The concept of financial leverage in the Forex market. Leverage (financial leverage) Leverage is the ratio

Even the ancient Greek scientist Archimedes paid attention to the enormous potentialities of the use of a lever. Remember his famous phrase in which he said that if he had a fulcrum, he could move the Earth? Nowadays, the lever is often used in practice in order to increase the force of impact on the short arm, while applying force to the long arm. In mechanics, the payoff obtained directly depends on the ratio of the length of the arms. But this principle can also be used in other areas, for example, in economics. Let's take a look at what leverage is and what business opportunities it holds.

In different publications, different synonyms for this term are often found. Financial leverage is often referred to as leverage, leverage, or financial leverage. In fact, it is the ratio of borrowed funds attracted to an investment project to the amount of equity capital. To better understand what constitutes leverage, let's look at a simple example. Suppose we are analyzing the possibility of investing our funds in a certain business project. The planned profitability is at the level of 30% per year, and the investment period is 12 months. The amount of equity capital that we are ready to direct to this project is 120 thousand rubles. It is easy to calculate that at the end of the first year of operation, our investments will bring an income of 36 thousand rubles. In order to get even more income from investments, you need to increase the amount of start-up capital. It is not easy to do this yourself, since available funds are limited at this moment.

However, if the expected profitability exceeds the average loan rate, then additional income can be obtained through a bank loan. So, reluctantly, we decide to direct the borrowed capital to the project in the amount of 120 thousand rubles. Suppose we managed to get a bank loan at 22% per annum. If everything goes according to our forecasts, the profit from the use of equity capital will bring us, as already mentioned, 36 thousand rubles, and with the attraction of loan capital, its amount will be 72 thousand rubles. From them we will pay interest to the bank (26.4 thousand rubles), and we will have 45.6 thousand rubles. As you can see, leverage is a good opportunity to improve business profitability. In our case, he allowed us to receive an additional 9.6 thousand rubles.

What will give you financial leverage. Calculation formula

The use of borrowed funds is not always beneficial. In order to make the right decision and assess what effect the use of financial leverage will bring, you can apply the following formula:

RFR = (1 - Np) × (Ra - CK) × ZK / SK, where

RFR - the result of using financial leverage,%;

Нп - decimal expression of the income tax rate;

RA - return on assets,%;

CK - the size of the average (weighted average) lending rate,%;

ЗК - borrowed capital;

SK - equity capital.

As you can see, there are three factors involved in calculating the effect size. The first of them - (1 - Нп) - does not depend on the company in any way. (Ra - Ck) shows how much the return on assets exceeds the interest rate on the loan. It has its own name - differential. (ZK / SK) - this, in fact, is the financial leverage.

Financial leverage (financial leverage)- this is the ratio of the company's borrowed capital to its own funds, it characterizes the degree of risk and stability of the company. The less financial leverage, the more stable the position. On the other hand, borrowed capital allows you to increase the return on equity ratio, i.e. get additional profit on equity capital.

The indicator reflecting the level of additional profit when using borrowed capital is called leverage effect... It is calculated using the following formula:

EFR = (1 - Cn) × (KR - Sk) × ZK / SK,

Where:

The formula for calculating the effect of financial leverage contains three factors:

Let us write the formula for the effect of financial leverage in a shorter way:

EFR = (1 - Cn) × D × FR.

• The efficiency of the use of borrowed capital depends on the ratio between the return on assets and the interest rate for a loan. If the rate for a loan is higher than the return on assets, the use of borrowed capital is unprofitable.
• All other things being equal, b O more financial leverage gives b O the greatest effect.

DEFINITION

Financial leverage of the enterprise(financial leverage, leverage) is an indicator reflecting the influence of the use of borrowed capital on the amount of net profit.

Financial leverage is the most important concept in financial and investment analysis. The meaning of the indicator can be reflected in the example of using a lever in physics, with the help of which you can lift more weight by applying less forces. Likewise, in economics, leverage can increase profit margins with less effort.

The formula for the effect of financial leverage is used to increase the company's profit by changing the capital structure, or rather the share of equity and borrowed funds. At the same time, an increase in the share of borrowed capital (short-term and long-term liabilities of the company) leads to a decrease in the financial independence of the enterprise. However, with the growth of financial risks, the possibility of obtaining maximum profit also grows.

Leverage Effect Formula

The leverage effect is by the product of the differential (including the tax corrector) by the lever arm.

There are three links in the formation of the effect of financial leverage (see figure).

The formula for the effect of financial leverage when using these links is as follows:

Here DFL is the effect of financial leverage;

T - income tax (interest rate);

ROA is the return on assets of the company;

r - attracted (borrowed) capital (interest rate);

D - the amount of borrowed capital;

E - the amount of equity capital.

Another formula for calculating leverage is balance sheet calculation, which is the difference between total return on equity (ROA) and return on equity (ROE).

In this case, ROA and ROE indicators can be found using the following formula:

ROA = line 2400 / line 1700

ROE = line 2400 / line 1300

Key Elements of the Leverage Effect Formula

Tax corrector

The tax adjuster reflects the effect of the income tax rate on the effect of financial leverage.

This tax is paid by all legal entities, while its rate changes in accordance with the type of business of the enterprise.

Financial Leverage Differential

Differential of financial leverage - the difference between the return on assets and rates on borrowed capital. To obtain a positive value of the effect of financial leverage, a higher return on equity is required than interest on a loan (loan). If the amount of financial leverage is negative, the company begins to suffer losses. This is because the enterprise does not provide more production efficiency than the payment for borrowed capital.

The ratio of the indicator of the effect of financial leverage

In practice, the optimal leverage (the ratio of debt and equity) for the company was calculated, which was determined in the range of 0.5 - 0.7. This value shows that the share of borrowed capital in the overall structure of the company is 50% - 70%.

If the share of borrowed capital is increased, then financial risks will also grow:

• loss of financial independence,
• loss of solvency,
• bankruptcy, etc.

The economic implications of the leverage effect

The formula for the effect of financial leverage shows how much of the company's total capital structure is borrowed capital (credit, loan, loan and other liabilities). The formula for the effect of financial leverage determines the strength of the influence of borrowed funds on the effect of financial leverage.

The effect of financial leverage can be explained by the fact that raising additional capital makes it possible to increase the efficiency of the company's production and economic activities. At the same time, borrowed funds can be used to create new assets that increase cash flow, including the organization's net profit. The emergence of additional cash flow leads to an increase in the value of the company for investors and shareholders, which is considered the most important strategic goal of the owners.

Examples of problem solving

EXAMPLE 1

EXAMPLE 2

The financial leverage of the company arises as a result of raising debt capital to finance its activities. The most common forms of raising debt capital for companies are bank loans and bond issues. The funds raised can be used to expand the scale of activities, replace or modernize industrial equipment, implement investment projects, etc., with the goal of obtaining additional profits.

Obtaining a bank loan requires the borrower to meet certain criteria, among which his current financial performance and credit history play an important role. If the bank makes a positive decision, the company receives additional financing, which, if used effectively, will help to generate additional profit.

The issue of bonds is an alternative to a bank loan, as the company offers its debt obligations directly to potential investors. However, as in the case of a loan, the issuer undertakes to pay interest at a fixed or floating interest rate, as well as to return the principal amount upon expiry of the period specified in the terms of the issue.

In general, attracting additional financing, provided it is used effectively, allows you to get additional profit, which leads to an increase in the return on equity. Therefore, the efficiency of the use of borrowed capital is assessed using such an indicator as earnings per share. To better understand the situation, consider the impact of financial leverage using an example.

Suppose there are two companies with the same asset size, revenue, fixed and variable costs, but different capital structures.

Let's consider the impact of leverage on both companies under two alternative scenarios.

A) Sales will increase by 3%.

B) Sales volume will decrease by 5%.

If the sales volume of both companies increases by 3%, then the variable costs will increase in a similar way. Thus, the operating income for both companies will be the same.

EBIT = 30,000,000 * 1.03 + 20,000,000 * 1.03-7000000 = 3,300,000 c.u.

Profit before tax for Company A will be equal to operating income of $ 3,300,000, and for Company B its amount will be less by the percentage of 420,000.

EBT Company B = 3,300,000 - 4,20000 = 2,880,000 c.u.

Consequently, the amount of net profit for both companies will be different.

Net profit Company A = 3,300,000 * 0.7 = 2,310,000 c.u.

Net profit of Company B = 2,880,000 * 0.7 = 2016,000 c.u.

Earnings per share for Company A will be $ 3.30 and Company B will have $ 5.04.

EPS Company A = 2,310,000 / 1,000,000 = $ 2.31

EPS Company B = 2016000/400000 = 5.04 c.u.

Thus, earnings per share for Company A increased by 10%, and for Company B by 11.5%.

EPS Change Company A = (2.31-2.10) / 2.10 * 100% = 10%

EPS change Company B = (5.04-4.52) / 4.52 * 100% = 11.5%

The difference in the rate of increase in earnings per share is explained by the financial leverage that arose as a result of the use of borrowed capital by Company B.

The influence of financial leverage will also manifest itself in the development of the second scenario, when the sales volume of both companies will decrease by 5%. Since the amount of total variable costs will decrease in proportion to the volume of sales, the amount of operating income for both companies will be 2,500,000 USD.

EBIT = 30,000,000 * 0.95 + 20,000,000 * 0.95-7000000 = 2,500,000 c.u.

The amount of profit before tax for Company A will be equal to the amount of operating income of 2,500,000 USD, and for Company B its amount will be less by the amount of interest 420,000 USD.

EBT Company B = 2,500,000 - 4,20000 = 2,080,000 c.u.

Thus, the amount of net profit for both companies will be different.

Net profit of Company A = 2,500,000 * 0.7 = 1,750,000 c.u.

Net profit of Company B = 2,080,000 * 0.7 = 1,456,000 c.u.

Therefore, Company A's earnings per share will be $ 1.75 and Company B will have $ 3.64.

EPS Company A = 1,750,000 / 1,000,000 = $ 1.75

EPS Company B = 1,456,000 / 400,000 = $ 3.64

At the same time, earnings per share for Company A decreased by 16.7%, and for Company B by 19.5%.

EPS change Company A = (1.75-2.10) / 2.10 * 100% = - 16.7%

EPS change Company B = (3.64-4.52) / 4.52 * 100% = - 19.5%

In this scenario, the leverage effect caused Company B's earnings per share to decline to a greater extent than Company A.

The above example showed that leverage affects the change in an indicator such as earnings per share. At the same time, the higher the share of borrowed capital, the more sensitive the earnings per share will be to changes in operating income. Graphically, this dependence will look like this.

As we can see, Company A, which is not leveraged, has EPS is less sensitive to changes in operating income. In contrast, Leveraged Company B has a higher rate of EPS change when operating income changes. In other words, for a company with higher leverage, earnings per share will grow faster as operating income rises. However, if it decreases, the rate of decline in earnings per share will also be higher.

The indicator reflecting the level of additional profit when using borrowed capital is called the effect of financial leverage.

It is calculated using the following formula:

EFR = (1 - Cn) x (KR - CK) x ZK / CK,
where:
EFR - the effect of financial leverage,%.
SN - rate, in decimal terms.
КР - assets ratio (ratio of gross profit to average asset value),%.
Ck - the average interest rate for a loan,%. For a more accurate calculation, you can take the weighted average rate for a loan.
ЗК - the average amount of borrowed capital used.
SK is the average amount of equity capital.

(1-Cn) - does not depend on the company.

(KR-Sk) - the difference between the return on assets and the interest rate for a loan. It is called the differential (D).
(ZK / SK) - financial leverage (FR).

Let us write the formula for the effect of financial leverage in a shorter way:

EFR = (1 - Cn) x D x FR.

Two conclusions can be drawn:

The efficiency of the use of borrowed capital depends on the ratio between the return on assets and the interest rate for a loan. If the rate for a loan is higher than the return on assets, the use of borrowed capital is unprofitable. - All other things being equal, more financial leverage gives a greater effect.

Financial leverage effect

Financial leverage (leverage) characterizes the use of borrowed funds by the company, which affects 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 according to the American concept is to assess 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.

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, in contrast to, for example, the payment of dividends, is mandatory, then with a relatively high level of financial leverage, even a slight decrease in the profit received 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 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.

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

The effect of financial leverage (EFI) shows how many percent increases the return on equity capital by attracting borrowed funds into the company's turnover and is calculated by the formula:

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

- differential of financial leverage (ra-C, k), which characterizes the difference between the profitability of the company's assets and the weighted average calculated interest rate on loans and borrowings;
- leverage of the financial leverage ZK / SK

The amount of borrowed capital per ruble of equity. 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 depreciated 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 differentiated tax rates are established for various types of activities of the enterprise;
- if, for certain types of activities, the enterprise uses income tax benefits;
- if individual subsidiaries of the enterprise operate in the free economic zones of their country, where there is a preferential profit taxation 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 (PA) 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 Ra is less than Czk, a negative EGF is created, as a result of which there is a decrease in the return on equity, which can ultimately become the reason.

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:

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 be an obstacle. 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 reserve requirements are lower, and Russian banks find themselves in unequal conditions.

Financial leverage profitability

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

Where Нп - income 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;
Цзк - 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:

Tax adjuster of financial leverage (l-Нп), which shows the extent to which the effect of financial leverage manifests itself in connection with different levels of taxation of profits;
- the differential of financial leverage (ra-C, k), which characterizes the difference between the profitability of the company's assets and the weighted average calculated interest rate on loans and borrowings;
- leverage of the financial leverage ZK / SK

Operating and financial leverage

The most common types of leverage are:

Production (operational) leverage.
Financial leverage.

All companies use financial leverage to one degree or another. The whole question is what is the reasonable ratio between equity and borrowed capital.

The financial leverage ratio (leverage) is defined as the ratio of debt to equity. It is most correct to calculate it by the market valuation of assets.

The effect of financial leverage is also calculated:

EFR = (1 - Kn) * (ROA - Tszk) * ZK / SK.
where ROA is the return on total equity before taxes (the ratio of gross profit to average asset value)%;
SK - the average annual amount of equity capital;
Кн - taxation coefficient, in the form of a decimal fraction;
Цзк - weighted average price of borrowed capital,%;
ЗК - the average annual amount of borrowed capital.

The formula for calculating the effect of financial leverage contains three factors:

(1 - Kn) - does not depend on the enterprise.
(ROA - Czk) - the difference between the return on assets and the interest rate for a loan. It is called the differential (D).
(ZK / SK) - Financial leverage (FR).

You can write the formula for the effect of financial leverage in a shorter way:

EFR = (1 - Kn) x D x FR.

The effect of financial leverage shows how much the return on equity increases by attracting borrowed funds. The effect of financial leverage arises from the difference between the return on assets and the cost of borrowed funds. The recommended EGF value is 0.33 - 0.5.

The resulting effect of financial leverage is that the use of the debt load, all other things being equal, leads to the fact that the growth of corporate earnings before interest and taxes leads to a stronger increase in earnings per share.

The effect of financial leverage is also calculated taking into account the effect of inflation (debts and interest on them are not indexed). With an increase in the level of inflation, the payment for the use of borrowed funds becomes lower (interest rates are fixed) and the result from their use is higher. However, if interest rates are high or the return on assets is low, financial leverage begins to work against the owners.

Leverage is a very risky business for those businesses whose activities are cyclical. As a result, several consecutive years of low sales can lead to high leverage businesses going bankrupt.

For a more detailed analysis of the change in the value of the financial leverage ratio and the factors that influenced it, the methodology of the 5th financial leverage ratio is used.

Thus, financial leverage reflects the degree of dependence of the company on creditors, that is, the magnitude of the risk of loss of solvency. In addition, the company gets the opportunity to take advantage of the "tax shield", since, unlike dividends on shares, the amount of interest on a loan is deducted from the total amount of taxable profit.

Operating leverage (operating leverage) shows how many times the rate of change in profit from sales exceeds the rate of change in revenue from sales. Knowing the operating leverage, it is possible to predict the change in profit when the revenue changes.

This is the ratio of fixed and variable costs of the company and the effect of this ratio on earnings before interest and taxes (operating income). Operating leverage shows how much the profit will change if there is a 1% change in revenue.

The operating price leverage is calculated using the formula:

Rts = (P + Zper + Zpost) / P = 1 + Zper / P + Zpost / P
where: B - sales proceeds.
P - profit from sales.
Zper - variable costs.
Zpost - fixed costs.
Рц - price operating lever.
PH is a natural operating lever.

The natural operating leverage is calculated using the formula:

Rn = (B-Zper) / P

Considering that B = P + Zper + Zpost, we can write:

Rn = (P + Zpost) / P = 1 + Zpost / P

Operating leverage is used by managers to balance different types of costs and increase revenue accordingly. Operating leverage makes it possible to increase profits while changing the ratio of variable and fixed costs.

Participating in the formation and use of funds of monetary resources, financial levers should influence the economic activities of economic agencies, stimulate economic growth, increase labor productivity, improve product quality, and perform all other tasks related to the organization of production in terms of commercial accounting. The impact of financial levers on the development of social production depends on the functions they are endowed with and on the implementation of these functions in practice. So, historical experience shows that taxes, if they are applied correctly, bring enormous benefits to the state, and if they are mistaken, irreparable harm. Even the technical aspect plays a very important role in tax practice. A classic example of this in the history of the Soviet economy is the fact that food appropriation was replaced by a tax in kind. As a result, the tax began to be levied in a different form and this led to positive results, although the severity of taxation remained almost the same. Hence the conclusion - all financial levers require the most careful attention to themselves, both in their development and in their application.

The system of financial incentives, which are levers of influence on social production, plays an important role in both production and non-production activities. The transformation of finance into an instrument that ensures the organic inclusion of commodity-money relations in the mechanism of managing a market economy, the increase in the impact of finance on production in modern economic conditions occurs by improving all forms of financial relations, including through the activation of financial incentives - by rewarding for good performance and application of sanctions for violations.

Various kinds of incentives, expressing the content of the financial mechanism, can be applied in the formation of income, savings and funds. A wide range of different benefits is provided for taxes levied to the budget through partial or complete exemption of enterprises from paying them. The purpose of incentives is to increase funds allocated for activities related to the development of production, with the social needs of workers, environmental protection measures, charitable purposes, and the expansion of production of certain types of products (works, services). In case of concealment of income or payment of them with a delay, various types of sanctions, both economic and administrative, are applied, up to criminal liability.

Benefits and sanctions are also applied when organizing financing and lending for the production activities of enterprises and organizations of all forms of ownership. For example, they can be applied for improper use of funds, untimely repayment of bank loans.

Of great importance is the development of quantitative parameters for each element of the financial mechanism, i.e., the determination of rates, norms and standards for the allocation and withdrawal of funds, the volume of individual funds, the level of spending of financial resources, etc.

One of the fundamental principles of the activities of legislative and executive bodies associated with the use of financial levers and incentives, the development of norms and standards, is the operational accounting of changes in economic processes and timely impact on them, aimed at increasing the efficiency of the economic development of the state.

Financial leverage action

It is a probabilistic and uncertain process. Therefore, it is extremely important to know the answer to the question: how likely is an entrepreneur to achieve his goals? It is possible to answer it only taking into account the riskiness of the project, that is, to determine a quantitative measure of risk associated with a given enterprise and a specific investment project (more on this later).

We have already said that the action of financial leverage inevitably creates a certain risk (financial) associated with the activities of the firm, the action of production (operational) leverage also creates risk (production) associated with the activities of the firm. Consequently, it seems logical to conclude that with a more accurate examination of the activities of the enterprise, the summation of financial and production risks occurs.

The financial risk arising from the activity of financial leverage appears in the form of the risk of obtaining a negative differential value (then not only will the return on equity not increase, but it will decrease) and the risk of reaching such a leverage value when it becomes impossible to pay interest on loans and current debt (there is an undermining of trust in the firm on the part of creditors and other economic entities with catastrophic consequences for it).

The quantitative measure of financial risk is determined by the optimal values ​​of the parameters of the financial leverage. For the differential, the optimal value is associated with the ratio of the effect of financial leverage and the return on equity. The quantitative value of this ratio ranges from 1/3 to 1/2. In this case, the value of the ratio of economic profitability and the average calculated interest rate should be greater than 1. From above, this ratio is limited by the possibilities of growth in the economic profitability of the company (these are objective factors of an economic and technological nature).

For leverage, the optimal leverage ratio for normally operating firms in the West is determined at 0.67. As mentioned above, for Russia today, this ratio should be different. The reason is high inflation (by Western standards), which Russian firms perceive as a normal background for carrying out their business activities. As a result, the optimal leverage is somewhere in the range of 1.5.

Obviously, in this case, the force of influence of the financial leverage should be in the range from 4/3 to 3/2. This value was obtained as follows: starting from the optimal ratio of EFR and RCC, we transferred it to the share of interest payments on a bank loan in the company's balance sheet profit (do not forget that we are trying to determine a certain limiting value of the strength of the impact of financial leverage as a quantitative expression of financial risk) ... This gave us the opportunity to determine a certain “good” position (the force of influence of financial leverage is 4/3, that is, up to 1/3 of the balance sheet profit is spent on paying interest on loans) and a certain position, which we can call a “red line”, to enter for which the firm is undesirable (the power of the influence of financial leverage is within 3/2, which requires the firm to pay 1/2 of the balance sheet profit as interest on loans).

In a similar way, we will try to determine the marginal value of the effect of production leverage. Recall that it shows how many percentage points the profit will increase (decrease) with an increase (decrease) in revenue by 1%. It should be noted that each industry has its own economic conditions, conditioned by economic, technological, and other reasons. Therefore, it is unlikely that it will be justified to determine a single quantitative value of the effect of production leverage for calculating the degree of risk associated with the entrepreneurial (not financial) activity of the firm.

Most likely, it should be about some kind of "framework". On the one hand, this will be the volume of production corresponding to the profitability threshold, on the other, the volume of production of these goods, which will require a one-time increase in fixed costs.

It is unsafe for a company to be both at the threshold of profitability, and at a position where it is no longer possible to increase production without increasing fixed costs. Both of these provisions involve the risk of significant loss of profits. It is known that the closer the firm is to the threshold of profitability, the greater the impact of production leverage (and this is a risk!). It is just as risky to “sleep through” the period of growth in fixed costs, having calmed down due to a significant margin of financial strength.

Thus, the firm is faced with a dilemma: either high rates of production growth and the approaching period for a one-time increase in fixed costs, or a slow increase in production, which makes it possible to “postpone” the period of a one-time increase in fixed costs. In the second case, the firm must be sure that its product will be in demand for a long time.

Now about the role of fixed costs in determining the production (entrepreneurial) risk. Recall that a large share of fixed costs that we are interested in is an objective requirement of technology (for example, capital-intensive production of ferrous metals).

Let's take a look at a simple example. We have two firms that differ only in the proportion of fixed costs:

First: revenue - 1200, fixed costs - 500, variable costs - 500, profit - 200.
Second: revenue - 1200, fixed costs - 100, variable costs - 900, profit - 200.
The force of the production lever for the first company is 3.5, for the second company it is 1.5.

Consequently, the higher the share of fixed costs, the greater the power of influence of the production leverage, and, consequently, the entrepreneurial risk associated with this firm, and vice versa.

Everyone knows (this has already been said above) that in the real activities of a real company, the summation of financial and entrepreneurial risks occurs. In financial management, this has found its expression in the concept of the conjugate effect of financial and production leverage:

The level of the associated effect of financial and operating leverage = the strength of the impact of financial leverage x the strength of the impact of the operating leverage

In fact, this indicator gives an estimate of the total risk associated with a given enterprise. Unfortunately, we will not be able to give an accurate quantitative assessment, we will restrict ourselves only to “framework” estimates.

So, the power of the influence of financial leverage increases during the period of mastering a new product (the period of increasing production and reaching the threshold of profitability) and during the period of refusal to produce this product and the transition to the production of a new one (the period when there is a sharp increase in fixed costs). Consequently, during this period, the financial risk associated with the firm increases (a sharp increase in borrowing).

Production (entrepreneurial) risk increases in the same periods of the firm's activity. Consequently, the overall risk associated with the enterprise increases in two cases: reaching the threshold of profitability and a sharp increase in fixed costs due to the need to master new products. It remains only to accurately determine the beginning of these periods! This will be the “universal” recipe for reducing the overall risk!

To determine the risk associated with a firm, it is necessary to use not only the values ​​of the strength of financial and operating leverage, but also be able to measure risk by determining the average expected value of the event magnitude and the variability (variability) of the possible result.

Science has also developed ways to reduce risks (financial and industrial). Especially in this manual, we will not consider this issue in detail. We will only list these methods: production, obtaining additional and reliable information, risk insurance, cost limitation, and so on. We see that among them there are both economic and financial ways to reduce the risk associated with the firm.

Within the framework of this work, I would like to dwell in more detail on one specific form of risk generated by the actions of shareholders. It seems that he should be in the center of attention of enterprise managers. To overcome it, you can use traditional forms of risk reduction (see above), but there is a fundamentally important aspect for the financial manager.

It is clear that owners and managers have different interests, including economic ones. If the main criterion for a shareholder's activity is to maximize income (profit) per share and the growth of its rate, then managers strive to increase the stability of the enterprise they manage, i.e., most likely, they tend to formulate and implement long-term (strategic) goals, in contrast to shareholders. outgoing, as a rule, from the setting of short-term goals.

Another very important point for a manager related to shareholders is that the risk posed by shareholders is the most dangerous for the firm. It is hard to imagine what could happen to a firm in the event of a panic between shareholders, who are not always as economically literate as managers. Shareholders are more likely to respond to rumors that may be deliberately spread by unscrupulous competitors. Their (shareholders') behavior is very difficult to regulate, since they are the owners, and the managers are only hired managers. Therefore, for managers, the issue of neutralizing shareholders becomes fundamental. By solving it, they will be able to reduce or even eliminate the risk associated with the behavior of shareholders.

In this regard, the role of the general meeting of shareholders and the report on it by the managers of the enterprise increases immeasurably (the financial section is the most important here, because it is written in a language understandable to shareholders - income, expenses, profits, losses, etc.). Shareholders are especially interested in the indicator of net earnings per share in the future period (let's not forget, we must neutralize shareholders, at least until the next shareholders meeting).

So, the net earnings per share in the future period is determined as follows:

Earnings per share in the future period = Earnings per share in the current period x (1 + the level of the associated effect of financial and operating leverage) x Percentage change in revenue from product sales

In the formula, the last factor - the percentage change in revenue from product sales, is determined according to the rules we have already formulated (see above), so financial managers have a tool to reassure shareholders. Obviously, if an increase in revenue is planned in the next period, this will have a positive effect on the amount of net earnings per share in the future period. A calm shareholder is actually a neutralized shareholder.
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