Financial leverage. Financial leverage of the enterprise

Reasons for attracting debt capital: the company has good (in the opinion of its owners and top managers) opportunities to implement a certain project, but does not have sufficient own sources of financing. Profit, as the most accessible source of own funds, is limited, borrowed capital on the market banking services not limited. Very often, profits are dispersed across different assets and therefore profits cannot be used directly for financing transactions.
During mobilization debt capital real money arises at a time and in large amounts.

Raising debt capital to enhance the economic potential of an enterprise requires proper justification.
EGF = (ROA - Tsk) x (1 - Kn) x ZK/SK, where ROA is the economic profitability of total capital before taxes (the ratio of the amount of book profit to the average annual amount of total capital), %;
Tsk - weighted average price of borrowed resources (ratio of costs for servicing debt obligations to the average annual amount of borrowed funds), %;
Кн - taxation coefficient (the ratio of the amount of taxes from profit to the amount of balance sheet profit) in the form of a decimal fraction;
ZK - average annual amount of borrowed capital;
SK is the average annual amount of equity capital.

The effect of financial leverage shows by what percentage the amount of equity capital increases due to the attraction of borrowed funds into the turnover of the enterprise. Positive effect of financial leverage occurs in cases where the return on total capital is higher than the weighted average price of borrowed resources, i.e. if ROA > Tsk. For example, the after-tax return on total equity is 15%, while the cost of debt is 10%. The difference between the cost of borrowed funds and the return on total capital will increase the return on equity. Under such conditions, it is beneficial to increase financial leverage, i.e. share of borrowed capital. If ROA is negative, the effect of financial leverage (the “stick” effect), resulting in a depreciation of equity capital, which may cause bankruptcy of the enterprise.

In conditions of inflation, if debts and interest on them are not indexed, the EFR and return on equity(ROE) increase because debt service and the debt itself are paid for with already depreciated money.
Then the effect of financial leverage will be equal to: EGF = x (1 - Kn) x ZK/SK + (I x ZK)/SK x 100%, where I is the inflation rate as a decimal fraction.

Attracting borrowed funds changes the structure of sources, increases the financial dependence of the company, increases the financial risk associated with it, and leads to an increase in WACC. This is precisely what explains the importance of such a characteristic as financial leverage.

The essence, significance and effect of financial leverage:

  • a high share of borrowed capital in the total amount of financing sources is characterized as high level financial leverage and indicates a high level of financial risk;
  • financial leverage indicates the presence and degree of financial dependence of the company on landers;
  • attracting long-term loans and borrowings is accompanied by an increase in financial leverage and, accordingly, financial risk;
  • the essence of financial risk is that regular payments (for example, interest) are mandatory, therefore, if the source is insufficient, and this is earnings before interest and taxes, it may be necessary to liquidate part of the assets;
  • for a company with a high level of financial leverage, even a small change in earnings before interest and taxes due to known restrictions on its use (first of all, the requirements of landers, i.e. third-party suppliers of financial resources, are satisfied, and only then - the owners of the enterprise) can lead to a significant change in net profit.
Theoretically, financial leverage can be equal to zero - this means that the company finances its activities only from its own funds, i.e. capital provided by owners and profits generated; such a company is often called a financially independent (unlevered company). In the event that borrowed capital is raised (bond issue, long-term loan), the company is considered as a financially dependent company.
Measures of financial leverage:
  • debt/equity ratio;
  • the ratio of the rate of change in net profit to the rate of change in gross profit.
The first indicator is very visual, easy to calculate and interpret, the second is used to quantify the consequences of the development of the financial and economic situation (production volume, product sales, forced or targeted change pricing policy etc.) under the conditions of the chosen capital structure, i.e. selected level of financial leverage.

Suppose there are two enterprises with similar levels of economic profitability and the same value of assets. However, only own funds, and the second - own and borrowed.

A situation arises in which, despite the same economic profitability, due to differences in the financing structure, different meanings return on equity (ROC). This difference in these performance indicators of two organizations is called the “financial leverage effect.”

How sources of financing activities affect profitability

The financial leverage effect (FLE) is an increase in the return on equity that occurs as a result of the use of loans, despite their payment. This leads to two conclusions:

1) An enterprise that uses only its own funds in its activities, without resorting to the services of credit institutions, keeps their profitability within the limits of RCC = (1-T)*ER, where T is the value of the interest rate of income tax.

2) An enterprise that uses funds received on credit to carry out its activities changes the RSS - increases or decreases it depending on the size of the interest rate and the ratio of shares of borrowed and equity funds. In such situations, such a phenomenon as the effect of financial leverage arises.

RSS=(1-T)*ER+EGF

To determine the value of the EFR, it is necessary to find the value of an indicator called the average interest rate (ASRP). This indicator is found as the ratio of existing financial costs for credit funds to the total amount of funds borrowed by the enterprise.

Components of the financial leverage effect

The effect of financial leverage is formed by two components:

1. Differential: (1-T)*(ER-SRSP).

2. Leverage of financial leverage, which is the ratio of borrowed funds to equity.

The formula for calculating the EGF is determined by the product of these two components.

Basic rules

1. The effect of financial leverage shows whether a loan will be beneficial for the enterprise. Positive value EGF indicator means that raising borrowed funds will be beneficial for the organization and expedient.

2. Attracting an additional loan increases the value of the financial leverage indicator; accordingly, the risk of non-repayment of borrowed funds also increases. This is compensated by increasing interest rates on loans. Consequently, the average interest rate also increases.

3. The effect of financial leverage also determines whether the enterprise has the ability to attract additional credit funds in an emergency. To do this, you need to monitor the value of one of its components - the differential. The differential must be positive, and a certain margin of safety in this indicator must be maintained.

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

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

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

What does financial leverage consist of?

To calculate the impact that financial leverage has, an economic formula is used, which is based on three components:

  • Tax proofreader. Characterizes a 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 activity of the enterprise, since tax rates are regulated by the state, but the company’s financiers can play on changes in the tax adjuster 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 financial leverage will have a positive impact on the company’s activities, depending on what the ratio turns out to be.
  • Financial leverage differential. The final measure of leverage can be obtained by subtracting the average interest paid on all loans from the return on assets ratio. 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 monitor the moment at which the return on assets begins to decline and intervene in the current situation in a timely manner.

The sum of all three components will show the volume of funds raised from outside that is necessary to obtain the required increase in profit.

How is financial leverage calculated? Calculation formula

Let's look at three ways to assess 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 fractional terms is multiplied by the difference in the return on assets ratio as a percentage and the average interest on loans paid. The resulting amount is multiplied by the ratio of borrowed and equity funds. IN literal expression the formula looks like this:

EFL = (1- SNP) x (KVRa – PC) x ZS/SS.

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

  • positive effect— KVR is higher than the average lending rate;
  • zero effect— return on assets and rate are equal;
  • negative effect, if the average interest rate on loans is lower than the CVR.
  1. The second method is built on the same principle as the operating lever. The influence of financial leverage is described here through 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 financial leverage, the first indicator is divided by the second. This value will show how much profit after taxes and contributions depends on gross profit.
  2. Another way to determine the impact of financial leverage is the ratio of the percentage changes in net profit for each ordinary share due to a change in the net result of operating the investment.

Net result of investment exploitation is one of the indicators of a company’s financial performance, which is used in financial management abroad. Speaking in simple words, this 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 profit per non-preferred share will increase or decrease if operating profit changes by one percent.

Financial dependency ratio. How to calculate?

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

The coefficient is calculated using the following formula:

Financial dependence ratio = Sum of short-term and long-term liabilities / Sum of assets

After calculation at normal conditions the coefficient is in the range 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 financial dependence ratio.
  • Kfz< 0,5. Such values ​​indicate the untapped capabilities of the company due to the fact that it is afraid to attract loans, thus increasing the profitability of its capital.
  • Kfz > 0.7. The financial stability of the company is weak because it is overly dependent on external loans.

The effect of financial leverage. Effect calculation

Financial leverage, or rather the effect of its influence, determines by what amount the percentage of profitability of the enterprise’s own assets will increase if cash will be brought in from outside.

Impact of financial leverage is the difference between the company's total assets and all loans.

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

EFL = (1- NP) x (Rakt – Zs) x ZS/SS.

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

Financial leverage and profitability

The relationship between the concepts of “financial leverage” and “organizational profitability”, or more precisely, “return on equity capital”, has already been described previously.

To increase the profitability of its own funds, the company needs not only to attract, but also to properly manage borrowed capital. And how successfully the management of the enterprise does this will show the effect of financial leverage.

Leverage ratio

Behind the seemingly complex name lies only the ratio of the amount of borrowed funds and equity. There are several other names for this value, for example, financial leverage or debt ratio (from English “debt ratio”).

By last name it becomes clear that the ratio reflects the share that funds raised from outside occupy among all sources of funds of the company.

There is a formula for calculating the financial leverage ratio:

, Where

  • D.R.– leverage ratio;
  • C.L.– short-term liabilities;
  • LTL– long-term liabilities;
  • E.C.– own capital;
  • L.C.– total raised capital (sum of short-term and long-term borrowed funds).

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

There are a few things to consider when calculating your leverage ratio:

  • When calculating, it would be better to take into account not the 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 their balance sheet value. If you use balance sheet indicators in the calculation, the coefficient will be incorrect.
  • Enterprises often have too high a financial leverage ratio, where the largest share of assets is occupied by liquid ones, for example, in 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.

Financial leverage ratio

This indicator allows you to find out what percentage of borrowed capital is in the company's own funds, and, more simply, shows the ratio of the company's borrowed funds and its equity capital.

The coefficient is calculated according to the following formula:

KFR = Net borrowing / Amount of own funds

In other words, net borrowing- These are all the company's liabilities minus its liquid assets.

In this case, equity capital is represented by the amounts on the balance sheet that shareholders invested in the organization: this is the authorized capital or par value of shares, as well as reserves accumulated during the company’s activities.

Retained earnings of the enterprise from its very foundation, the revaluation of property objects is reserve accumulation.

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 even exceed them, which means that creditors bring for the enterprise sums of money much larger than its own shareholders.
  • More than 200%. There are known cases when the CFR exceeded 250%. This situation already indicates the complete absorption of the company by its creditors, because most of the sources of funds consist of borrowed funds.

Such situations are not easy to get out of and extreme measures may be taken to reduce the leverage ratio and, consequently, the debt, for example, the sale of several of the company's main activities.

Financial leverage indicator

The essence of the financial leverage indicator is it is a measurement of a firm's financial risk. Leverage becomes longer as the company's leverage increases, which in turn makes financial condition more unstable and may threaten the company with serious losses.

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

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

  1. Coverage indicators.

This group of indicators allows you to evaluate, for example, interest coverage on debt payments. With this indicator, the gross profit is correlated with the costs of loan payments and they look at how much the profit in this case covers the costs.

  1. Using loan obligations as a means of financing a company's assets.

The debt ratio, which is calculated by dividing the sum of all liabilities by the sum of all assets, shows how capable the company is of repaying existing loans and obtaining new ones in the future.

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

Conclusion

So, financial leverage– this is an opportunity for a company to manage its profits by changing the volume and structure of capital, both its own and borrowed.

Entrepreneurs resort to the effect of financial leverage when they plan to increase the company's income.

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

But we should not forget that an increase in a company’s liabilities always entails an increase in the level of financial risks of the organization.

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

Capital Balance Theory

When attracting borrowed funds, it is important to maintain a balance between the repayment obligations undertaken and the goals set. By violating it, you can get a significant decrease in the pace of development and a deterioration in all indicators.

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

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

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

Financial leverage (leverage), definition

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

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

Shoulder Components

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

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

Financial leverage formula

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

Leverage = Amount of debt capital / Amount of equity capital

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

Leverage, effects

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

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

There are positive and negative effects of financial leverage.

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

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

American and European interpretations of the leverage effect

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

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

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

Conclusion

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

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

General meaning

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

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

On the one hand, using only our 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:

RSK = 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 method presented above, it is necessary to consider it using a 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.



Related articles