Financial leverage is characterized by a ratio. Financial leverage: concept, essence. The effect of financial leverage: concept, formula, calculations, elements

Leverage is an English word translated as “lever.” The name is related to the principle of operation of the phenomenon. In favorable financial conditions, leverage multiplies profits.

But, during a crisis, the lever works in the opposite direction, leading to losses. It sounds vague if you don’t understand the essence of the concept and its scope. Let's start with this.

Leverage and its principles

In specialized literature leverage is determined, as a process of optimizing the assets and liabilities of an enterprise. The goal is profit growth. Liabilities refer to the financial obligations, debts and responsibilities of a company. Assets are the totality of a company's economic wealth used as a source of income.

There is a difference between these indicators, this is leverage ratio. Simply put, it is the difference between the total cost of an investment and the amount required to control it. For example, let's look at buying shares on the stock market.

To manage assets, here, as a rule, it is enough to make not their entire value, but only a deposit of 5-10%. If the total price tag is 200 dollars, and you need to pay 10 at the initial stage, then the leverage is 20:1.

High financial leverage ratio– high degree of risk. As soon as the contract price moves even a little, the client immediately suffers losses or, on the contrary, becomes significantly enriched. The excitement of stock trading is based on this. If we talk about standard purchase and sale transactions, their leverage is often equal to 1:1.

That is, in order to dispose of the goods, you need to pay for it in full. In this case, the risk of the parties to the transaction is 0. The higher leverage level, the greater the risk. So in 1995, Sumitomo lost $2.6 billion on one transaction with copper futures.

Leverage calculation– control over one’s own activities and forecasting the success of transactions with a particular organization. Risk limits are established in each area. Thus, for investment banks it is considered normal level of financial leverage 10:1.

For stock exchanges, the bar is set at 20:1. But let’s focus on the adjectives placed in front of the English concept. Financial is just one of the types of leverage. Let's look at the classification of the phenomenon.

Financial leverage

The ratio of equity and debt capital. This is it financial leverage. Formula: - liabilities/own assets. An enterprise can cover most expenses with its own funds, or perhaps attract third parties.

In the latter case, obligations to borrowers appear. You need to repay the money on time and, as a rule, also interest, covering the costs of using someone else's capital.

Financial leverage divides companies into independent and dependent. The latter are credited, and the former use only their own funds. Thus, the leverage ratio of independent firms is 0. However, few people boast of such an indicator. The point is the profitability of attracting finance from lenders, the so-called lenders.

If you take capital from the owners of the enterprise, they will have to pay dividends at the end of the year. This is the portion of net profit remaining after taxes. Landers receive interest. They are written off as cost, avoiding taxes.

The method is legal and profitable. Is it true, financial leverage effect The downside is that interest must be paid in any case and on time, but the owners can wait for dividends.

For companies leverage, his formula, are based on percentages, not exchange rates, and ratios of 10:1 or 20:1. This is related to accounting reports. The balance will not converge if the leverage is less than 1, so they resort to interest. If the indicator is 50% or higher, it means that the majority of the company’s capital is borrowed.

Operating leverage

Known as well as production leverage. The risks of an enterprise depend not only on its capital and shares in it, but also on its technical base. The operating indicator shows a change financial well-being companies depending on the costs of the intangible plan.

As a rule, losses are incurred on repairs, maintenance of equipment and the purchase of new ones. Positive leverage effect– competitiveness of goods made using high technology and, consequently, customer trust.

The downside of high operating performance is the possibility of losing funds invested in equipment. Let's take a drilling company as an example. She purchased cementing units. The technique fills wells with super-viscous mixtures. However, the developed formations were under low fracture pressure. Ordinary cement cements are sufficient.

It turns out that the cars must be idle, or they need to be sold. But it is unlikely that it will be possible to sell it at the purchase price. As a result, production leverage leads to financial losses for the enterprise.

Let’s add to this the negative consequences of the crisis, in particular, the fall in prices for energy resources, and we may end up with bankruptcy. That’s why they say that leverage makes you rich in times of stability and ruins you in difficult periods for the economy.

State regulation of leverage

It is no coincidence that companies with off-scale leverage level. Not only Russian legislation, but also the laws of most other countries do not in any way regulate the upper limit of the coefficient.

This allows company directors to take risks in order to get rich quickly. The company may eventually go bankrupt. On the other hand, the director, or a group of people who have been at the helm for several years, will find themselves in the kings.

Managers receive salaries from the profits of the enterprise. Consequently, the goal is its short-term increase. So, Richard Fuld earned 400 million dollars. The man ran Lehman Brothers on Wall Street. Richard ruined the company. There was no reason for the enormous profit.

The businessman "played" on leverage effect. The former manager enriched himself, but the company's clients and its employees were left as losers and without state protection. That is why it is especially important to calculate the leverage of an office when entering into business relations with it.

You will have to become familiar not only with financial and production indicators, but also with operational and financial indicators. This is the third type of leverage, located at the junction of two main ones. It is its calculation that gives an accurate idea of ​​the organization’s activities and the level of riskiness of these activities.

The catch is that for leverage calculation you need to look into the company's accounting department. This opportunity is rare for third parties. Often, you have to rely only on verbal statements of company managers. The same Richard Fuld, right up to the bankruptcy of Lehman Brothers, argued that the company was attractive for investment.

The man deliberately paid high dividends to the staff so that rumors about the power and financial reliability of the company would spread. A pair of managers received one-time incentives of $18,000 each. At the same time, the office was already on the verge of collapse.

Such examples are an incentive to learn not from your own, but from other people’s mistakes, to be careful in doing business and calculating the risks associated with it. Leverage can be either a blessing or a disaster. It all depends on the coefficient and the field of business.

• FINANCIAL LEVERAGE
• FINANCIAL LEVERAGE
• CREDIT LEVER
• LEVERAGE
• BORROWED CAPITAL
• OWN CAPITAL
• EFFECT OF FINANCIAL LEVERAGE

The article reveals the essence of financial leverage as one of the credit instruments of an enterprise. A method for calculating the effect of financial leverage for companies is considered.

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Financial leverage (financial leverage, financial leverage, credit leverage, credit leverage, debt leverage) is the ratio of borrowed capital to equity, which is one of the most important indicators of investment and financial analysis enterprises. The ratio of borrowed capital to equity determines the level of risk, financial and credit stability. Many companies use leverage instead of raising their own equity assets, which can reduce earnings per share for existing shareholders.

Purpose scientific article- identification and consideration of financial leverage as one of the ways to increase the productivity of an enterprise.

The relevance of this topic lies in the fact that understanding the changes in the factors of influence of financial leverage on the level of return on equity capital and the degree of financial risk allows for targeted management and disposal of both the value and capital structure of the enterprise.

Leverage, as a business term, refers to the raising of liabilities or borrowing of funds to finance the purchase of inventory, equipment and other assets of a company. Business owners can use debt or equity to finance or purchase the company's assets.

Because interest is a fixed cost (which can be written off against revenue), debt allows an organization to earn more profit without a corresponding increase in equity, requiring an increase in dividend payments (which cannot be written off against revenue). However, while high levels of leverage can be beneficial during boom periods, it can cause serious cash flow problems during recession periods because there may not be enough sales revenue to cover interest payments.

In conditions modern market, where all organizations, different from each other, can choose for themselves whether to use financial leverage or not. Before this, the company needs to know what it is doing and take into account all the pros and cons.

Benefits of financial leverage:

• increases the profitability of the company; in particular, its profitability own funds. This is true because if debt is used rather than equity, then the owner's equity is not broken up by the issue large quantity shares;
• favorable tax regime. Many tax jurisdictions tax interest expense, reducing its net cost to the borrower.
• through on-time payments, the company will establish a positive payment history and business credit rating.
• By increasing the share of borrowed funds, you can increase the profitability of your own funds.

Disadvantages of financial leverage:

• the use of borrowed funds and leverage increases the likelihood of the company going bankrupt;
• an increase in the share of borrowed capital (short-term and long-term liabilities) of an organization leads to a decrease in financial independence.
• unusually large fluctuations in earnings caused by high leverage increase the volatility of the company's share price;
• There is usually a natural limit to the amount of financial leverage, since lenders are less likely to provide additional funds to a borrower who has already borrowed a large amount of debt.

The leverage ratio is important given that companies rely on a combination of equity and debt to finance their operations, and knowing how much debt a company has is useful in assessing whether it can repay its debts.

For example, Macy's, one of the largest and oldest retail chains, has $15.53 billion in debt and $4.32 billion in equity as of fiscal 2017. The company's debt-to-equity ratio is $15.53 billion / $4.32 billion = 3.59 Macy's liabilities are 359% of shareholders' equity, which is very high for a retail company.

A high leverage ratio generally indicates that a company has been aggressive in financing the growth of its debt. This may result in a reduction in profits as a result of additional interest expense. If a company's interest costs rise too high, it can increase the company's chances of bankruptcy. Generally, a ratio greater than 2.0 indicates a risky scenario for the investor, but this meridian can vary depending on the industry. Enterprises requiring large capital costs, such as utility and manufacturing companies, may need to secure more credit than other companies. It's a good idea to measure a firm's leverage ratios against past performance and with companies in the same industry to better understand the data.

The effect of financial leverage (EFF or DFL) is an increase in the profitability of equity due to the use of a loan, despite its payment. The level of EFR shows to what extent the percentage of return on equity capital will change due to the attraction of borrowed funds into the turnover of the enterprise.

(1-T) - tax corrector, where T - interest rate income tax; ROA - return on assets of the enterprise; r - interest rate on borrowed capital (price of borrowed capital); D - borrowed capital of the enterprise; E- equity capital of the enterprise.

Let's look at financial leverage at Lenta LLC in 2016.

Table 1. Initial indicators for calculating EGF

After calculations based on reporting data from Lenta LLC, the calculation results show that by attracting borrowed capital, the company can increase the efficiency of its own assets by 4.67%.

IN in this case, the effect of financial leverage is not regulated in any way, that is, it does not have a recommended interval range. Any company has the right to use as many financial levers as it needs.

In general, the use of financial leverage, or debt, in financing a firm's operations can actually improve a firm's return on capital and generate outsize returns for shareholders. This is because the firm does not dilute the owner's profits through equity financing. However, too much financial leverage can lead to the risk of outright default and bankruptcy if cash flows fall below expectations.

References

1. Kiperman, G. Under what conditions is a loan for current needs beneficial? / G. Kiperman. // Financial newspaper. – 2007. – No. 40. –.
2. Etrill, P. financial management and management accounting for managers and businessmen / Etrill. Peter. – : Alpina Publisher, 2015. – 656 p.
3. Investopedia [Electronic resource]. – Access mode: https://www.investopedia.com/terms/l/leverageratio.asp, free. - Cap. from the screen.
4. ReadyRatiosn - IFRS financial reporting and analysis software [Electronic resource]. – Access mode: https://www.readyratios.com/reference/analysis/degree_of_financial_leverage_dfl.html, free. - Cap. from the screen.

Financial leverage characterizes the enterprise's use of borrowed funds, which affect the measurement of the return on equity ratio. Financial leverage is an objective factor that arises with the appearance of borrowed funds in the amount of capital used by an enterprise, allowing it to obtain additional profit on its own capital. The formation of financial leverage is presented in "Fig 1":

“Fig.1. Structure of formation of financial leverage"

The greater the relative volume of borrowed funds attracted by the enterprise, the more amount interest paid on them, and the higher the level of financial leverage. Consequently, this indicator also allows you to estimate how many times the enterprise's gross income (from which interest on the loan is paid) exceeds taxable profit.

Financial leverage allows us to distinguish three main components:

1. Tax adjuster of financial leverage (1-Snp), which shows to what extent the effect of financial leverage is manifested in connection with different levels of profit taxation.

The tax corrector can be used in the following cases:

a) if according to various types activities of the enterprise, differentiated rates of profit taxation have been established;

b) if by certain species activities, the enterprise uses tax benefits on profits;

c) if separate subsidiaries enterprises operate in free economic zones of their country, where preferential profit taxation regimes apply;

d) if individual subsidiaries of the enterprise operate in countries with a lower level of income taxation

2. Financial leverage differential (KVRa-PC), which characterizes the difference between the gross return on assets ratio and the average interest rate on a loan. The financial leverage differential is the main condition that forms the positive effect of financial leverage. This effect manifests itself only if the level of gross profit generated by the assets of the enterprise exceeds the average interest rate for the loan used. The higher the positive value of the financial leverage differential, the higher, other things being equal, its effect.

3. Financial leverage ratio (LC/SC), which characterizes the amount of borrowed capital used by the enterprise per unit of equity capital. The financial leverage ratio is the lever (leverage in literal translation - leverage) that causes a positive or negative effect obtained due to its corresponding differential. With a positive differential value, any increase in the financial leverage ratio will cause an even greater increase in the return on equity ratio, and with a negative differential value, an increase in the financial leverage ratio will lead to an even greater rate of decline in the return on equity ratio. In other words, an increase in the financial leverage ratio causes an even greater increase in its effect.

Thus, with a constant differential, the financial leverage ratio is the main generator of both the increase in the amount and level of profit on equity, and the financial risk of losing this profit. Similarly, with a constant financial leverage ratio, positive or negative dynamics of its differential generate both an increase in the amount and level of return on equity and the financial risk of its loss.

- Calculation of financial leverage of an enterprise

Financial leverage is calculated as the ratio of the entire advanced capital of the enterprise to the equity capital:

Kfz = ZK/SK, (3.5)

i.e., it characterizes the ratio between debt and equity capital. This indicator is one of the most important, since it is associated with the choice of the optimal structure of sources of funds

An indicator reflecting the level of additionally generated profit on equity capital at different shares of borrowed funds is called the effect of financial leverage. It is calculated using the following formula:

EFL = (1 - Snp) x (KVRa - PK) x ZK/SK, (3.6)

where EFL is the effect of financial leverage, which consists in an increase in the return on equity ratio, %; SNP - income tax rate, expressed as a decimal fraction; KVRa - gross return on assets ratio (ratio of gross profit to average asset value), %; PC - medium size interest on the loan paid by the enterprise for the use of borrowed capital, %; ZK - the average amount of borrowed capital used by the enterprise; SK is the average amount of the enterprise's equity capital.

- Operating leverage

Operational (production) leverage depends on the structure of production costs and, in particular, on the ratio of semi-fixed and semi-variable costs in the cost structure. Therefore, production leverage characterizes the relationship between the cost structure, output volume and sales and profit. Production leverage shows the change in profit depending on changes in sales volumes.

Concept operating leverage associated with the cost structure and, in particular, with the relationship between semi-fixed and semi-variable costs. Consideration of the cost structure in this aspect allows, firstly, to solve the problem of profit maximization due to the relative reduction of certain expenses with an increase in the physical volume of sales, and, secondly, dividing costs into conditionally constant and conditionally variable allows us to judge the payback costs and provides the opportunity to calculate the margin of financial strength of the enterprise in case of difficulties, complications in the market, thirdly, it makes it possible to calculate the critical sales volume that covers costs and ensures break-even activity of the enterprise.

Solving these problems allows us to come to the following conclusion: if an enterprise creates a certain amount of semi-fixed expenses, then any change in sales revenue generates an even stronger change in profit. This phenomenon is called the operating leverage effect.

- Calculations of the operating leverage ratio and the effect of operating leverage

The operating leverage ratio shows the strength of the operating leverage. It is calculated using the following formula:

Col = I post / I o (3.7)

Where And post is the sum of fixed operating costs. And o is the total amount of operating costs.

The effect of production leverage is that a change in sales revenue always leads to a larger change in profit. The strength of operating leverage is a measure of the business risk associated with the enterprise. The higher it is, the greater the risk shareholders bear; profitability threshold. This is the volume of sales revenue at which zero profit is achieved with zero losses.

The effect is calculated using the following formula:

Eol = ΔBOP / ΔOP, (3.8)

Where ΔGOP is the growth rate of gross operating profit in % ΔOP is the growth rate of product sales in %

3.3 Dividend policy. Formation of operating profit

The main goal of developing a dividend policy is to establish the necessary proportionality between the current consumption of profit by the owners and its future growth, maximizing the market value of the enterprise and ensuring its strategic development.

Based on this goal, the concept of dividend policy can be formulated as follows: dividend policy is an integral part of the general policy profit management, which consists in optimizing the proportions between the consumed and capitalized parts in order to maximize the market value of the enterprise.

- Characteristics of the types and approaches of the enterprise's dividend policy.

There are three approaches to the formation of dividend policy - “conservative”, “moderate” (“compromise”) and “aggressive”. Each of these approaches corresponds to a certain type of dividend policy.

1. Residual dividend policy assumes that the dividend payment fund is formed after the need for the formation of its own financial resources, ensuring the full implementation of the enterprise’s investment opportunities, is satisfied at the expense of profits.

2. Policy of stable dividend payments involves payment of a constant amount over a long period (at high rates of inflation, the amount of dividend payments is adjusted to the inflation index).

3. Minimum stable dividend policy with a premium in certain periods (or the “extra-dividend” policy), according to a very widespread opinion, represents its most balanced type.

4. Stable dividend policy provides for the establishment of a long-term standard ratio of dividend payments in relation to the amount of profit. The advantage of this policy is the simplicity of its formation and the close connection with the amount of profit generated"

5. Policy of constant increase in dividends(carried out under the motto “never reduce the annual dividend”) provides for a stable increase in the level of dividend payments per share. The increase in dividends when implementing such a policy occurs, as a rule, in a firmly established percentage of increase to their size in the previous period (the Gordon Model, which determines the market value of shares of such companies, is built on this principle

Finally, measures are developed aimed at increasing the dividend return of share capital. These are mainly activities that help increase net profit and return on equity.

- Financial mechanism management of the formation of operating profit.

The mechanism for managing the formation of operating profit is built taking into account the close relationship of this indicator with the volume sales of products, income and costs of the enterprise. The system of this relationship, called the “Interrelationship of costs, sales volume and profit,” allows us to highlight the role of individual factors in the formation of operating profit and ensure effective management of this process in the enterprise.

In the process of managing the formation of operating profit based on the CVP system, the enterprise solves the following tasks:

1. Determination of the volume of product sales that ensures break-even operating activities for a short period.

2. Determination of the volume of product sales that ensures break-even operating activities in the long term.

3. Determining the required volume of product sales to ensure the achievement of the planned amount of gross operating profit. This problem can also have an inverse formulation: determining the planned amount of gross operating profit for a given planned volume of product sales.

4. Determination of the amount of the “safety limit” of the enterprise, i.e. the size of a possible reduction in product sales.

5. Determining the required volume of product sales to ensure the achievement of the planned (target) amount of marginal operating profit of the enterprise.

- The main goal of managing the formation of operating profit

The main goal of managing the formation of an enterprise's operating profit is to identify the main factors that determine its final size and to find reserves for further increasing its amount.

The mechanism for managing the formation of operating profit is built taking into account the close relationship of this indicator with the volume of product sales, income and costs of the corporation. The system of this relationship, called “The relationship between costs, sales volume and profit" allows you to highlight the role individual factors in the formation of operating profit and ensure effective management of this process at the enterprise.

Receiving gross income from product sales. The main source of profit from sales is gross income from the sale of goods. Gross income equal to the sum trade allowances.

Gross income consists of the amount of money received from the sale of goods, due to the difference between the sale price of goods and the price of their acquisition. This portion of gross income represents the trade markup.

The most important factors shaping the volume and level of gross income include

Volume, composition and assortment structure of trade turnover;

Terms of delivery of goods;

Economic feasibility of trade markup;

Quantity and quality of additional services.

An increase in the volume of trade turnover means an increase in the amount of gross income: the more goods sold, the greater the total amount of funds received from the trade markup. The market model of the economy allows trading enterprises independently set premiums for most product groups. It is only important to find a certain line in order, on the one hand, to prevent losses in income, and on the other, to maintain competitive prices.

A qualitative indicator of gross income from sales is the level of gross income: Amount of gross income = amount of trade markups

ATC = (Sum of ATC / To) * 100% (3.9)

The level of gross income shows the amount of income per ruble of trade turnover.

Net income from product sales. Net income from product sales is determined by subtracting relevant taxes, fees, discounts, etc. from income (revenue) from product sales.

The net income indicator is calculated using the formula, where the numerator is the sum of depreciation volumes of fixed assets and intangible assets plus net profit, the denominator is net revenue from product sales plus income from other sales and income from non-sales operations.

Calculation of marginal operating profit. Marginal operating profit is the result of net operating income (i.e. excluding VAT) without fixed costs, its calculation is carried out using the following formula:

MOP=CHOD-Ipost; (3.10)

Where, VOD is the amount of net operating income in the period under review; Ipost is the sum of fixed operating costs.

Calculation of gross operating profit. Gross operating profit is calculated using the following formula:

VOP=CHOD-Io; VOP=MOP-Iper (3.11)

Where, NOR - the amount of net operating income; Io - the total amount of transaction costs; Iper - the sum of variable operating costs

Calculation of net operating profit. Net operating profit is income after taxes, it is also called after-tax operating profit (Net Operating Profit Less Adjusted Tax, NOPLAT). Net operating income does not take into account the fact that a business must cover both operating costs and capital expenditures.

Net operating profit, its calculation is carried out using the following formulas:

CHOP+CHOD-IO-NP; CHOP=MOP-Iper-NP; CHOP=VOP-NP; (3.12)

Where NP is the amount of income tax and other mandatory payments from profits.

Financial leverage, or, as it is also called, financial leverage, is a certain ratio of borrowed capital to the company's own financial resources. This indicator allows you to assess the degree of stability and risk of the company. The lower its value, the more stable the company feels in current market conditions. However, the ability to take out a loan means for any company solving problems that have arisen and receiving additional profit, that is, increasing profitability.

The name of this term comes to us from the English language; the word “leverage” can be translated as a lever or a means of achieving a result. This is a certain factor; its slight fluctuations have a significant impact on the indicators that are associated with it.

Attracting borrowed capital is always associated with a certain amount of risk. Why do enterprises go for this, since they can completely get by with their own funds? The fact is that financial leverage allows you to obtain additional profit, provided that the return on total capital is greater than the return on borrowed capital. The more capital a firm's top managers have at their disposal, the wider the range of investment opportunities. However, you should always remember that, unlike dividends, payments for the use of raised funds must be made in a timely manner and in full.

Own funds are the amount of issued and paid shares calculated at the nominal price, plus retained earnings and other accumulated reserves along with additional capital, if any, of the enterprise.

The coefficient that determines financial leverage is often calculated using a 5-factor model:

CFL = (borrowed capital/total assets) : (fixed capital/total assets) : (current assets/fixed capital) : (equity value working capital/ current assets)

In Russian theory, financial leverage, depending on the data source, is assessed using one of several methods:

1. According to accounting data.

In this case, only long-term loans are taken into account and short-term loans are not taken into account. Critical value The coefficient is equal to one, and a zero value indicates that the enterprise manages mainly with its own funds.

2. Based on tax reporting (profit and loss statement).

This method uses two formulas depending on whether historical data is available for the calculation. If yes, then the calculation is performed like this:

FL = ∆ChP/∆OP, where

FL - financial leverage;

∆NP - change in net profit;

∆OP - change in operating profit.

If historical data is not available, then the following formula is used:

DFL = OP/(OP-P), where

DFL - financial leverage;

OP - operating profit;

P - the amount of interest on loans and borrowings.

The minimum value of the indicator calculated using this method is equal to one.

In this case, the amount of all liabilities is included in the debt capital, regardless of the period.

KR - profitability ratio of all assets of the company, %.

Sk - average value of the interest rate on the loan, %.

ZK - the value of borrowed capital.

SK is the value of equity capital.

“The success of long-term lending in any line of business depends on a clear understanding of what cannot be trusted in the statements,” Robert Jackson, Associate Justice of the United States Supreme Court.

So, let's figure out what the success of lending depends on and what is the role of reporting in this matter.

Credit funds are a double-edged sword.

Their ineffective use can lead to an increase in debt, inability to pay it off and, as a result, to bankruptcy.

Conversely, with the help of borrowed funds, you can increase the company’s own funds, but subject to skillful management, competent and timely control over such an indicator as financial leverage.

The formula for its calculation and its role in assessing the effectiveness of using borrowed funds is in the article.

Leverage: calculation formula

Financial leverage of an enterprise (analogue: leverage, leverage, financial leverage, leverage) - shows how the use of borrowed capital of an enterprise affects the amount of net profit. Financial leverage is one of the key concepts of financial and investment analysis of an enterprise.

In physics, using a lever allows you to lift more weight with less effort. A similar operating principle exists in economics for financial leverage, which allows you to increase your profit margin with less effort.

The purpose of using financial leverage is to increase the profit of the enterprise by changing the capital structure: the shares of equity and borrowed funds. It should be noted that an increase in the share of borrowed capital (short-term and long-term liabilities) of an enterprise leads to a decrease in its financial independence.

But at the same time, as the financial risk of an enterprise increases, the possibility of obtaining greater profits also increases.

Economic sense

The effect of financial leverage is explained by the fact that attracting additional funds makes it possible to increase the efficiency of the production and economic activities of the enterprise. After all, the capital raised can be used to create new assets that will increase both cash flow and net profit of the enterprise.

Additional cash flow leads to an increase in the value of the enterprise for investors and shareholders, which is one of the strategic objectives for the company's owners.

The effect of financial leverage of an enterprise

The effect of financial leverage is the product of the differential (with tax adjustment) and the leverage. The figure below shows the diagram key links formation of the effect of financial leverage.

If we describe the three indicators included in the formula, it will look like this:

where DFL is the effect of financial leverage;
T – interest rate of income tax;
ROA – return on assets of the enterprise;
r – interest rate on attracted (borrowed) capital;
D – borrowed capital of the enterprise;
E is the enterprise’s own capital.

So, let's look at each of the elements of the financial leverage effect in more detail.

Tax proofreader

The tax adjuster shows how a change in the profit tax rate affects the effect of financial leverage. Everyone pays income tax legal entities RF (LLC, OJSC, CJSC, etc.), and its rate may vary depending on the type of activity of the organization.

So, for example, for small enterprises engaged in the housing and communal services sector, the final income tax rate will be 15.5%, while the income tax rate without adjustments is 20%. Minimum bid By law, income tax cannot be lower than 13.5%.

Financial leverage differential

The leverage differential (Dif) is the difference between the return on assets and the interest rate on borrowed capital. In order for the effect of financial leverage to be positive, the return on equity must be higher than the interest on loans and advances.

With negative financial leverage, the company begins to suffer losses because it cannot ensure production efficiency higher than the payment for borrowed capital.

Differential value:

• Dif > 0 - The enterprise increases the amount of profit received through the use of borrowed funds
• Dif = 0 - Profitability is equal to the interest rate on the loan, the effect of financial leverage is zero

Financial leverage ratio

The financial leverage ratio (analogue: financial leverage) shows what share in general structure The capital of the enterprise is borrowed funds (loans, advances and other obligations), and determines the strength of the influence of borrowed capital on the effect of financial leverage.

Optimal leverage size for financial leverage effect

Based on empirical data, the optimal leverage size (ratio of debt and equity capital) for an enterprise was calculated, which ranges from 0.5 to 0.7. This suggests that the share of borrowed funds in the overall structure of the enterprise ranges from 50% to 70%.

As the share of borrowed capital increases, the financial risks: the possibility of loss of financial independence, solvency and risk of bankruptcy. If the amount of borrowed capital is less than 50%, the company misses the opportunity to increase profits. The optimal size of the financial leverage effect is considered to be 30-50% of return on assets (ROA).

Source: "finzz.ru"

Financial leverage ratio

For evaluation financial stability enterprises in the long term, the indicator (coefficient) of financial leverage (CFL) is used in practice. Financial leverage ratio is the ratio of an enterprise's borrowed funds to its own funds (capital). This coefficient is close to the autonomy coefficient.

The concept of financial leverage is used in economics to show that with the use of borrowed capital, an enterprise creates financial leverage to increase the profitability of operations and the return on equity capital. The financial leverage ratio directly reflects the level of financial risk of the enterprise.

Formula for calculating the financial leverage ratio

Financial leverage ratio = Liabilities / Equity

Various authors understand liabilities as either the sum of short-term and long-term liabilities or only long-term liabilities. Investors and business owners prefer more high coefficient financial leverage because it provides a higher rate of return.

Lenders, on the contrary, invest in enterprises with a lower financial leverage ratio, since this enterprise is financially independent and has a lower risk of bankruptcy.

It is more accurate to calculate the financial leverage ratio not by the balance sheets of the enterprise, but by the market value of assets.

Since the enterprise’s value is often market value, the value of the assets exceeds the book value, which means the risk level of this enterprise is lower than when calculated at the book value.

Financial leverage ratio = (Long-term liabilities + Short-term liabilities) / Equity

Financial leverage ratio = Long-term liabilities / Equity

If the financial leverage ratio (FLR) is described by factors, then according to G.V. Savitskaya’s formula will have the following form:

CFL = (Share of borrowed capital in total assets) / (Share of fixed capital in total assets) / (Share of working capital in total assets) / (Share of own working capital in current assets) * Maneuverability of equity capital)

The effect of financial leverage (leverage)

The financial leverage ratio is closely related to the financial leverage effect, which is also called financial leverage effects. The effect of financial leverage shows the rate of increase in return on equity with an increase in the share of borrowed capital.

Effect of financial leverage = (1-Income tax rate) * (Gross profitability ratio - Average interest rate on a loan from the enterprise) * (Amount of borrowed capital) / (Amount of equity capital of the enterprise)