financial leverage, or as it is called, leverage - a certain ratio of debt-to-equity finance company.This indicator to assess the degree of resistance and the risk of the company.The lower the value, the more stable feel firm in the current market conditions.However, the ability to borrow means for any firm decision of the problems and to obtain additional income, an increase in profitability.
name this term has come to us from the English language, the word «leverage» translates as leverage or means to an end.It is a factor, a slight fluctuation of its significant impact on the indicators associated with it.
debt financing is always associated with a certain degree of risk.Why do companies go for it, because you can completely manage their own means?The fact that the financial leverage allows you to earn extra income, provided that the total return on capital greater profitability debt.The more capital that is available to top managers of the company, the wider the range of investment opportunities.However, it should always be remembered that, unlike dividends, payments for the use of borrowed funds should be implemented in due time and in full.
financial leverage ratio is calculated by the following formula:
CFL = NC / SC where
NC - net borrowing;
SS - own funds.
net borrowing - is the total value of bank loans and overdraft net of cash businesses and other liquid assets.
Equity - is the amount of issued and paid-up share capital, calculated on the nominal price of the shares, plus retained earnings and other accumulated reserves, together with the additional capital, if any at this enterprise.
factor that determines financial leverage, often calculated using the 5-factor model:
CFL = (debt capital / total assets): (fixed assets / total assets): (current assets / equity) (the value of working capital / current assets)
The Russian theory of financial leverage depending on the source data is evaluated using one of several methods:
1. According to accounting.
In this case, only long-term loans and short-term loans are not included.The critical factor is equal to one, and a value of zero indicates that the company manages mainly own funds.
2. On the basis of tax statements (profit and loss).
This method uses two formulas depending on whether there is history data for the calculation.If so, then the calculation is performed so:
PL = ΔCHP / ΔOP where
FL - financial leverage;
ΔCHP - Change in net profit;
ΔOP - Changes in operating profit.
If historical data is not available, then use the following formula:
DFL = OP / (OP-P), where
DFL - financial leverage;
OP - operating profit;
P - the amount of interest on loans and borrowings.
minimum value of the index calculated by this method is equal to one.
3. On the basis of guidelines.
In this case, part of the debt capital includes the sum of all liabilities regardless of the period.
effect of financial leverage - this is another important option to make a quantitative assessment of the use of borrowed funds.It is determined by the following formula privedennyo:
EPL = (1 - NP) * (KR - Sk) * LC / SC, where:
EPL - desired effect of financial leverage,%;
NP - decimal notation income tax rate;
KR - factor of profitability of the firm's assets,%.
Ck - average interest rate on the loan,%.
ZK - the value of the borrowed capital.
SC - the value of equity.
