Financial leverage is considered to be the potential ability to manage the profits of the organization by changing the volume and composition 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, drawing up 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 company significantly increases its own risks, because regardless of whether the invested funds have 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 company's equity capital, taking into account the different share of the use of credit funds. Often, when calculating it, the formula is used:

EFL = (1 - Cnp) x (КBРа - PC) х ЗК / СК,
where

• EFL- the effect of financial leverage,%;
• Cnp- the rate of income tax, which is expressed decimal;
• KBPa- coefficient of gross return on assets (characterized by the ratio of gross profit to average asset value),%;
• PC- the average amount of interest on the loan, which the company pays for the use of attracted capital,%;
• ZK- the average amount of borrowed capital used;
• SK- the average amount of the company's equity capital.

Components of financial leverage

This formula has three main components:
1. Tax corrector (1-Снп)- a value indicating how the EFL will change when the level of taxation changes. The enterprise has practically no influence on this value, the tax rates are set by the state. But financial managers can use the change in the tax corrector to obtain the desired effect in the event that some branches (subsidiaries) of an enterprise are subject to different tax policies due to their territorial location and types of activities.
2.Financial leverage differential (KBPa-PC). Its value fully reveals the difference between the gross return on assets and the average interest on a loan. The higher the value of the differential, the greater the likelihood of a positive effect from the financial impact on the company. This indicator is very dynamic, constant monitoring of the differential will allow you to control the financial situation and not miss the moment of declining return on assets.
3. Financial leverage ratio (ZK / CK), which characterizes the amount of credit capital attracted by the enterprise, per unit of equity capital. 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 company and will allow you to get the desired increase in profit.

Leverage Ratio

The leverage ratio shows the percentage of borrowed funds in relation to the company's own funds.
Net borrowings are bank loans and overdrafts less 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-up share capital, recorded at the par value of the shares, plus accumulated reserves. Reserves are retained earnings of the company from the date of incorporation, as well as any increments 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 lenders 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 about 250% - temporarily! This could have been the result of a major takeover that required significant borrowing to pay for the acquisition.

In such circumstances, it is highly likely, however, that the Chairman's report 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 leverage is the heavy burden of interest on borrowings and overdrafts on the P&L account. In the face of a worsening economic environment, profit may well find itself under a double burden. Not only can there be a decrease in trading revenue, but also an increase in interest rates.
One way to determine the effect of leverage on profit is to calculate the interest coverage ratio.
The rule of thumb is that the interest coverage ratio must be at least 4.0, preferably 5.0 or more. This rule should not be neglected, because the loss of financial well-being can become a payback.

Debt ratio

Leverage ratio (debt-to-equity ratio)- an indicator of the financial position of an enterprise, which characterizes the ratio of borrowed capital and all assets of the organization.
The term "financial leverage" is also used to characterize the principled approach to business financing, when with the help of borrowed funds the company forms financial leverage to increase the return on its own funds invested in the business.
Leverage(Leverage - "leverage" or "lever action") is a long-term operating factor, a change in which can lead to a significant change in a number of effective indicators. This term is used in financial management to characterize the dependence showing how an increase or decrease in the share of a certain group of conditionally fixed costs affects the dynamics of income of the firm's owners.
The following names of the term are also used: autonomy ratio, financial dependence ratio, financial leverage ratio, debt burden.
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 allows one to judge the company's efficiency in choosing sources of financing.

Method of calculating the ratio of financial dependence

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

• The coefficient 0.5 is optimal (equal ratio of equity and debt capital).
• 0.6-0.7 - is considered a normal ratio of financial dependence.
• A ratio below 0.5 indicates a too cautious approach of the organization 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, it means that the company has a high dependence on creditors, which indicates a deterioration in the stability of its financial position. The higher the ratio, the more risks the company faces with respect to the potential for bankruptcy or a shortage of cash.

Conclusions from the Debt ratio value
The financial leverage ratio is used to:
1) Comparisons with the industry average, 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, optimal solutions financial managers in matters of choosing objects and sources of investment.
3) Analysis of the structure of debt, namely: the share of short-term debts in it, as well as arrears in the payment of taxes, wages, and various deductions.
4) Determination by lenders of financial independence, stability of the financial position of the organization, which plans to attract additional loans.

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Ural Socio-Economic Institute

Labor Academy and social relations

Department of Financial Management

Course work

By course: Financial Management

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

Form of study: Part-time

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 way to calculate financial leverage

2. Conjugate effect of operating and financial leverage

3. The power of financial leverage in Russia

3.1 Controllable factors

3.2 Business size matters

3.3 The structure of external factors affecting the effect of financial leverage

Conclusion

Bibliography

Introduction

Profit is the simplest and at the same time the most difficult economic category. It received a new content in the context of the country's modern economic development, the formation of real independence of business entities. Being the main driving force of the 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 the formation of profits 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. The priority is the rule that both equity and borrowed funds must provide a return in the form of profit. Competent, effective management of profit formation provides for the construction of appropriate organizational and methodological systems for ensuring this management at the enterprise, knowledge of the main mechanisms of profit formation, the use of modern methods its analysis and planning. One of the main mechanisms for the implementation of this task is financial leverage.

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

The 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 management involves the use of appropriate organizational and methodological systems, knowledge of the basic 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 circulation period of the securities. The costs associated with servicing 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 the costs of enterprises (operating expenses), it is cheaper for the company to use debt as a source of financing than other sources, payments for which are made from net income (for example, dividends on shares). However, an increase in the share of borrowed funds in the capital structure increases the degree of risk of the company's insolvency. 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 influence 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 the return on equity. Financial leverage is an objective factor that arises with the appearance 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 by American concept consists in assessing the level of risk based on fluctuations in net profit caused by a constant value of the company's debt service costs. Its effect 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 leverage ratio: it shows how many times the profit before interest and taxes exceeds the net profit. The lower limit of the coefficient is one. The greater the relative volume 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 is 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 impact of financial leverage, other things being equal, leads to greater financial instability, expressed in less predictability of the net profit. Since the payment of interest, unlike, for example, the payment of dividends, is mandatory, then with a relatively high level financial leverage even a slight decrease in profit can have adverse consequences compared to a situation when the level of financial leverage is low.

The higher the effect of financial leverage, the more non-linear becomes the relationship between net profit and earnings before interest and taxes. A small change (increase or decrease) in earnings before interest and taxes in a high leverage environment 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 that have 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 an enterprise with a higher value of the level of financial leverage.

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

Financial leverage effect(EFR) shows by what percentage the return on equity capital increases by attracting borrowed funds into the company's turnover and is calculated by the formula:

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

where N p is the profit tax rate, in units of shares;

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

Ts zk - the weighted average price of borrowed capital, in unit shares;

ЗК - the average annual cost of borrowed capital; SK is the average annual cost of equity capital.

The above formula for calculating the effect of financial leverage has three components:

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

♦ leverage differential(p a -Ts, k), characterizing the difference between the profitability of the assets of the enterprise and the weighted average calculated interest rate on loans and borrowings;

♦ financial leverage ZK / SC

the amount of borrowed capital per ruble of the company's equity capital. In conditions 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 is not indexed, the effect of financial leverage increases, since debt service and the debt itself are paid for with already impaired money:

EFR = ((1-Np) * (Ra - Tszk / 1 + i) * ZK / SK,

where i is the characteristic of inflation (inflation rate of price growth), in fractions of units.

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

♦ if by different types the activities of the enterprise are differentiated tax rates;

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

♦ if individual subsidiaries of the enterprise carry out their activities in the free economic zones of their country, where there is a preferential profit 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 by the level of its taxation, it is possible, by lowering the average tax rate of profit, to reduce the impact of the tax corrector of financial leverage on its effect (all other things being equal).

The differential of financial leverage is a condition for the occurrence of the effect of financial leverage. A positive EFR occurs when 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 leverage of the financial leverage, i.e. the share of borrowed funds in the capital structure of the enterprise. If P 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 dynamics of this indicator, it requires constant monitoring in the process of profit management. This dynamism is due to a number of factors:

♦ during a period of deteriorating financial market conditions (a drop in the supply of loan capital), the cost of raising borrowed funds may sharply increase, 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 bankruptcy, which forces lenders to raise interest rates for loans, taking into account the inclusion of premiums for additional financial risk. As a result, the 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 profits it generates will be used to service debt at high interest rates;

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

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

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

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

Knowledge of the mechanism of influence of financial leverage on the level of financial risk and profitability of equity capital allows you to purposefully manage both the value and the structure of the company's capital.

1.1 The first way to calculate financial leverage

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

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

1) the volume, structure and efficiency of cost management related to the financing of current and non-current assets;

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

On the basis of profit indicators, indicators of the company's profitability are calculated. Thus, the volume, structure and cost of funding sources of funds affect the profitability of the enterprise.

Businesses are resorting to various sources financing, including through the placement of shares or the attraction of loans and borrowings. The attraction of equity capital is not limited by any time period, therefore the joint-stock company considers the funds raised from shareholders to be its own capital.

Attraction of 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.

A company can work, financing its expenses only from its own capital, but no company can work only on borrowed funds. As a rule, the company uses both sources, the ratio between which forms the structure of the liability. The structure of the liabilities is called the financial structure, the structure of long-term liabilities is called the capital structure. Thus, the capital structure is part of financial structure. Long-term liabilities that make up the capital structure and include equity and a share of term borrowed 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 shares of each of the long-term sources (equity and debt capital) as a result of liabilities.

The use of borrowed funds as a source of financing assets 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 profitability ratios, asset profitability (profit / asset) and return on equity (profit / equity).

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

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

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 adjusted 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 size of their funding sources, i.e. through long-term liabilities (the amount of equity and debt capital):

Assets = equity+ borrowed capital

Substitute the resulting expression of assets into the profit formula:

Profit = return on assets ratio(equity capital + debt capital)

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

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

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

Return on equity = return on assets ratio equity + debt capital (return on assets ratio - 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 ratio is higher than the interest rate on long-term borrowed funds. This phenomenon is called the effect of financial leverage.

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

A quantitative assessment of the strength of the impact of financial leverage is carried out using the following formula:

The strength of the impact of financial leverage = 2/3 (return on assets - the interest rate on loans and borrowings)(long-term borrowed funds / 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 (value) of long-term borrowed funds. In this case, the annual interest rate is adjusted to the term 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 leverage formula 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 capital, called the leverage.

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

The strength of the influence of financial leverage = 2/3 of the differentiallever arm

After taxes are paid, 2/3 of the differentials remain. The formula for the strength of the impact of financial leverage, taking into account the taxes paid, can be presented 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) equal to 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 ratio will increase with the increase in borrowed funds until the average interest rate becomes equal to return on assets ratio. At the moment of equality of the average interest rate and the return on assets ratio, the effect of leverage will “reverse”, 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 leverage should be optimal. It is believed that the optimal level is equal to 1 / 3-1 / 3 of the return on assets.

1.2 The second method of calculating financial leverage

By analogy with production (operational) leverage, the force of 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 influence of financial leverage implies the degree of sensitivity of net profit to changes in gross profit.

1.3 The third way to calculate 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 an investment (earnings before interest and taxes).

The power of financial leverage= percentage change in net income per ordinary share outstanding / percentage change in the net result of operating investments

Consider the indicators included in the formula for financial leverage.

The concept of earnings per ordinary share outstanding.

Net Income Ratio per Share Outstanding = Net Income - Preferred Dividend Amount / Ordinary Shares Outstanding

Number of ordinary shares outstanding = total number of outstanding ordinary shares - own ordinary shares in the company's portfolio

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

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

2) the direct source of dividend payment is not profit, but money;

3) buying up 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 exploitation of the investment. In Western financial management, four main indicators are used to characterize the financial results of an enterprise:

1) added value;

2) the gross result of the exploitation of investments;

3) the net result of the exploitation of investments;

4) return on assets.

1. Value added (ND) represents the difference between the value of products manufactured and the value of consumed raw materials, materials and services.

Added value - value of manufactured products - value of consumed raw materials, materials and services

By its economic essence, added value. represents that part of the value of the social product, which is re-created in the production process. Another part of the value of the social product is the cost of used raw materials, materials, electricity, work force etc.

2. Gross Operational Result of Investment (BREI) represents the difference between value added and costs (direct and indirect) for wages. Tax on salary overruns may also be deducted from the gross result.

Gross result of investment exploitation =value added - expenses (direct and indirect) for labor remuneration - tax on salary overruns

The gross result of the operation of investments (BREI) is an intermediate indicator of the financial results of the enterprise, namely, the indicator of the sufficiency of funds to cover the expenses taken into account in its calculation.

3. Net result of investment exploitation (NREI) is the difference between the gross result of operating investments 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 profit is often taken for the net result of the exploitation of investments, which is incorrect, since the balance profit (profit transferred to the balance sheet) is profit after paying not only interest and taxes, but also dividends.

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

4. Return on assets (RA). Profitability is the ratio of the result to the money spent. The return on assets is understood as the ratio of profit to

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

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

The transformation of the formula for the return on assets will allow to obtain the formulas for the return on sales and the turnover of assets. To do this, we will 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. Let's multiply the numerator and denominator of the fraction (return on assets) by the sales volume and divide the resulting indicator into two fractions:

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

The resulting formula for the return on assets as a whole is called the DuPont formula. The indicators that make up this formula have their own names and their own meaning.

The ratio of the net result of the exploitation of investments to the volume of sales is called commercial margin... In essence, this ratio is nothing more than a profitability ratio.

The indicator "sales volume / assets" is called the transformation ratio, in fact, 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 (profitability of sales) and the transformation ratio (asset turnover).

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

The strength of the impact of financial leverage = percentage change in net profit per ordinary share in circulation / percentage change in net result of operating investments = (net profit - amount of dividends on preferred shares / number of ordinary shares in circulation) / (net result of operating investments / assets) 100%

This formula allows you to estimate the percentage change in the net profit per ordinary share in circulation if the net result of the operation of investments changes by one percent.

2. Conjugate effect of operating and financial leverage

The effect of production (operating) leverage can be combined with the effect of financial leverage to obtain a coupled effect of production (operating) and financial leverage, i.e. production and financial, or general, leverage.

At the same time, the synergistic effect 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 production and financial (general) leverage is greater than the arithmetic sum of the values ​​of indicators of production (operational) and financial leverage.

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 an enterprise.

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

2) financial risk, measured by financial leverage;

3) aggregate risk, measured by the general (production and 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 influence of financial leverage, the greater, and, conversely, the lower the force of influence of financial leverage, the less:

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

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

Combining the actions of production (operational) I and financial leverage means an increase in the overall risk, the risk associated with the enterprise. At the same time, the effect of synergism is manifested, i.e. the value of the aggregate risk is greater than the arithmetic sum of the indicators of production (operational) and financial risks.

3. The power of financial leverage in Russia

In the course of a large-scale study of the possibilities of domestic business for managing the capital structure, at the first stage, the question was investigated: do Russian companies manage their capital structure and do they realize, when building appropriate financial strategies, the financial risk that grows with the increase in borrowed capital? At the second, it was studied whether the real subject of capital structure management is the domestic business itself 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 businesses are trying to play in the financial market using different financing strategies. 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 retained and strengthened their positions in domestic financial market.

The mechanisms for raising capital by large businesses differ from those available to medium and small businesses. If the representatives of the former take 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. It turns out such a picture: today big business and banks faced the global liquidity crisis in the second half of 2007 and finally realized the growing financial risk. It seems that small and medium businesses will have to pay for the underestimation of the risk, and ultimately - the topic for the population of Russia. Conditions for long-term lending in the domestic financial market have tightened - the cost of loans after a long period of decline has sharply increased, volumes have decreased.

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

3.1 Controllable factors

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

The magnitude of the power of influence of financial leverage fairly accurately indicates the degree of financial risk associated with the firm. The greater the share of costs in taxable profit (before interest payments for servicing borrowed capital), the greater the impact of financial leverage and the higher the risk of loan defaults.

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 affecting the EFR and SVFR, let us single out those that companies can control to some extent, and uncontrollable ones related to external factors. The parameter of return on assets can be classified as manageable, although not in full measure, since its value is determined by the qualifications of management, the ability of managers to use the favorable market conditions for the benefit of the company not only when selling products, but also by attracting external capital. The average cost of borrowed capital also refers to 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, and sometimes by scale and industry affiliation. Finally, the leverage, that is, the ratio of debt and equity capital (its structure) is determined by the company itself.

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

Is it possible to increase the EGF by varying the indicated parameters? Does the scale of a company's business depend on its ability to manage, for example, its return on assets?

It is obvious that the profitability of the assets of companies supplying products for export, given a favorable market situation, is by no means always the result of only one control action. Today, companies engaged in the extraction of fuel, energy and other minerals, the production of coke, petroleum products, chemical and metallurgical production and the production of finished metal products, or providing communication services, in a favorable market environment, receive and consume rent. Almost all business in these spheres of activity is represented by large and largest corporations, often with solid state participation.

The extremely favorable market conditions prevailing in the world markets contribute to an increase in the profitability of exporting companies not only when selling products, but also when attracting inexpensive capital in external financial markets. Indeed, not long ago 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. The largest Russian companies often found it simply difficult to refuse loans, since 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 investments - a solid positive trade balance, budget surplus, huge reserves, not too high inflation "1

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

3.2 Business size matters

Large Russian business has already lost the ability to refinance and build up new external 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 us 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, which is not a business-controlled factor. It “works” in favor of domestic corporations, because, as the formula shows, the higher the tax rate, the lower the leverage effect. Russia boasts one of the lowest income taxes in the world, at a rate of 24%. Having gained access to cheap Western loans, domestic big business “skimmed the cream” in this area as well.

Well, and small and medium businesses, inevitably remaining loyal 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 has spilled into the Russian market contributed to a gradual decrease in the cost of domestic loans for corporations. The bank's margin, which reached its maximum in 2004, when the largest banks gained access to the external debt capital market, was gradually decreasing, as a result of which the price of loans on the domestic market also dropped noticeably. It was during that period that the scale of mortgage lending to the population and housing construction grew. Having fallen in price, although still expensive in comparison with Western ones, domestic loans nevertheless found use for themselves, working for Russia.

Medium-sized businesses were looking for and finding new ways to cheaper debt capital. Thus, starting from 2003, the scale of borrowing through the issuance of corporate bonds by medium-sized companies has noticeably expanded. Moreover, bonds were often placed by private subscription, which, as you know, significantly reduces the issuer's costs for the issue. Really, closed way placement of bonds, which is practiced with a relatively small (but sufficient for medium-sized business) issue scale, on the one hand, provides the issuer not only with capital, but also a good credit history for future possible IPOs, and on the other hand, it allows him to get borrowed capital at a cost lower than the bank ...

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

For small businesses, such sources of debt 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 independence, or go into the shadows and develop by reducing tax and off-budget payments.

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

The same situation is observed with respect to domestic banks, which were unable to get access to cheap Western loans. Since the rates on interbank loans, although they decreased, but to a lesser extent than for banks of the first (6-7%) and second circle (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, rates on interbank loans again increased by 1.5-2%, and less for banks in the first and more for the third circle.

Other internal factors that affect financial strategies in different ways are no less significant for domestic business entities. Without considering here in detail, we will list them:

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

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

* industry affiliation of the company, its organizational and legal form, stage 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 great, it can be assumed that the effect of financial leverage is also influenced by external factors in a wider range of directions than internal ones, and, consequently, their influence may be great. External to the business are factors such as the dynamics of bank margins, the average market value of bank loans and non-bank sources for the corporate sector.

Taking into account the changes in the external environment introduced by state policy in different spheres of the 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's focus on those factors of the external environment that are regulated by the market and the state.

3.3 The structure of external factors affecting the effect of financial leverage

The indicators of the impact on the financial behavior of the company of external factors that cause the strengthening or weakening of the effect of financial leverage, we will consider changes in government policy and market conditions in world markets. The influence of market conditions on the world markets for raw materials, metals and other products of low value added, as well as on the financial markets by the end of 2007 has basically already been considered. We only add that the volatility of the ruble and major currencies used for international settlements also noticeably changes the financial behavior of Russian companies and banks, primarily those with access to foreign markets.

Exchange rate and interest rates

The peculiarity of the current situation is that over the past two years, the US dollar, 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 ruble is declining against the European currency, in the last 3-4 years the rate of this decline has slowed down, which forces large exporters, including Russian ones, to switch to the euro.

As you know, the dependence of the national currency exchange rate on the inflation rate 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 inflation rate is most clearly manifested when calculating the exchange rate based on export prices. In this respect, both Russia and the United States are in approximately equal position, with the only exception that Russian oil and gas exports are accompanied by a long and high rise in world prices for these products, which has a positive effect on the balance of payments of Russia, and the United States in an expensive environment. and unsuccessful military operations in the Middle East have 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 privileges, government guarantees and subsidies of interest rates, subsidies and loans. However, to a greater extent, the Russian state supports large corporations and banks, as a rule, with solid state participation, that is, itself. But small and medium-sized businesses get little from the stream of benefits pouring into big business. 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 much more stringent than those for large businesses.

The exchange rate and the direction of movement of world capital are also influenced 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, while the movement of speculative, “hot” money increases the volatility of the balance of payments. But regulation of interest rates is unlikely to be productive due to the need to control liquidity, which means it can impede economic growth. At the same time, the Central Bank has lowered the rate of contributions to the Mandatory Reserve Fund for ruble deposits. This measure is justified by the fact that in Europe the required reserve rates are lower, and Russian banks find themselves in unequal conditions.

Conclusion

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

1. Factors external and internal in relation to business affect the effect of financial leverage and the strength of its impact, and this is reflected in different ways on the financial behavior of domestic companies and banks of various sizes.

2. External factors associated with government regulation of certain areas of business (taxation, dynamics of the cost of bank loans, government funding of business support programs, etc.), as well as with the impact of the market (yield of bonds and stocks, price dynamics on the world market, rate dynamics currencies, etc.), have more than strong influence than internal factors driven by the business itself.

3. 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 the most of the effect of financial leverage in their financial strategies, is the significant participation of the state in these largest corporations and banks. Thus, for the latter, state regulation is not an absolutely external factor.

5. Really deals with the management of 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. For big business, this is done by the state, creating most favored nation treatment for it.

6. Management of the capital structure and the formation of appropriate financial strategies by small and medium-sized businesses push them out of the legal field, since the financial market in Russia today is built and adjusted to the interests of large businesses with state participation.

7. The global liquidity crisis, in which the Russian economy is also involved through large-scale loans from large businesses in the external financial market, may further weaken the financial capabilities of medium and small businesses and lead to massive bankruptcies of enterprises of these categories, while large business 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, poor management can lead to an increase in debt and the inability to pay off debts. On the other hand, with skillful leadership, with the help of borrowed funds, you can save and increase your own funds. Therefore, borrowing money can bring both benefit and harm.

Bibliography

1. Galitskaya S.V. Financial management. The financial analysis. Enterprise finance: textbook. allowance / S.V. Galitskaya. - 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. study. / A.N. Gavrilov [and others]. - M.: KnoRus, 2009 .-- 1 p.

4. Financial management: textbook. manual for universities / A.N. Gavrilov [and others]. - 5th ed., Erased. - M.: KnoRus, 2009 .-- 432 p.

5. Financial management: textbook. manual for universities / A.N. Gavrilov [and others]. - 5th ed., Erased. - M.: KnoRus, 2008 .-- 432 p.

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

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

8. Nikitina N.V. Financial management: textbook. allowance / N.V. Nikitin. - M.: KnoRus, 2009 .-- 336 p.

9. Savitskaya G.V. Analysis of the economic activity of the enterprise: textbook / G.V. Savitskaya. - 5th ed., Rev. and add. - M.: INFRA-M, 2009 .-- 536 p. - (Higher education)

10. Kozenkova T. Models and forms of organization of financial management / T. Kozenkova, Yu. Svatalova // Your partner is a consultant. - 2009. - No. 25. - S.

11. Cheremisina T.P. The Power of Financial Leverage in Modern Russia / T.P. Cheremisin // ECO. - 2008. - No. 5. - S. 27-41.

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

The effect of financial leverage is an increase in the profitability of own funds obtained through the use of a loan, despite the fact that the latter is paid.

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

РСС - net profitability of own funds;

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 value of the interest rate. Then the effect of financial leverage (EFR) arises:

(3)

Let's consider the mechanism of financial leverage. A differential and a leverage are distinguished in the mechanism.

Differential - the difference between the economic return on assets and the average calculated interest rate (AIR) on borrowed funds.

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

Leverage of financial leverage - characterizes the strength of the impact of financial leverage.

(4)

Combining both components of the leverage effect, we get:

(5)

(6)

Thus, the first way to calculate the level of leverage 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 a loan at all, or at least calculate the maximum maximum amount of a loan that leads to growth.

If the rate of the loan is higher than the level of economic profitability of the tourist enterprise, then the increase in the volume of production due to this loan will lead not to the return of the loan, but to the transformation of the enterprise's activities from profitable to unprofitable.

There are two important rules to highlight here:

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

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

You should not increase the leverage of the 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 profitability of assets.

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

The advantage of the rational use of financial leverage is the ability to generate income from the use of capital borrowed at a fixed interest rate in investment activities that bring a higher interest than paid. In practice, the value of financial leverage is influenced by the scope of the enterprise, legal and credit restrictions, and so on. Excessive leverage is dangerous for shareholders, as it carries a significant amount of risk.

Commercial risk means uncertainty about the possible result, the uncertainty of this result of activity. Recall 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 occurring as a result of any operations in the financial, credit and exchange spheres, operations with stock securities, that is, the risk that arises from the nature of these operations. Financial risks include credit risk, interest rate risk, foreign exchange risk, and the risk of foregone financial gain.

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 and borrowings. The increase in financial leverage is accompanied by an increase in the degree of riskiness of the given enterprise. This is manifested in the fact that for two tourism enterprises that have the same production volume, but a different level of financial leverage, the variation in net profit due to a change in production volume will not be the same - it will be greater for an enterprise with a higher value of the level of financial leverage.

The effect of financial leverage can also be interpreted as a change in net profit per ordinary share (in percent) generated by a given change in the net result of investment exploitation (also in percent). This perception of the effect of financial leverage is characteristic mainly of the American school of financial management.

With the help of this formula, they answer the question, by what percentage will the net profit for each ordinary share change if the net result of the investment operation (profitability) changes by one percent.

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

Hence the conclusion: the higher the interest and the lower the profit, the greater the strength of 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, in which the value of an enterprise share will be the highest. This, in turn, becomes possible with a sufficiently high, but not excessive, effect of financial leverage. The level of indebtedness is for the investor a market indicator of the well-being of the enterprise. The extremely high share of borrowed funds in liabilities indicates an increased risk of bankruptcy. If a tourist company prefers to do with its own funds, then the risk of bankruptcy is limited, but investors, receiving relatively modest dividends, believe that the company is not pursuing the goal of maximizing profits, and begin to dump shares, reducing the market value of the company.

There are two important rules:

1. If the net result of the exploitation of investments per share is small (and the differential of financial leverage is usually negative, the net profitability of equity and the level of dividend is reduced), then it is more profitable to increase own funds through the issue of shares than to take out a loan: borrowing means costs the enterprise more expensive than raising its own funds. However, there may be difficulties in the IPO process.

2. If the net result of the exploitation of investments per share is large (and the differential of financial leverage is most often positive, the net profitability of equity capital and the level of dividend are increased), then it is more profitable to take out a loan than to increase its own funds: raising borrowed funds costs the enterprise cheaper than raising your own funds. It is very important: it is necessary to control the strength of the impact of financial and operational leverage in the event of their possible simultaneous increase.

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

(10)

1. The rate of increasing the turnover of the enterprise. Increased growth rates of turnover also require increased funding. This is due to an increase in variable, and often fixed costs, an almost inevitable swelling accounts receivable, as well as for many other very different reasons, including cost inflation. Therefore, on a steep rise in turnover, firms tend to rely not on internal, but on external financing, with an emphasis on an increase in the share of borrowed funds in it, since issuance costs, the cost of an initial public offering 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 large share of borrowed funds in liabilities and more significant fixed costs;

3. The level and dynamics of profitability. It is noticed that the most profitable enterprises have a relatively low share of debt financing on average over a long period. The business generates sufficient profits to finance development and pay dividends and is increasingly managing its own funds;

4. The structure of assets. If an enterprise has significant general-purpose assets, which by their very nature are capable of serving 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 incentives and opportunities to use accelerated amortization, the more attractive debt financing is for an enterprise due to the attribution of at least part of the interest for the loan to the prime cost;

6. The attitude of creditors to the company. The game of supply and demand in the money and financial markets determines the average conditions for credit financing. But the specific conditions for the provision of this loan may deviate from the average, depending on the financial and economic situation of the enterprise. Whether the bankers are competing for the right to provide a loan to the enterprise, or whether the money has to be begged from creditors - that is the question. The real possibilities of the enterprise in forming the desired structure of funds largely depend on the answer to it;

8. Acceptable degree of risk for company managers. The people at the helm may be more or less conservative in determining acceptable risk when making financial decisions;

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

10. State of the market for short-term and long-term capital. In an unfavorable situation on the money and capital market, it is often necessary to simply obey the circumstances, postponing until better times the formation of a rational structure of sources of funds;

11. Financial flexibility of the enterprise.

Example.

Determination of the size of the financial leverage of the economic activity of the enterprise on the example of the hotel "Rus". We will determine the appropriateness of the amount of the attracted loan. The structure of enterprise funds is presented in Table 1.

Table 1

The structure of financial resources of the enterprise of the hotel "Rus"

Index	The magnitude
Initial Values
Hotel assets minus credit debt, RUB mln	100,00
Borrowed funds, million rubles	40,00
Own funds, million rubles	60,00
Net result of investment exploitation, mln. Rub.	9,80
Debt servicing costs, RUB mln	3,50
Calculated values
Economic profitability of own funds,%	9,80
Average calculated interest rate,%	8,75
Differential of financial leverage excluding income tax,%	1,05
Differential of financial leverage, taking into account income tax,%	0,7
Leverage of financial leverage	0,67
Financial leverage effect,%	0,47

Based on these data, the following conclusion can be drawn: the hotel "Rus" can take out loans, but the differential is close to zero. Minor changes in production process or higher interest rates could reverse the leverage. There may come a time when the differential is less than zero. Then the effect of financial leverage will act to the detriment of the hotel.

Economic analysis Litvinyuk Anna Sergeevna

30. Leverage (financial leverage). Financial leverage effect

Financial leverage ("financial leverage") is a financial mechanism for managing the return on equity by optimizing the ratio of equity and borrowed funds used. Thus, the financial leverage allows you to influence profit by optimizing the capital structure.

The effect of financial leverage is an indicator that reflects the increment in the profitability of equity obtained through the use of a loan, despite the fact that the latter is paid. It is calculated using the following formula:

EFL = (1? NP)? (R A?% Avg.) ZK / SK,

where EFL is the effect of financial leverage, which consists in an increase in the return on equity ratio,%; ПН - income tax rate, expressed as a decimal fraction; Р А - coefficient of gross profitability of an asset (the ratio of gross profit to the average value of assets),%; % Wed- the average amount of interest on a loan paid by the company for the use of borrowed capital,%; 3K - the average amount of borrowed capital used by the enterprise; SK is the average amount of the company's equity capital.

The above formula for calculating the effect of financial leverage allows us to distinguish three main components in it:

1. Tax corrector of financial leverage (1-NP), which shows the extent to which the effect of financial leverage manifests itself in connection with different levels of taxation of profits.

2. Differential financial leverage (R A?% Avg.), Which reflects the difference between the gross return on assets and the average rate of interest on a loan.

3. Leverage of financial leverage ZK / SK, which characterizes the amount of borrowed capital used by the company, per unit of equity.

The tax corrector of financial leverage practically does not depend on the activities of the enterprise, since the income tax rate is established by law. In the process of managing financial leverage, a differential tax corrector can be used in the following cases:

Differentiation of the rate of taxation of profits or the availability of tax benefits for various types of activities of the enterprise;

Carrying out the activities of subsidiaries of the enterprise in offshore zones or countries with a different tax climate. The financial leverage differential is the main

a condition that forms a positive effect of financial leverage, if the level of gross profit generated by the assets of the enterprise exceeds the average rate of interest for the loan used. The higher the positive value of the financial leverage differential, the higher, other things being equal, will be its effect.

Financial leverage is the leverage that has a positive or negative effect on the differential. With a positive value of the differential, any increase in the financial leverage ratio will cause an even greater increase in the return on equity ratio, and with a negative value of the differential, an increase in the financial leverage ratio will lead to an even greater rate of decrease in the return on equity ratio. Thus, with a constant differential, the leverage of financial leverage is the main generator of both an increase in the amount and level of profit on equity, and the financial risk of losing this profit. Similarly, with a constant leverage of financial leverage, the positive or negative dynamics of its differential generates both an increase in the amount and level of return on equity, and the financial risk of its loss.

Knowledge of the mechanism of influence of financial capital on the level of profitability of equity capital and the level of financial risk allows you to purposefully manage both the value and the structure of the company's capital.

The quantitative value of the influence of factors on the change in the resulting indicator is found by applying one of the special techniques of economic analysis.

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From the author's book

Financial Leverage The third leverage on ROE is financial. The company increases this indicator by increasing the ratio of debt to equity to finance the business. In contrast to the return on sales and the asset turnover ratio,

Financial leverage(or leverage) is the method of influencing the profit indicators of an organization by varying the volume and composition of long-term liabilities.

Financial leverage just reveals the essence of this phenomenon, since "leverage" (leverage) is translated from English as "a device for lifting weights."

Financial leverage action shows whether it is so necessary at the moment to attract borrowed funds, because an increase in their share in the structure of liabilities will lead to an increase in the return on equity.

What does the financial leverage consist of?

An economic formula is used to calculate the impact of financial leverage, which is based on its three components:

• Tax corrector... It characterizes the change in the effect of financial leverage with a simultaneous increase in the volume of the tax burden. This indicator does not depend on the activities of the enterprise, since tax rates are regulated by the state, but the company's financiers can play on changing the tax corrector if subsidiaries apply different tax policies depending on the territory or type of activity.
• Financial leverage ratio... Another parameter of financial leverage is calculated by dividing borrowed funds by equity. Accordingly, it is this ratio that shows whether the financial leverage will have a positive effect on the company's activities, depending on what the ratio will be.
• Financial leverage differential. The latter measure of leverage can be obtained by subtracting the average interest paid on all loans from the return on assets. How more value this component, the more likely the possibility of a positive impact of financial leverage on the organization. By constantly recalculating this indicator, financiers can track the moment at which the return on assets begins to decline and intervene in time in the current situation.

The sum of all three components will show the amount of funds attracted from the outside, which is necessary to obtain the required increase in profit.

How is leverage calculated? Calculation formula

Consider three ways to assess the impact of the impact of financial leverage(or leverage):

1. The first method is the most common. Here the effect is calculated according to the following scheme: the difference between the unit and the tax rate in equity is multiplied by the difference in the return on assets in percent and the average interest on the loans paid. The amount received is multiplied by the ratio of borrowed and own funds. V literal expression the formula looks like this:

EFL = (1- SNp) x (KVRa - PC) x ЗС / SS.

Thus, three options are possible the impact of financial leverage on the activities of the organization:

• positive effect- CVRa is higher than the average lending rate;
• zero effect- the return on assets and the rate are equal;
• negative effect, if the average interest on loans is lower than the CWR.

1. The second method is built on the same principle as the operating lever... The effect of financial leverage is described here in terms of the rate of increase or decrease in net profit and the rate of change in gross profit. To obtain the value of the strength of the financial leverage, the first indicator is divided by the second. This value will show how strongly the profit after taxes and contributions depends on the gross profit.
2. Another way to determine the impact of financial leverage- This is the ratio of the percentage changes in net income per ordinary share due to changes in the net result of operating investments.

Net result of investment exploitation Is one of the indicators of the company's financial results, which is used in financial management abroad. In simple terms, it is profit before taxes and other fees and interest, or operating profit.

The third method determines the effect of financial leverage by determining the amount of interest by which the organization's net income per non-preferred share will rise or fall if the operating profit changes by one percent.

Financial dependence ratio. How to calculate?

The financial dependence ratio (Kfz) shows whether the company is dependent on external funding sources and, if dependent, how much. In addition, the ratio helps to see the structure of capital as a whole, that is, both debt and equity.

The coefficient is calculated according to the following formula:

Dependency ratio = Sum of short-term and long-term liabilities / Amount of assets

After calculation under normal conditions, the coefficient is in the range of 0.5 ÷ 0.7. What does it mean:

• Kfz = 0,5. This is the best result in which liabilities are equal to assets, and the financial stability of the company is high.
• Kfz is equal to the value 0.6 ÷ 0.7. This is still an acceptable range of values ​​for the ratio of financial dependence.
• Kfz< 0,5. Such values ​​indicate untapped opportunities for the firm due to the fact that it is afraid to attract loans, thus increasing the profitability of its capital.
• Kfz> 0.7. Financial stability the firm is weak because it is overly dependent on external borrowing.

Financial leverage effect. Effect calculation

Financial leverage, or rather the effect of its impact, determines by what amount the percentage of profitability of the company's own assets will increase if funds are attracted from outside.

Impact of financial leverage Is the difference between the total assets of the company and all loans.

Formula for calculating the effect of financial leverage has already been presented above. It includes indicators of the tax rate (NP), return on assets (Rakt), the weighted average price of borrowed capital (CZS), the cost of borrowed capital (LC) and equity (CC) funds and looks like this:

EFL = (1- NP) x (Rakt - Tszs) x ZS / SS.

The EPL value should be in the range from 0.33 to 0.5.

Financial leverage and profitability

We have already described the relationship between the concepts of "financial leverage" and "profitability of the organization", more precisely, "return on equity".

To increase the profitability of its own funds, the company must not only attract, but also properly dispose of borrowed capital. And how successfully the management of the enterprise does it and will show the effect of financial leverage.

Leverage ratio

The seemingly complex name hides only the ratio of the amount of borrowed funds and own funds. There are several other names for this value, for example, leverage or debt ratio.

The last name makes it clear that the ratio reflects the share that funds attracted from outside occupy among all sources of company funds.

There is a formula for calculating the financial leverage ratio:

, where

• DR- leverage ratio;
• CL- Short-term liabilities;
• LTL- long term duties;
• EC- equity;
• LC- total attracted capital (the sum of short-term and long-term borrowed funds).

The normal value of this ratio is in the range from 0.5 to 0.8.

There are several things to consider when calculating the leverage ratio:

• When calculating, it would be better to take into account non-accounting data, and the market value of assets. This is due to the fact that large enterprises have a much higher market value of their own funds than the book value. If you use balance sheet indicators in the calculation, then the ratio will turn out to be incorrect.
• Too high leverage ratio is often obtained by enterprises, where in the assets the largest share is occupied by liquid ones, for example, from credit and trade organizations. Stable demand and sales guarantee them a stable flow of money, that is, a constant increase in the share of their own funds.

Leverage Ratio

This indicator allows you to find out how many percent of the borrowed capital in the company's own funds, and, in other words, shows the ratio of the company's borrowed funds and its own capital.

The coefficient is calculated according to the following formula:

KFR = Net Borrowing / Equity Amount

In other words, net borrowing- these are all liabilities of the company minus its liquid assets.

In this case, own funds are represented by those amounts on the balance sheet that the shareholders have invested in the organization: this is the authorized capital or the par value of shares, as well as the reserves accumulated in the course of the company's activities.

Retained earnings of the enterprise since its inception, the revaluation of property assets is what reserve accumulations are.

Sometimes the financial leverage ratio can reach critical values:

• Kfr ≥ 100%. This means that the amount of borrowed funds is at least equal to own funds, and may have exceeded them, which means that creditors bring money to the enterprise much larger than their own shareholders.
• More than 200%. There are cases when KFR exceeded 250%. This situation already speaks of the complete absorption of the company by its creditors, because most of the sources of funds consist of borrowed funds.

It is not easy to get out of such situations and extreme measures can be taken to reduce the value of the leverage ratio and, accordingly, the debt, for example, the sale of several of the company's core activities.

Financial Leverage Indicator

The essence of the financial leverage indicator is it is a measurement of a firm's financial risks. The leverage becomes longer if the share of the company's borrowed capital grows, and this, in turn, makes the financial condition more unstable and can threaten the company with serious losses.

But, at the same time, an increase in the share of funds attracted from outside also increases profitability, only this time of own funds.

Financial analysis knows two ways to calculate financial leverage indicators(lever):

1. Coverage indicators.

This group of indicators allows you to assess, for example, the coverage of interest on the payment of debt. With this indicator, the gross profit and the cost of payments on loans are correlated and they look at what amount the profit in this case covers the costs.

1. Using loan liabilities as a means of financing company assets.

The debt indicator, which is calculated by dividing the sum of all liabilities by the sum of all assets, shows how the firm is able to repay existing loans and receive new ones in the future.

Too high value of the debt ratio indicates too little financial flexibility of the company and a small amount of assets with large debts.

Output

So financial leverage- this is an opportunity for the company to manage the profit obtained by changing the volume and structure of capital, both equity and debt.

Entrepreneurs resort to the action of the effect of financial leverage when they plan to increase the income of the enterprise.

In this case they attract credit money, replacing their own funds.

But do not forget that an increase in the company's liabilities always entails an increase in the level of financial risks of the organization.