rules:

If new borrowing brings the company an increase in the level of financial leverage, then such borrowing is profitable. But at the same time, it is necessary to carefully monitor the state of the differential: when increasing leverage, the banker is inclined to compensate for the increase in his risk by increasing the price of his “product” - a loan.

The lender's risk is expressed by the value of the differential: the larger the differential, the lower the risk; the smaller the differential, the greater the risk.

Credit conditions may worsen with an irrepressible increase in borrowing.

Enterprise A, considered above, with a leverage effect of 4 percent and a differential of 2 percent, with an increase in the cost of credit by only 1 percentage point, will have to increase the leverage 6 to maintain the previous leverage effect.

EGF = 2/3 (20% - 19%) 6 = 4%.

To compensate for an increase in loan costs of just 1 percentage point, enterprise A is forced to double the ratio between borrowed and equity funds.

Then there may come a time when the differential becomes less than zero. The effect of leverage will then act only to the detriment of the enterprise if, for example, with a nine-fold ratio of borrowed and equity funds, you have to pay an average rate of 22 percent on a loan, then the effect of leverage and the return on equity of enterprise A will be:

To identify the optimal relationships between return on equity, economic return on assets, average interest rate and leverage, we will draw graphs (Fig. 6).

From these graphs it is clear that smaller gap between Er and the average interest rate (AR), the larger the share that must be allocated to borrowed funds to raise the RSS, but this is unsafe when the differential decreases.

For example, to reach 33 percentage between the leverage effect and PCC (when the success of an enterprise is 1/3 ensured by the financial side of the business and 2/3 by production), it is desirable to have

lever arm 0.75 at ER = 3SP

lever arm 1.0 at ER = 2SP

lever arm 1.5 at ER = 1.5SP

Thus, ER = 3 SRSP

ER = 2 SRSP

ER = 1.5 SRSP

The second concept of the financial leverage effect

The effect of financial leverage can also be interpreted as the percentage change in net income for each ordinary share generated by a given percentage change in the net result of operating an investment (earnings before interest on loans and taxes). This perception of the effect of financial leverage is typical mainly for the American school of financial management.

According to the second concept of the effect of financial leverage, the strength of the impact of financial leverage is determined by formula 66:

Using this formula, they answer the question by how many percent the net profit for each ordinary share will change if the net result of operating the investment changes by one percent.

Based on the fact that the net operating result of investments (NREI) can be calculated as the sum of book profit and financial costs of the loan attributable to the cost of production, formula (66) can be transformed as follows:

Using this formula, the following conclusions can be drawn: the greater the power of financial leverage, the greater the financial risk associated with the enterprise:

1. The risk of not repaying the loan with interest for the banker increases.

2. The risk of falling dividends and stock prices for the investor increases.

When comparing 2 enterprises with the same level of economic profitability (Profit from sales/all Assets), the difference in m/d between them may be the absence of loans in 1 of them, while the other actively attracts borrowed funds (PE/SC). That. the difference lies in the different level of return on equity obtained through a different structure of financial sources. The difference in m/d between two levels of profitability is the level of the effect of financial leverage. EGF there is an increase in the net return on equity obtained as a result of using a loan, despite its payment.

EFR=(1-T)*(ER - St%)*ZK/SC, where T is the income tax rate (in shares), ER-eq. profitability (%), St% - average interest rate on the loan,

ER = Sales Profit/Total Assets. ER characterizes the investment attractiveness of an enterprise. There is no efficiency in using all capital, despite the fact that you still have to pay interest on the loan.

The first component of the EGF is called differential and characterizes the difference between the economic profitability of assets and the average calculated interest rate on borrowed funds (ER - SRSP).

The second component - financial leverage (financial activity ratio) - reflects the ratio between borrowed and equity funds (ZK/SK). The larger it is, the greater the financial risks.

The effect of financial leverage allows you to:

Justify financial risks and assess financial risks.

Rules arising from the EGF formula:

If new borrowing brings an increase in the level of EGF, then it is beneficial for the organization. It is recommended to carefully monitor the state of the differential: when increasing financial leverage, the bank tends to compensate for the increase in its own risk by increasing the loan price

The larger the differential (d), the lower the risk (accordingly, the smaller d, the greater the risk). In this case, the lender's risk is expressed by the value of the differential. If d>0, you can borrow if d<0, то высокие риск - не рекомендуется занимать, эффект от использования ЗК меньше суммы % за кредит; если d=0, то весь эффект от использования ЗК пойдет на уплату % за кредит.

EGF represents an important concept that, under certain conditions, allows one to assess the impact of debt on the profitability of an organization. Financial leverage is typical for situations where the structure of sources of capital formation contains obligations with a fixed interest rate. In this case, an effect similar to the use of operating leverage is formed, that is, profit after interest increases/declines at a faster rate than changes in the volume of output.

The advantage of fin. lever: capital borrowed by an organization at a fixed interest rate can be used in the process of activity in such a way that it will generate a higher profit than the interest paid. The difference accumulates as the organization's profit.

The effect of operating leverage affects the result before financial expenses and taxes are taken into account. EFR occurs when an organization is in debt or has a source of financing that entails the payment of constant amounts. It affects net income and thus return on equity. EGF increases the impact of annual turnover on return on equity.

Total leverage effect = Operating leverage effect*Financial leverage effect.

With a high value of both levers, any small increase in the annual turnover of an organization will significantly affect the value of its return on equity capital.

The effect of operating leverage is the presence of a relationship between changes in sales revenue and changes in profit. The strength of operating leverage is calculated as the quotient of sales revenue after reimbursement of variable costs by profit. The action of operating leverage generates entrepreneurial risk.