A financial evaluation of the company's stability indicators is essential for the successful organization and planning of its activities. Financial leverage is often used in this analysis. It allows you to evaluate the organization’s capital structure and optimize it.
The investment rating of the enterprise, the possibility of development, and the increase in the amount of profit depend on this. Therefore, in the process of planning the work of the analyzed object, this indicator plays an important role. The methodology of its calculation, the interpretation of the research results deserve special attention. The information obtained during the analysis is used by company management, founders and investors.
General concept
Financial leverage is an indicator characterizing the degree of risk of a company with a certain ratio of its borrowed and own sources of financing. Translated from English, “leverage” means “leverage”. This suggests that when one factor changes, other factors associated with it are affected. This ratio is directly proportional to the financial risk of the organization. This is a very informative technique.
In a market economy, the indicator of financial leverage should be considered not from the point of view of the balance sheet valuation of equity, but from the point of view of its real valuation. For large enterprises that have long and successfully been operating in their industry, these figures are quite different. When calculating the financial leverage ratio, it is very important to consider all the nuances.
General meaning
Applying a similar technique at the enterprise, it is possible to determine the relationship between the ratio of own and borrowed capital and financial risk. Using free sources of business support, risks can be minimized.
The stability of the company is the highest. Using paid borrowed capital, a company can increase its profit. The effect of financial leverage involves determining the level of accounts payable at which return on total capital will be maximum.
On the one hand, using only its own financial sources, the company loses the opportunity to expand its production, but on the other hand, too high a level of paid resources in the overall structure of the balance sheet currency will lead to the inability to pay off its debts and reduce the stability of the enterprise. Therefore, the leverage effect is very important in optimizing the balance structure.
Payment
To calculate the financial leverage ratio, a special technique is used. It looks like this:
Kfr = (1 - H) (KPA - K) S / S,
where H is the income tax ratio, KRA is the return on assets, K is the rate for using the loan, H is borrowed capital, and C is equity.
KRA = Gross Profit / Assets
In this technique, three factors are combined. (1 - Н) - tax corrector. It is independent of the enterprise. (KRA - K) - differential. S / S is financial leverage. This technique allows you to take into account all conditions, both external and internal. The result is obtained in the form of a relative value.
Component Description
The tax corrector reflects the degree of influence of changes in the percentage of tax on profit on the entire system. This indicator depends on the type of company activity. It cannot be lower than 13.5% for any organization.
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 general 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 overall structure of the balance sheet currency should not exceed 70%, otherwise the risk of debt default increases and financial stability decreases. But with its amount less than 50%, the company loses the opportunity to increase the amount of profit.
Calculation Method
Operational and financial leverage is an integral part of determining the effectiveness of a company's capital. Therefore, the calculation of these values is required. To calculate the financial leverage, you can resort to the following formula:
FR = KRA - DGC, where DGC - return on equity.
For this calculation, it is necessary to use the data presented in the balance sheet (f. No. 1) and statement of financial performance (f. No. 2). Based on this, you need to find all the components of the above formulas. Return on assets is as follows:
KRA = Net Profit / Balance Currency
KRA = s. 2400 (f. No. 2) / s. 1700 (f. No. 1)
To find the return on equity, you must use the following equation:
DGC = Net Profit / Equity
RSK = s. 2400 (f. No. 2) / s. 1300 (f. No. 1)
Next is financial leverage, the formula of which was presented above.
Calculation and interpretation of the result
To understand the above calculation method, it is necessary to consider it with a specific example. To do this, you can take the accounting data enterprise reporting 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 816,265 p., And equity in its composition reached the level of 624,376 p. Based on the data listed, it is possible to find financial leverage:
KRA = 39 350/816 265 = 4.8%
RSK = 39 350/624 376 = 6.3%
FR = 6.3 - 4.8 = 1.5%
Based on the above calculations, we can say that the company through the use of credit funds was able to increase profits in the reporting period by 50%. The financial leverage on return on equity is 50%, which is optimal for the effective management of borrowed funds.
Having become acquainted with such a concept as financial leverage, we can conclude that the method of calculating it allows you to determine the most effective ratio of credit funds to own liabilities. This makes it possible for the organization to make big profits by optimizing its capital. Therefore, this technique is very important for the planning process.
