The level of production leverage is calculated as a ratio. Production leverage

Production leverage is identified by assessing the relationship between the total revenue of a commercial organization, its earnings before interest and taxes, and production costs.

The main elements of the cost of production are variable and fixed costs, and the ratio between them can be different and is determined by the technical and technological policy chosen by the enterprise. Changing the cost structure can significantly affect the amount of profit. Investing in fixed assets is accompanied by an increase in fixed costs and, at least theoretically, a decrease in variable costs. However, the dependence is non-linear, so finding the optimal combination of fixed and variable costs is not easy. This relationship is characterized by the category of production or operating leverage, the level of which determines, in addition, the amount of production risk associated with the company.

Production leverage is quantitatively characterized by the ratio between fixed and variable costs in their total amount and the variability of the indicator "earnings before interest and taxes". It is this indicator of profit that makes it possible to isolate and evaluate the impact of the volatility of operating leverage on the financial performance of the company.

The graph of changes in sales volume reflects the relationship between these indicators (Fig. 1.1.).

The analytical connection of the graph parameters is represented by the following formula:

where S - implementation in value terms;

VC - variable production costs;

FC - semi-fixed production costs;

GI is earnings before interest and taxes.

Fig.1.1. Graph of volume change

Converting this formula to the form

shows the volume of sales of products Q in natural units.

It is called specific marginal profit, where p is the price of a unit of production, v is the variable production costs per unit of production.

Using this formula, by setting the required profit, you can calculate the amount of products that need to be produced. For profit G/ = 0, the amount of production in the "dead center" or the profitability threshold (threshold sales volume) is calculated.

Such calculations are called the method of critical sales volume - the determination for each specific situation of the volume of sales of products in accordance with existing production costs and profits.

Production leverage - the relationship between changes in net profit and changes in sales.

Production leverage - a progressive increase in net profit with an increase in sales, due to the presence of fixed costs that do not change with an increase in production and sales 11 Kovalev VV Introduction to financial management. M.: Finance and statistics 2008. p. 91.

There are three main indicators of production leverage: DOL d , DOL p , DOL r

Let's consider them in more detail.

The share of fixed production costs in the total cost, or, equivalently, the ratio of fixed and variable costs (DOL d) is the first indicator of production leverage:

If the share of fixed costs is high, the company is said to have a high level of operating leverage. For such a company, sometimes even a slight change in production volumes can lead to a significant change in profits, since the company has to bear fixed costs in any case, whether products are produced or not.

The ratio of net profit to fixed production costs (DOL p) is the second indicator of production leverage:

where P n - net profit;

FC- fixed production costs.

The ratio of the rate of change in profit before interest and taxes to the rate of change in sales volume in natural units (DOL r) is the third indicator of production leverage.

As follows from the definition, the indicator can be calculated by the formula:

where DGI - the rate of change in earnings before interest and taxes percent);

D Q - the rate of change in the volume of sales in natural units percent).

The main purpose of these indicators - control and analysis in; production dynamics.

Ceteris paribus, growth in the dynamics of DOL r and DOL d as well as a decrease in DOL p means an increase in the level of production leverage and an increase in the probability of achieving a given level of profit.

The third indicator after some transformations should be written using the equation:

Economic meaning of DOL r quite simple - it shows the degree of sensitivity of profit before interest and taxes of a commercial organization to changes in the volume of production in natural units. Namely, for a commercial organization with a high level of production leverage, a small change in the volume of production can lead to a significant change in earnings before interest and taxes.

As you can see from the dead center equation, when the profit GI tends to zero, the DOL r ratio rises strongly.

The DOL r indicator is called the force of the operating leverage. It is concluded that at a small distance from the threshold of profitability, the force of the impact of the operating lever will be maximum, and then it will begin to decrease again; and so on until a new jump in fixed costs with overcoming a new threshold of profitability.

The impact of the production lever is associated with entrepreneurial risk.

Entrepreneurial risk - the risk of shortfall in earnings before interest and taxes. Risk is the probability of potential loss of invested funds, or shortfall in income compared to the project or plan. Risk can be assessed using statistical methods based on the calculation of the standard deviation of a variable such as sales or profits. In practice, risk assessment methods using the leverage effect have found wide application. According to the concept of the lever

Total Leverage = Operating Leverage × Financial Leverage

The assessment of the strength of the production lever depends on the ratio of fixed costs and profits of the enterprise. The strength of the impact is expressed as the percentage change in gross profit caused by each percentage change in sales revenue. The level of production leverage is calculated as the following ratio:

Gross Profit + Fixed Costs/Gross Profit = 1 + Fixed Costs/Gross Profit

The strength of the impact of the operating lever indicates the level of entrepreneurial risk of the enterprise: with a high value of the strength of the operating lever, each percentage of the decrease in revenue gives a significant decrease in profit 11 Kovalev VV Workshop on financial management. Abstract of lectures with tasks. M.: Finance and statistics, 2007, p. 59.

Analysis of the level of production leverage is presented in the next chapter of this course work.

Production and financial leverage

The general category is production and financial leverage. Its influence is determined by evaluating the relationship of three indicators: revenue, production and financial costs of net profit 11 Handbook of the financier of the enterprise, 2nd ed. - M.: Infra-M, 2007, p. 152.

On fig. 1.2. a diagram of the relationship of these indicators and the types of leverage related to them are presented.

Semi-fixed costs of production and financial nature largely determine the final financial results of the enterprise. The choice of more or less capital-intensive activities determines the level of operating leverage. The choice of the optimal structure of sources of funds is associated with financial leverage. As for the relationship between the two types of leverage, it is quite common to believe that they should be inversely related - a high level of operating leverage in a company suggests the desirability of a relatively low level of financial leverage and vice versa.

It is believed that the combination of a powerful operating leverage with a powerful financial leverage can be disastrous for an enterprise, as business and financial risks mutually multiply, multiplying adverse effects.

The task of reducing the overall risk associated with the enterprise, is reduced mainly to the choice of one of three options.

1. High level of financial leverage combined with weak operating leverage.

2. Low level of financial leverage combined with strong operating leverage.

3. Moderate levels of financial and operational leverage effects - and this option is often the hardest to achieve.

Rice. 1.2. Relationship between income and leverage

Production and financial leverage summarizes the categories of production and financial leverage. Level it up (DTL) can be assessed as follows:

where I n - interest on loans and borrowings.

It follows that production and financial risks are cumulated in the form of a general risk, which is understood as the risk associated with a possible lack of funds to cover current costs and expenses for servicing external sources 11 Financial management: Textbook / Ed. G. B. Poliak. - M.: Finance, UNITI, 2007, p. 80.

The calculation of production - financial leverage is also presented in the next chapter of the course work.

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MINISTER OF EDUCATION AND SCIENCE OF THE REPUBLIC OF KAZAKHSTAN

ALMATY ACADEMY OF ECONOMICS AND STATISTICS

DEPARTMENT "FINANCE"

Course work

Subject "Finance"

On the topic: "Estimation of production leverage"

3rd year SPO group students

Specialties "Finance"

Akparova G.B.

Almaty 2013

Introduction

1. Estimation of production leverage

1.1 Concept - financial leverage

1.2 Estimating operating leverage

1.3 Estimating financial leverage

1.4 Assessment of production and financial leverage

2. Types of potential leverage

2.1 Positive potential (or effect) of financial leverage

2.2 Negative potential (or effect) of operating leverage

Conclusion

List of used literature

Introduction

Under the production, or operating, leverage (Operating Leverage) is understood a certain characteristic of semi-fixed costs (costs) of a production nature (i.e., non-financial) in the total amount of the company's current costs as a factor in the variability of its financial result, which is the indicator of operating profit The process of optimizing the structure of assets and liabilities of an enterprise in order to increase profits in financial analysis is called leverage. There are three types of leverage: production, financial and production-financial. In the literal sense, "leverage" is a lever, with a little effort which can significantly change the results of the production and financial activities of the enterprise. Under financial leverage (Financial Leverage) is understood a certain characteristic of financial conditionally fixed costs (costs) in the total amount of current costs (costs) of the company as a factor in the variability of its financial result. Depending on the measure chosen, financial leverage can be measured in different ways. The negative potential (or effect) of operational leverage is predetermined by the fact that investments in long-term non-financial assets represent a risky diversion of funds. Let's imagine that an expensive technological line was purchased in the expectation of an increased demand for the products manufactured on it, but the calculations turned out to be erroneous, the products "did not work." As noted above, production and (DTL). DTL

1. Otsenc production leverage

1.1 Concept- financial leverage

The process of optimizing the structure of assets and liabilities of an enterprise in order to increase profits in financial analysis is called leverage. There are three types of leverage: production, financial and production-financial. In the literal sense, "leverage" is a lever, with a little effort which can significantly change the results of the production and financial activities of the enterprise. To reveal its essence, we present the factor model of net profit (NP) as the difference between revenue (B) and production costs (IP) and financial nature (FI):

PE=V-IP-IF

Production costs are the costs of production and sale of products (full cost). Depending on the volume of production, they are divided into fixed and variable. The ratio between these parts of the costs depends on the technical and technological strategy of the enterprise and its investment policy. Capital investment in fixed assets causes an increase in fixed costs and a relative reduction in variable costs. The relationship between the volume of production, fixed and variable costs is expressed by the indicator of production leverage (operating leverage). According to V.V. Kovalev, production leverage is the potential opportunity to influence the profit of an enterprise by changing the structure of the cost of production and the volume of its output. The level of production leverage is calculated as the ratio of the growth rate of gross profit (?P%) (before interest and taxes) to the growth rate of sales volume in physical, nominal units or in value terms (?VRP%)

Kp.l \u003d (? P%) / (? VRP%)

It shows the degree of sensitivity of gross profit to changes in the volume of production. With its high value, even a slight decline or increase in production leads to a significant change in profit. A higher level of production leverage usually has enterprises with a higher level of technical equipment of production. With an increase in the level of technical equipment, there is an increase in the share of fixed costs and the level of production leverage. The table shows that the enterprise with the highest ratio of fixed costs to variables has the highest value of production leverage. Each percentage increase in output under the current cost structure ensures an increase in gross profit at the first enterprise of 3%, at the second - 4.125%, at the third - 6%. Accordingly, with a decline in production, profit at the third enterprise will decrease 2 times faster than at the first. Consequently, the third enterprise has a higher degree of production risk. Graphically, this can be represented as follows:

On the abscissa axis, the volume of production is plotted on an appropriate scale, and on the ordinate axis, the increase in profit (in percent). The point of intersection with the abscissa axis (the so-called "dead point", or equilibrium point, or break-even sales volume) shows how much each company needs to produce and sell products in order to reimburse fixed costs. It is calculated by dividing the sum of fixed costs by the difference between the price of the product and specific variable costs. With the current structure, the breakeven volume for the first enterprise is 2000, for the second - 2273, for the third - 2500. The greater the value of this indicator and the angle of the graph to the abscissa, the higher the degree of production risk. The second component of the formula

PE=V-IP-IF

financial costs (debt servicing costs). Their value depends on the amount of borrowed funds and their share in the total amount of invested capital. As already noted, an increase in the leverage of financial leverage (the ratio of debt and equity) can lead to both an increase and a decrease in net profit. The relationship between profit and the ratio of equity to debt capital is financial leverage. By definition, V.V. Kovaleva, financial leverage- the potential opportunity to influence the profit of the enterprise by changing the volume and structure of equity and borrowed capital. Its level is measured by the ratio of the growth rate of net profit (?NP%) to the growth rate of gross profit (?P%): Kf.l = (? PE%/? P%) It shows how many times the growth rate of net profit exceeds the growth rate of gross profit. This excess is ensured by the effect of financial leverage, one of the components of which is its leverage (the ratio of borrowed capital to equity capital). By increasing or decreasing the leverage depending on the prevailing conditions, it is possible to influence the profit and return on equity. An increase in financial leverage is accompanied by an increase in the degree of financial risk associated with a possible lack of funds to pay interest on loans and borrowings. A slight change in gross profit and return on invested capital in conditions of high financial leverage can lead to a significant change in net profit, which is dangerous during a decline in production. If an enterprise finances its activities only from its own funds, the financial leverage ratio is equal to 1, i.e. there is no leverage effect. In this situation, a change in gross profit by one percent leads to the same increase or decrease in net profit. It is easy to see that with an increase in the share of borrowed capital, the range of variation in the return on equity (RCC), the financial leverage ratio and net profit increases. This indicates an increase in the degree of financial risk of investing with a high leverage. Graphically, this dependence is shown in the figure below:

The abscissa shows the value of gross profit on an appropriate scale, and the ordinate shows the return on equity as a percentage. The point of intersection with the x-axis is called the financial critical point, which shows the minimum amount of profit required to cover the financial costs of servicing loans. At the same time, it also reflects the degree of financial risk. The degree of risk is also characterized by the steep slope of the graph to the x-axis. The general indicator is production and financial leverage- the product of the levels of production and financial leverage. It reflects the general risk associated with a possible lack of funds to cover production costs and financial costs of servicing external debt.

For example, the increase in sales is 20%, gross profit - 60%, net profit - 75%:

Kp.l= 60/20=3, Kf.l=75/60=1.25, Kp-f.l=3x 1.25=3.75

Based on these data, we can conclude that with the current cost structure at the enterprise and the structure of capital sources, an increase in production by 1% will ensure an increase in gross profit by 3% and an increase in net profit by 3.75%. Each percentage increase in gross profit will result in a 1.25% increase in net profit. In the same proportion, these indicators will change with a decline in production. Using them, it is possible to evaluate and predict the degree of production and financial investment risk.

1. 2 Estimation of production leverage

Under the production, or operating, leverage (Operating Leverage) is understood a certain characteristic of semi-fixed costs (costs) of a production nature (i.e., non-financial) in the total amount of the company's current costs as a factor in the variability of its financial result, which is the indicator of operating profit . Depending on the measure chosen, production leverage can be measured in different ways. Managing the dynamics and value of this indicator is an element of the company's development strategy, i.e. operating leverage is a strategic measure of its economic potential. The fact is that the variation of this factor means more or less attention to investments in the material and technical base. Increasing the level of operating leverage leads, on the one hand, to an increase in the technical level of the company, i.e. to an increase in its property of the share of non-current assets, which, as you know, serve as the main material generating production factor; on the other hand, to the emergence of an additional risk of non-recoupment of capital investments made. The logic here is obvious and for clarity can be represented by the following chain:

A is preferable to M is preferable to R,

where A is automation. M - mechanization, P - manual labor.

The positive potential (effect) of operating leverage is due to the fact that, in general, mechanization and automation measures are economically profitable: new equipment and technology allow the company to gain competitive advantages. If the investment object was chosen correctly, investments in it will quickly pay off and the company and its owners will receive additional income. Ceteris paribus and a reasonable choice of investment directions, increasing the technical level of the company is beneficial both for the company itself and for its owners.

1.3 Estimation of financial leverage

Under financial leverage (Financial Leverage) is understood a certain characteristic of financial conditionally fixed costs (costs) in the total amount of current costs (costs) of the company as a factor in the variability of its financial result. Depending on the measure chosen, financial leverage can be measured in different ways. Managing the value of this indicator is an element of the company's development strategy, that is, financial leverage is a strategic characteristic of its economic potential. The fact is that the variation in the level of this indicator means a greater or lesser substitution of own sources of financing with funds attracted from third parties on a long-term paid basis. In other words, by attracting funds from landers, the firm binds itself for a long time not only to return the principal amount of the debt at the right time, but also to regularly pay interest as a payment for the use of these funds. The payment of interest is mandatory and depends on the final financial results. Recall that the payment of dividends as a form of regular remuneration of shareholders for the use of their funds by the company is not mandatory, therefore, replacing equity capital with borrowed capital increases the financial risk embodied in this company (roughly speaking, you can wait with dividends, but you can’t wait with interest).

Thus, the essence, significance and effect of financial leverage can be expressed in the following theses. A high share of borrowed capital in the total amount of long-term sources of financing is characterized as a high level of 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, i.e. third-party investors lending to the firm on a temporary basis.

Attracting long-term loans and borrowings is accompanied by an increase in financial leverage and, accordingly, financial risk, which is expressed in an increase in the probability of non-payment of mandatory interest expenses as payment for the received financial resources. The essence of financial risk lies in the fact that regular payments (for example, interest) are mandatory, therefore, in case of insufficiency of the source (as such), it may be necessary to liquidate part of the assets, which, as a rule, is accompanied by direct and indirect losses. 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 are satisfied, and only then - the owners of the enterprise) can lead to a significant change in net income. Managing the level of financial leverage, and, consequently, the level of financial risk does not mean reaching a certain target value, but, first of all, controlling its dynamics and providing a comfortable safety margin in terms of exceeding operating profit (i.e., earnings before interest and taxes) over the amount of semi-fixed financial expenses (on an annualized basis).

Theoretically, financial leverage can be equal to 0; this means that the company finances its activities only from its own funds, i.e. capital provided by owners and generated profits; such a company is often called financially independent (unlevered company). If there is attraction of borrowed capital (bond loan, long-term loan), the company is considered as having a high level of financial leverage, or financially dependent (highly leveraged company).

1.4 Assessment of production and financial leverage

As noted above, production and financial leverage is summarized by the category "production-financial leverage" (DTL). By analogy with operational and financial leverage, the level DTL can be measured as the coefficient of elasticity between net profit and the volume of production in natural units.

In such an assessment, the production and financial leverage really generalizes the production and financial leverages and is equal to their product:

By simple transformations of the formula, it can be shown that the indicator "production-financial leverage" (DTL r) summarizes the impact of semi-fixed production costs (characterize production risk), operating profit and interest on long-term loans and borrowings (characterize financial risk):

You can derive a formula that allows you to calculate the value DTL, as a function of output Q for given values of semi-fixed costs, interest on loans and borrowings, income tax rates, unit prices, variable production costs per unit of output:

It is obvious that any decision of a financial nature is made in three stages: at the first, financing needs are determined, at the second - the possibilities for mobilizing sources of funds, at the third - financial instruments that can and should be used in the financing process. The number of fundamentally different sources is limited, these are own funds (profit and share capital) and borrowed funds (short-term and long-term sources). Each source has its own advantages and disadvantages.

Profit is formally considered the most accessible source, but it is limited in volume, highly variable, and involves highly desirable, i.e., practically mandatory, areas of use (for example, the payment of dividends). Equity capital is an expensive source of funds. Short-term liabilities (for example, bank loans) have a number of obvious advantages: lower costs for mobilizing this source compared to the issuance of shares and bonds, lower interest rates compared to long-term loans and borrowings, greater dynamism, since the amount of credit can be controlled depending on financial needs, etc. At the same time, focusing on this source is associated with a number of negative aspects: it is hardly advisable to link strategy issues with short-term sources, rates on short-term loans are very volatile, the risk of liquidity loss increases, etc.

In particular, the problem of liquidity in relation to borrowed funds arises whenever it is necessary to settle with the creditor either on current interest or, much more significantly, on the principal amount of the debt; the more often the need for credit settlements arises, the greater the likelihood of an aggravation of the liquidity problem. Thus, it is quite logical to attract long-term borrowed funds; the leverage effect is manifested in the fact that the cost of maintaining this source is less than its contribution to the generation of additional profit, i.e., in the end, the well-being of the owners of the enterprise grows.

Financial leverage can be compared to a double-edged sword: on the one hand, an increase in its level, i.e. an increase in the share of long-term borrowed funds in the total amount of capital, leads to additional profit; on the other hand, the level of financial risk increases, as the costs of expanding this source increase, the amount of mandatory fixed current expenses increases, the probability of bankruptcy increases, etc.

Practical actions for managing leverage are not amenable to strict formalization and depend on a number of factors: sales stability, the degree of market saturation with the products of a given company, the availability of reserve borrowing potential, the pace of company development, the current structure of assets and liabilities, the tax policy of the state in relation to investment activities, the current and prospective situation in the stock markets, etc.

In particular, if the company has a strong position in the market of goods and services, i.e. profit is generated in sufficient volume, and the possibilities of consumption of products in the goods market are not exhausted, then the company may well resort to attracting additional borrowed capital to expand the scale of activities. If the company has not exhausted its reserve borrowing potential, and investment opportunities look attractive, then it is quite justified to rely on long-term borrowed funds to realize them. It is obvious that companies that are at the stage of rapid development, i.e. companies that successfully scale up their production capacity may be more leveraged than companies whose business is not as successful. Some increase in financial risk compared to its industry average value looks justified here.

When determining the company's development strategy, it is necessary to remember the close relationship between operational and financial leverage. Note that a relatively small share of long-term borrowings should not necessarily be interpreted as the inability of the company's management to attract external sources; such a situation can take place in highly profitable industries, when the generated profit is sufficient for current and future financing. We examined the role of leverage from the standpoint of production and financial risk. For a financial manager, financial leverage plays a particularly important role.

2. Types of potential leverage

2.1 Positive potential (or effect) of financial leverage

It is predetermined by the fact that the amount of funds attracted from landers (borrowed capital) is usually cheaper than that attracted from owners (own capital). Indeed, let's imagine that a certain amount is attracted from the owners and from the landers. At the end of the year, persons who have provided their capital are paid a certain equal remuneration: owners - dividends, landers - interest.

Dividends are part of net profit (ie, after settlements with the budget for taxes), interest is part of the cost. Writing off interest on cost leads to a decrease in taxable profit, i.e., to a smaller outflow of funds for paying taxes. Attracting funds in the form of borrowed capital is more profitable, since less is given to the budget, more is left to the owners in the form of capitalized income. Thus, if the company is working successfully, and the cost of borrowed capital is covered by the income generated by it, it is profitable to increase its capacity through landers.

The negative potential (or effect) of financial leverage is determined by the fact that the payment of interest on borrowed capital is mandatory, while the payment of dividends is not. In other words, if some capital was involved in the business, but the business did not go, then the consequences of such a development of events differ fundamentally depending on who was the source of the capital - the owners or landers. Owners can wait until better times to receive dividends, while landers demand their remuneration regardless of current performance. Therefore, if capital is involved in the business, but there is no current return (perhaps this is temporary), extraordinary measures will have to be resorted to for settlements with landers, up to the sale of property, which is fraught with serious financial losses, and in the worst case, bankruptcy. This is the essence of financial risk. Similarly With production leverage level of financial leverage (DFL) can be measured by several indicators; two of them are most famous; debt to equity ratio (DFL p) and the ratio of the rate of change in net income to the rate of change in earnings before interest and taxes (DFL r).

The first indicator is very clear, easy to calculate and interpret, it is most often used to characterize the company as a whole, as well as in comparative analysis, since, in addition to the above-mentioned advantages, it is characterized by spatial and temporal comparability. The second indicator is more difficult to calculate and interpret; it is better to use it in dynamic analysis, as well as to quantify the consequences of the development of the financial and economic situation (production volume, product sales, forced or targeted change in pricing policy, etc.) under the conditions of the chosen capital structure, i.e., the chosen level financial leverage (the situation is similar to the above situation with operational leverage). Regarding the change in these indicators for a particular company, we can say the following: other things being equal, their growth in dynamics is unfavorable (an increase in financial leverage is equivalent to an increase in financial risk).

As follows from the definition, the value DFL r can be calculated using the formula

where T N.I. -- rate of change in net profit (in percent) T ebit -- the rate of change in earnings before interest and taxes (as a percentage).

Using the above notation and the scheme of the relationship between income and leverage, it can be transformed into a more convenient form (taking into account the constancy of the value in)

EBIT = contQ- FC

NI = (EBIT-In)(1-T)

DNI = DEV1T(1-T)

where N1 -- net profit;

EBIT-- earnings before interest and taxes; In -- interest on loans and borrowings; T -- average tax rate.

So, from the above formula it can be seen that the level of financial leverage really characterizes the relationship between operating profit and taxable profit (provided that the profit taxation system does not change; for example, the rate is constant), this means the relationship between two indicators of profit - operating and net. Coefficient DFL r has a very clear interpretation. It shows how many times the income (before interest and taxes) exceeds taxable income. The lower limit of the coefficient is 1. The larger the relative amount of borrowed funds attracted by the enterprise, the greater the amount of interest paid on them, the higher the level of financial leverage, the more variable 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 level of financial leverage, ceteris paribus, leads to greater financial instability, expressed in a certain unpredictability of net profit. Since the payment of interest (as opposed to, for example, the payment of dividends) is mandatory, with a relatively high level of financial leverage, even a slight decrease in operating profit can have very unpleasant consequences. As in the case of production costs, the relationship here is more complex.

The effect of financial leverage is that the higher its value, the more non-linear the relationship between net income and earnings before interest and taxes. One thing is clear - a slight change (increase or decrease) in earnings before interest and taxes in a highly leveraged environment can lead to a significant change in net income. Spatial comparisons of levels of financial leverage are possible only if the base value of the gross income of the commercial organizations being compared is the same. From the above reasoning, it is clear why the concept of financial risk is closely intertwined with the category of financial leverage. Financial risk is associated with a possible lack of funds to pay interest on long-term loans and borrowings. The increase in financial leverage is accompanied by an increase in the riskiness of this commercial organization.

This is manifested in the fact that for two organizations with the same volume of production, but a different level of financial leverage, the variation in net profit due to changes in the volume of production will not be the same. It will be larger for a commercial organization with a higher financial leverage value. Let's look at a few examples. Example Suppose that in the conditions of the previous example, the company BB uses borrowed capital to a greater extent; this means that it has higher fixed financial costs. Income tax is 20%. It is required to analyze the impact of financial leverage on return on sales and return on equity. Solution. In table. 1 shows the calculations of the impact of financial leverage on the change in the profitability of the company in the case of varying production volumes.

Table 1 Variation analysis of profitability as a function of financial leverage, (thousand tenge)

Index	Basic option	Decreased production by 20%	Increasing production by 20%
	IP Halykova	IP Akparova	IP Halykova	IP Akparova	IP Halykova	IP Akparova


operating income (profit from sales, EBIT)
Interest payable (fixed financial costs)
Taxable income (NI)

Net profit
Net profitability of sold products, %
Level of financial leverage

Return on equity, ROE, %
Decrease (-) or increase ROE, percentage points

The level of financial leverage, calculated as the ratio of debt to equity, in Akparov LLP is almost 4 times higher than in Halykov LLP , i.e., the financial risk associated with it is much higher. This is manifested in the variation of net profit and net profitability. So, with an unfavorable development of the situation, accompanied by a decline in production, the profitability of the less risky, in a financial sense, IP Halykov will decrease from 9.2% to 6.0%, while IP Akparov this decrease will be much more significant - from 12% to 6%. Even more indicative is the dynamics of the net profitability of sales; if in the basic version IP Akparov was more profitable (19.2% versus 18.4%), then in the event of a decline in sales, the company becomes more profitable AA. A situation is possible when the margin of safety in relation to market fluctuations in sales of the firm is low; it means that the profit from sales is less than the fixed financial costs (interest payments). The firm will be forced to pay off the Dendera-MU not from current income, but from a decrease in equity capital.

Example

Data on companies with the same amount of capital, but a different structure of sources (tg.) are given.

Solution

In table. 2 shows the results of calculations that allow us to make a comparative description of the change in the net profit of two firms. Companies' revenues are declining, and by the third goal, the need to pay expenses to maintain borrowed sources of funds that are mandatory in Akparov LLP leads to losses; because in Halykov LLP the costs of maintaining borrowed sources of funds are lower, the negative impact of a decrease in profits on the final financial result is significantly lower.

Table 2 Effect of the level of financial leverage on the change in net profit

	Halykov LLP	LLP Akparova

Earnings before interest and taxes
Percentage to be paid
Taxable income

Profit to distribute

Earnings before interest and taxes
Percentage to be paid
Taxable income

Profit to distribute

Earnings before interest and taxes
Percentage to be paid
Taxable income

Profit to distribute

The above examples confirm the conclusion that a company with a higher level of financial dependence suffers more in the event of a decrease in operating income (which is manifested in a change in operating profit). Another aspect should also be noted. Interest rates on long-term bonds may change over time. If this change, from the point of view of borrowers, is negative, i.e., rates are rising, then a company with a higher level of financial leverage is more sensitive to such changes. When making decisions on the advisability of changing the capital structure, the impact of financial leverage can be taken into account using the net profit indicator. Example To make a comparative analysis of financial risk with a different capital structure of a commercial organization (Table 3). How does the return on equity change (ROE) with a deviation of earnings before interest and taxes from the baseline RUB b mln. on 10%?

Table 3 Initial information for a comparative analysis of the impact of the level of financial leverage, (thousand tenge)

Graphs of dependence of the return on equity from the amount of operating profit for different options for long-term sources are shown in the figure.

Relationship between ROE and financial leverage

1. In the first version. when a commercial organization is fully funded by its own funds, the level of financial leverage is equal to one. In this case, it is customary to say that there is no financial dependence, and the change in net profit is completely determined by the change in profit before interest and taxes, that is, the change in production conditions. Indeed, in this case, a 10% change in earnings before interest and taxes results in the same change in net income.

2. The level of financial leverage increases with an increase in the share of borrowed capital. In this case, the range of variation of the indicator increases ROE(as the difference between the largest and smallest values). Compared with the option when the organization is fully financed by its own funds, for the capital structure with the highest level of borrowed funds, the range of variation ROE increased by 2 times. The same is true for the variation in net profit. For the capital structure with the highest financial leverage, a 10% change in earnings before interest and taxes results in a 15% change in net income. This indicates an increase in the risk of investing in an enterprise with a change in the capital structure towards an increase in the share of borrowed funds.

3. The dependence of financial risk on the capital structure at a qualitative level can be seen using the plotted graphs.

The point of intersection of the graph with the x-axis is the financial critical point. It shows the amount of operating profit, the minimum required to cover interest for the use of long-term borrowed capital. When plotted graphically in the chosen coordinates, financial risk is characterized by the value of the financial critical point (the larger this value, the higher the risk) and the steepness of the graph to the abscissa axis (the greater the steepness, the higher the risk). In the example under consideration, the greatest financial risk is characteristic of a structure with a large share of borrowed capital (50%).

4. This example can be viewed in a spatial or dynamic context. In the first case, three commercial organizations are compared, having the same volume of production, but a different capital structure. In the second case, there is one enterprise whose management is studying the feasibility of changing the capital structure (this option is quite real and corresponds to a situation where solid shareholders buy up part of the shares from small shareholders, compensating for the lack of capital with long-term loans). In both cases, the general conclusion is that an increase in the share of long-term borrowed funds leads to an increase in the return on equity, but at the same time there is an increase in financial risk.

2.2 Negative potential (or effect) of operating leverage

Investments in long-term non-financial assets represent a risky diversion of funds. Let's imagine that an expensive technological line was purchased in the expectation of an increased demand for the products manufactured on it, but the calculations turned out to be erroneous, the products "did not work." The best way out of this situation is to sell the line in whole or in part, but, as experience shows, the forced sale of any asset available on the market is always fraught with significant financial losses. (So, just bought a new car after leaving the market gates instantly loses 5--10% in price, since the next potential buyer will certainly have a question about the reasons for the imminent resale, i.e., the risk associated with this product increases, and therefore , and the requested discount as compensation for this risk.) Therefore, by definition, the acquisition of a technological line is accompanied, on the one hand, by an increase in operating leverage and hopes for additional profits, and, on the other hand, by the emergence of additional risk - the risk of this line not paying off. The risk associated with a change in the structure of production facilities is called production or operational and is part of the overall risk (the so-called business risk). So, the obvious consequence of operations of an investment nature is an increase in the overall risk embodied in the activities of this firm. There is a need for a gradual return on invested funds through the depreciation mechanism, there are hopes for additional income, but to what extent these hopes will be justified is a big question. Therefore, increasing operating leverage is an undertaking that requires careful justification; it can bring both additional income and significant losses. Note that a high level of operating leverage is typical for high-tech industries that, by definition, require significant investments. It is these industries (the so-called high-tech industries), as well as the securities of the companies representing them, that are considered, on the one hand, as promisingly very profitable, and on the other hand, as very risky.

Thus, the essence, significance and effect of operational leverage can be expressed in the following theses. A high share of semi-fixed production costs in the total cost of the reporting period is characterized as a high level of operating leverage and indicates a significant level of operational risk (synonym: production risk). An increase in the level of technical equipment of the company is accompanied by an increase in its inherent operating leverage and, accordingly, operational risk.

The essence of operational risk is that semi-fixed production costs are determined by the choice of this material and technical base as a source of current income generation and, therefore, must be covered by these incomes; if the choice was wrong, the current income may not be enough to cover the costs. For a company with a high level of operating leverage, even a small change in production volume, due to the well-known autonomy and inevitability of semi-fixed production costs, can lead to a significant change in operating profit. Companies with a relatively high level of production leverage are considered to be more risky in terms of production risk. (In this case, we mean the risk of not receiving profit before interest and taxes, i.e., the possibility of a situation where the company will not be able to cover its production costs.) Managing production leverage, and therefore operational risk, means not achieving some target values, but above all control over its dynamics and ensuring a comfortable margin of safety in terms of exceeding marginal income (i.e., profit before depreciation, interest and taxes) over the amount of semi-fixed production costs (on an annualized basis). Hence the conclusion: the level of operational leverage must be able to assess and manage it.

There are three main measures of operating leverage:

* the share of semi-fixed production costs in the total cost, or, equivalently, the ratio of semi-fixed and variable costs (this representation of operating leverage is the most common in practice) (DOL d);

* the ratio of net profit to material semi-fixed production costs (DOL p,);

* the ratio of the rate of change in profit (before interest and taxes) to the rate of change in sales volume in natural units (DOL r) t.

Each of the above indicators has its own advantages and disadvantages in terms of interpretability, spatio-temporal comparability and analyticity. In principle, these indicators can be used for both dynamic and inter-farm comparisons, but their main purpose is control and analysis in dynamics. Other things being equal growth in the dynamics of indicators DOL r and DOL d , as well as decline indicator DOL p means an increase in production leverage and the risk of achieving a given profit. The first two indicators are easy to interpret and do not require further explanation. The situation is somewhat more complicated with the indicator DOL r, although in terms of the transition to natural units it is possible to avoid the distorting effect of differing price fluctuations on resources, tariffs, and products. analyticity and clarity, its calculation is very useful. As follows from the definition, the indicator can be calculated by the formula

where T ebit-- the rate of change in earnings before interest and deductibles (percentage), T q -- rate of change in sales volume (percentage)

By simple transformations of the formula, it can be reduced to a simpler form. To do this, passing to natural units, we transform as follows.

pQ = vQ + FC + EBIT or contQ = FC + EBIT,

where p - price of a unit of production,

Q -- sales volume in natural terms,

v - variable production costs per unit of output,

FC - semi-fixed production costs,

EBIT -- Operating profit,

cont -- specific gross margin ( cont = p-- v)

It follows that when the volume of implementation changes, for example, from Q 0 to Q 1 , the corresponding change EBIT will be

DEBIT = EBIT 1 -EBIT 0 = cont Q 1 -contQ 0 = contDQ

Therefore, we get the following two representations:

FC and EBIT given without relativity to the base or reporting period - it does not matter. Received Views DOL r allow us to draw several conclusions. Firstly, the formula allows us to give a fairly clear economic interpretation of the indicator DOL T : it shows the degree of sensitivity of profit (before interest and taxes) of a commercial organization to a change in the volume of production in natural units (in other words, it is an elasticity coefficient showing how much the operating profit will change when the volume of production and sales changes by b%). For a commercial organization with a high level of production leverage, even a small change in the volume of production can lead to a significant change in earnings before interest and taxes. In other words, a relatively higher level of production leverage entails a greater volatility in profits. leverage financial dividends

Secondly, it follows that the level of operating leverage really depends on the ratio between semi-fixed production costs and operating profit. Indicator value DOL r is not constant for a given commercial organization and depends on the base level of production volume, from which the countdown is based. In particular, the highest values of the indicator DOL r, has in cases where the change in the volume of production occurs from levels not significantly exceeding the critical volume of sales; in this case, even a slight change in output leads to a significant relative change in earnings before interest and taxes; the reason is that the underlying profit value is close to zero. In other words, when characterizing the level of operating leverage using the indicator DOL r it is not so much its value that is important, but the variational analysis of the dependence of tempo indicators. We draw the analyst's attention to the following circumstance: spatial comparisons of the levels of production leverage are possible only for companies with the same basic level of output.

Table 4. Variation analysis of profitability as a function of operating leverage (thousand tenge)

Index	Base option	decline production by 20%	Increase production by 20%
IP Amarova	IP Akparova	IP Amarova	IP Akparova	IP Halykova	IP Akparova
Revenues from sales
variable costs
Marginal income
Semi-fixed production costs
Operating profit (sales profit)
operating profitability, %
Operating leverage level
Decrease (-) or increase (+) profitability, percentage points

The level of operating leverage is calculated as the ratio of the value of semi-fixed production costs to the total amount of costs:

That is, the value of this indicator is two times higher in Akparov LLP compared to Halykov LLP . This means that Akparov LLP has higher technical equipment and, accordingly, lower manual labor costs; this manifests itself in relatively lower variable costs. Such a policy is justified, since the operating profitability of sales (the ratio of operating profit to sales revenue) is higher in Akparov LLP. However, the company BB more risky than the company AA, since the profitability indicator varies to a greater extent (see the last line of the table). You can win significantly (for example, in the event of an economic recovery and growth in product sales), but you can also lose significantly (for example, in the event of an economic downturn accompanied by a decrease in production and sales volumes). This is the effect of operational leverage as a characteristic of the level of production risk of the company, its positive and negative potential.

Example

Analyze the level and effect of the production leverage of the three companies (A, B, C).

Let's make calculations for different production options:

production	Sales (thousand rubles)	total production costs nature (thousand rubles)	Profit up to deduction of interest and taxes (thousand roubles.)
Company BUT




Company AT




Company C

Using the formula, we calculate the point of critical sales volume for each company.

company BUT-- 30 thousand units.

company AT-- 36 thousand units.

company FROM-- 45 thousand units.

The level of production leverage with an increase in production volume from 80 thousand units. up to 88 thousand units the formula is calculated as follows:

Company BUT

Company AT

Company FROM

The enterprise has the highest value of the level of production leverage FROM; the same enterprise also has a higher level of semi-fixed production costs per ruble of variable costs. So, with a production volume of 50 thousand units. For the company BUT this indicator is equal to 0.3 (for 100 rubles of variable costs, there are 30 rubles of conditionally fixed costs); For the company AT -- 0.72; For the company FROM -- 1.35. Company C is therefore more sensitive to changes in output, as can be seen from the variation in earnings (before interest and taxes) as output varies. The economic meaning of the indicator "level of production leverage" in this case is as follows: if each of the companies plans to increase production by 10% (from 80 to 88 thousand units), this will be accompanied by an increase in profit (before interest and taxes): for the company BUT -- by 16%. For the company AT-- by 18.2%, for the company FROM -- by 22.9%. Note that the same will happen if there is a decrease in the volume of production in relation to the base level. As can be seen from the examples, the level of production leverage can be measured in different ways, and therefore its economic interpretation is far from always obvious (compare the calculation algorithms in the examples).

This implies the thesis given at the beginning of the section that leverage management consists primarily in controlling its dynamics...

Leverage is the management of assets and liabilities of an enterprise for profit, deleveraging is the process of reducing leverage

Concept and functions of production and financial leverage, financial leverage ratio, leverage formula, concept and functions of deleverage

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Leverage is the definition

Leverage is the process of managing the assets and liabilities of an enterprise, organization or institution in order to make a profit. In a literal sense, leverage is a lever, with a small effort of which you can significantly change the results of the production and financial activities of an enterprise, the ratio of capital investments in fixed income securities (bonds, preferred shares) and investments in securities with non-fixed income (ordinary shares).

Leverage is the ratio or balance between capital invested in fixed income securities (they include preferred shares, bonds, etc.) and capital invested in ordinary shares.

Leverage is the ratio of the fixed capital of an organization, an enterprise to borrowed, attracted funds. Leverage in financial analysis is interpreted as a factor, a small change in which can lead to a significant change in the resulting indicators. Any enterprise is a source of financial risk. In this case, the risk arises on the basis of factors of an industrial and financial nature that form the costs and income of the enterprise. Production and financial costs are not interchangeable, however, their structure can be controlled.

Leverage (from English leverage - leverage) is use of debt financing by attracting loans. The term "leverage" is used in several meanings. In the conditions of market relations, any commercial enterprise plans its activities in such a way as to get the maximum profit from its activities. Therefore, one of the urgent tasks of the current stage is the mastery of managers and financial managers with modern methods of effective management of profit formation in the process of production, investment and financial activities of the enterprise.

Leverage (translated from English - lever) is barbarism, i.e. direct borrowing of the American term "leverage", already widely used in domestic special literature; we note that in the UK the term “Gearing” is used for the same purpose. In some monographs, the term “lever” is used, which should hardly be recognized as successful even in a linguistic sense, since in a literal translation in English the lever is “lever”, but not “ 1 everge".

Leverage is the process of managing the assets and liabilities of an enterprise aimed at increasing (increasing) profits. The main effective indicator is the net profit of the company, which depends on many factors, and therefore various factor expansions of its change are possible. In particular, it can be represented as the difference between revenue and expenses of two main types: production nature and financial nature. They are not interchangeable, but the amount and share of each of these types of costs can be controlled. Such a presentation of the factor structure of profit is extremely important in a market economy and freedom in financing a commercial organization with loans from commercial banks, which differ significantly in interest rates offered by them.

Leverage is in the application to the financial sector, it is interpreted as a certain factor, a small change in which can lead to a significant change in the resulting indicators; in financial management, this term is used to characterize a relationship showing how and to what extent an increase or decrease in the share of a particular group of conditionally constant expenses (expenses) in the total amount of current expenses (expenses) affects the dynamics of the income of the company's owners.

Leverage is double-edged sword: it increases the income of the owners, while increasing their financial risks. Identification of the level of leverage is a characteristic of the potential danger of not achieving target profit values due to the need to incur significant semi-fixed costs that are not commensurate with the generated income. The specificity of semi-fixed costs is in their long-term and certainty for the future. This means that leverage is a long-term factor; in addition, a slight change in the factor itself or the conditions in which it operates can lead to a significant change in a number of performance indicators. , 30% at your own expense, 70% at the expense of the bank).

Deleverage is the process of reducing leverage, i.e. level of debt. It is believed that deleveraging is the main reason for the long-term (decade) cyclical downturn in economic activity.

High leverage pressure

All companies use financial leverage to some extent. The whole question is to what extent it is advisable to increase the loan, what is the reasonable ratio between own and borrowed capital. It is clear that borrowing too much increases risk, which in turn leads to higher interest rates. The basic rule of leverage is that if an enterprise borrows at an interest rate less than the return on assets, the return on capital will increase; if the company borrows money at a rate of interest higher than the return on assets, the return on equity will fall. Leverage is a very risky business for those enterprises whose activities are cyclical in nature (they include, for example, construction and the automotive industry). At these enterprises, sales volume fluctuates from year to year. As a result, several consecutive years of low sales can lead heavily leveraged businesses to bankruptcy.

Over the past few years, in the wake of the consumer boom, retail companies, construction and a number of other sectors of the domestic economy have been actively developing by attracting relatively cheap credit resources. There was a classic leverage, which in a growing economy allowed companies to achieve growth in financial performance at the expense of borrowed funds. However, as a result of the aggravation of the global financial crisis, banks began to reduce lending volumes and increase interest rates on credit resources.

Thus, in a crisis period, liquidity collapses, and the flywheel begins to spin in the opposite direction - a process of deleveraging takes place, when everyone has to “unload” balance sheets. A sharp decline in the availability of loans leads to a drop in demand, the sales markets themselves are shrinking, the use of production capacities is decreasing and workers are being laid off, which causes a new round of demand reduction, investment programs are suspended, plans for expanding production are postponed.

The global credit expansion of the last 20 years, accompanied by the growth of margin positions in the global financial system, is ending before our eyes, and this is happening quite dramatically: a liquidity crisis, a crisis of confidence, systemic risks, numerous defaults, global deleveraging. According to analysts, the most vulnerable in terms of creditworthiness in Russia are companies operating in real estate development, agricultural production, retail trade, air transportation, light and food industries.

In order to mitigate the impact of the crisis on various sectors of the Russian economy, the government and the Central Bank of Russia have developed a number of measures aimed at supporting the banking sector and a number of other sectors of the economy. Similar measures to stabilize the situation in the financial markets and support the economy were taken by the governments and central banks of many countries, both developed and developing.

At the moment, it is still too early to make predictions at what level of "cash injection" the suspension of the global deleveraging process will occur. After all, the bankruptcy of even one large corporation automatically generates default swap liabilities of up to several hundred billion dollars (default swaps are financial instruments used to speculate on a company's ability to pay its debt.

If the company is unable to pay its debts, the buyer is paid the face value of the securities he holds. A sharp drop in world stock markets leads to a significant depreciation of collateral in the form of shares or bonds. It is logical that creditors in this situation require additional collateral from companies, which often find it difficult to do something and offer something in the face of liquidity shortage. And only the saturation of the market with monetary resources can stop the current process of deleveraging in the global financial system, which, in general, the world's central banks and governments have been doing over the past month.

Leverage in the financial sector

The main performance indicator is the company's net profit, which depends on many factors, and therefore various factor expansions of its change are possible. In particular, it can be represented as the difference between revenue and expenses of two main types: production nature and financial nature. They are not interchangeable, but the amount and share of each of these types of costs can be controlled. Such a presentation of the factor structure of profit is extremely important in a market economy and freedom in financing a commercial organization with loans from commercial banks, which differ significantly in interest rates offered by them.

From the position of financial management of the activities of a commercial organization, net profit depends; firstly, on how rationally the financial resources provided to the enterprise are used, i.e. what they are invested in, and, secondly, on the structure of sources of funds. The first point is reflected in the volume and structure of fixed and working capital and the efficiency of their use. The main elements of the cost of production are variable and fixed costs, and the ratio between them can be different and is determined by the technical and technological policy chosen by the enterprise. Changing the cost structure can significantly affect the amount of profit. Investing in fixed assets is accompanied by an increase in fixed costs and, at least in theory, a decrease in variable costs.

However, the dependence is non-linear, so finding the optimal combination of fixed and variable costs is not easy. It is this relationship that is characterized by the category of production, or operational, leverage, the level of which, in addition, determines the amount of production risk associated with the company.

risk

Leverage in the application to the financial sector is interpreted as a certain factor, a small change in which can lead to a significant change in the resulting indicators. In financial management, the following types of leverage are distinguished:

Production (operational);

Financial.

Production leverage (from English leverage - leverage) is

Production leverage (English leverage - leverage) is a mechanism for managing the profit of an enterprise based on optimizing the ratio of fixed and variable costs. With its help, you can predict the change in the profit of the enterprise depending on the change in sales volume, as well as determine the break-even point.

A necessary condition for the application of the mechanism of production leverage is the use of the marginal method based on the division of the company's costs into fixed and variable. The lower the share of fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

Production leverage is determined using one of two formulas:

The value found using formula (1) production leverage effect further serves to predict changes

earnings depending on the change in the company's revenue. To do this, use the following formula:

For clarity, consider the effect of production leverage using an example:

Using the mechanism of industrial leverage, we predict the change in the profit of the enterprise depending on the change in revenue, and also determine the break-even point. For our example, the production leverage effect is 2.78 units (12,5000 / 45,000). This means that with a decrease in the company's revenue by 1%, the profit will decrease by 2.78%, and with a decrease in revenue by 36%, we will reach the profitability threshold, i.e. profit will be zero. Let's assume that the revenue will be reduced by 10% and will amount to 337,500 rubles. (375,000 - 375,000 * 10 / 100). Under these conditions, the profit of the enterprise will be reduced by 27.8% and amount to 32,490 rubles. (45,000 - 45,000 * 27.8 / 100).

Production leverage is an indicator that helps managers choose the optimal strategy for the enterprise in managing costs and profits. The amount of production leverage may change under the influence of: price and sales volume; variable and fixed costs; combinations of these factors. Let's consider the influence of each factor on the effect of production leverage based on the above example. An increase in the selling price by 10% (up to 825 rubles per unit) will lead to an increase in sales up to 412,500 rubles, marginal income - up to 162,500 rubles. (412,500 - 250,000) and profits - up to 82,500 rubles. (162,500 - 80,000). At the same time, the marginal income per unit of product will also increase from 250 (125,000 rubles / 500 pieces) to 325 rubles. (162,500 rubles / 500 pcs.). Under these conditions, a smaller volume of sales will be required to cover fixed costs: the break-even point will be 246 units. (80,000 rubles / 325 rubles), and the marginal margin of safety of the enterprise will increase to 254 units. (500 pieces - 246 pieces), or by 50.8%. As a result, the company can receive additional profit in the amount of 37,500 rubles. (82,500 - 45,000). At the same time, the effect of production leverage will decrease from 2.78 to 1.97 units (162,500 / 82,500).

Reducing variable costs by 10% (from 250,000 rubles to 225,000 rubles) will lead to an increase in marginal income up to 150,000 rubles. (375,000 - 225,000) and profits - up to 75,000 rubles. (150,000 - 80,000). As a result of this, the break-even point (profitability threshold) will increase to 200,000 rubles. , which in kind will be 400 pcs. (200,000: 500). As a result, the marginal margin of safety of the enterprise will be 175,000 rubles. (375,000 - 200,000), or 233 pcs. (175,000 rubles / 750 rubles). Under these conditions, the effect of production leverage at the enterprise will decrease to 2 units (150,000 / 75,000). With a decrease in fixed costs by 10% (from 80,000 rubles to 72,000 rubles), the profit of the enterprise will increase to 53,000 rubles. (375,000 - 250,000 - 72,000), or 17.8%. Under these conditions, the break-even point in monetary terms will be 216,000 rubles. , and in kind - 288 pcs. (216,000 / 750). At the same time, the marginal margin of safety of the enterprise will correspond to 159,000 rubles. (375,000 - 216,000), or 212 pcs. (159,000 / 750). As a result of a 10% reduction in fixed costs, the effect of production leverage will be 2.36 units (125,000 / 53,000) and, compared to the initial level, will decrease by 0.42 units (2.78 - 2.36).

The analysis of the above calculations allows us to conclude that the change in the effect of production leverage is based on the change in the share of fixed costs in the total cost of the enterprise. At the same time, it must be borne in mind that the sensitivity of profit to changes in sales volume can be ambiguous in enterprises with a different ratio of fixed and variable costs. The lower the share of fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

It should be noted that in specific situations, the manifestation of the mechanism of production leverage may have features that must be taken into account in the process of its use. These features are as follows: the positive impact of production leverage begins to appear only after the company has overcome the break-even point of its activities. In order for the positive effect of production leverage to begin to manifest itself, the enterprise must first receive a sufficient marginal income to cover its fixed costs.

This is due to the fact that the company is obliged to recover its fixed costs regardless of the specific volume of sales, therefore, the higher the amount of fixed costs, the later, other things being equal, it will reach the break-even point of its activities. Therefore, until the enterprise has ensured the break-even of its activities, a high level of fixed costs will be an additional “burden” on the way to reaching the break-even point.

As sales increase further and further away from the break-even point, the effect of production leverage begins to decline. Each subsequent percentage increase in sales will lead to an increasing rate of increase in the amount of profit. The mechanism of industrial leverage has the opposite direction: with any decrease in sales, the size of the enterprise's profit will decrease even more. There is an inverse relationship between the production leverage and the profit of the enterprise - the higher the profit of the enterprise, the lower the effect of the production leverage, and vice versa. This allows us to conclude that production leverage is a tool that equalizes the ratio of the level of profitability and the level of risk in the process of carrying out production activities.

The effect of production leverage is manifested only in the short period. This is determined by the fact that the fixed costs of the enterprise remain unchanged only for a short period of time. As soon as the next jump in the amount of fixed costs occurs in the process of increasing sales, the enterprise needs to overcome a new break-even point or adapt its production activities to it. In other words, after such a jump, the effect of production leverage manifests itself in new economic conditions in a new way.

With unfavorable commodity market conditions that determine a possible decrease in sales, as well as in the early stages of the life cycle of an enterprise, when it has not yet overcome the break-even point, it is necessary to take measures to reduce the fixed costs of the enterprise. And vice versa, with a favorable commodity market situation and the presence of a certain margin of safety, the requirements for the implementation of a regime of saving fixed costs can be significantly weakened. During such periods, an enterprise can significantly expand the volume of real investments by reconstructing and modernizing fixed production assets.

When managing fixed costs, it must be borne in mind that their high level largely depends on the industry-specific characteristics of the activity that determine the different level of capital intensity of manufactured products, the differentiation of the level of mechanization and automation of labor. In addition, it should be noted that fixed costs are less amenable to rapid change, so enterprises with a high value of production leverage lose flexibility in managing their costs.

However, despite these objective constraints, each enterprise has enough opportunities to reduce, if necessary, the amount and proportion of fixed costs. These reserves include: a significant reduction in overhead costs (management costs); sale of part of unused equipment and intangible assets in order to reduce the flow of depreciation; widespread use of short-term forms of leasing machinery and equipment instead of acquiring them as property; reduction in the volume of consumption of some utilities, etc.

When managing variable costs, the main guideline should be to ensure their constant readiness, since there is a direct relationship between the amount of these costs and the volume of production and sales. Providing these savings before the enterprise overcomes the break-even point leads to an increase in marginal income, which allows you to overcome this point faster. After breaking the break-even point, the amount of savings in variable costs will provide a direct increase in the profit of the enterprise. The main reserves for saving variable costs include: reducing the number of employees in the main and auxiliary industries by ensuring the growth of their labor productivity; reduction in the size of stocks of raw materials, materials and finished products during periods of unfavorable commodity market conditions; ensuring favorable conditions for the supply of raw materials and materials for the enterprise, etc. The use of the production leverage mechanism, targeted management of fixed and variable costs, and the rapid change in their ratio under changing business conditions will increase the potential for generating profits for the enterprise.

The concept of operating leverage is closely related to the cost structure of a company. Operating leverage or production leverage (leverage - leverage) is a company profit management mechanism based on improving the ratio of fixed and variable costs. It can be used to plan a change in the organization's profit depending on changes in sales volume, as well as determine the break-even point. A necessary condition for the application of the mechanism of operating leverage is the use of the marginal method based on the division of costs into fixed and variable. The lower the share of fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

As already mentioned, there are two types of costs in the enterprise: variable and fixed. Their structure as a whole, and in particular the level of fixed costs, in the total revenue of an enterprise or in revenue per unit of production can significantly affect the trend in profits or costs. This is due to the fact that each additional unit of production brings some additional profitability, which goes to cover fixed costs, and depending on the ratio of fixed and variable costs in the company's cost structure, the total increase in revenue from an additional unit of goods can be expressed in a significant sharp change in profit. As soon as the break-even point is reached, there is profit, which begins to grow faster than sales.

The operating lever is a tool for defining and analyzing this dependence. In other words, it is designed to establish the impact of profit on the change in sales volume. The essence of its action lies in the fact that with the growth of revenue there is a higher growth rate of profit, but this higher growth rate is limited by the ratio of fixed and variable costs. The lower the share of fixed costs, the less this limitation will be. Production (operating) leverage is quantitatively characterized by the ratio between fixed and variable costs in their total amount and the value of the indicator "Profit before interest and taxes". Knowing the production lever, it is possible to predict the change in profit with a change in revenue. There are price and natural price leverage. The price operating leverage (Pc) is calculated by the formula:

Natural operating leverage is calculated by the formula:

Comparing the formulas for operating leverage in price and physical terms, it can be seen that Рн has less influence. This is explained by the fact that with an increase in natural volumes, variable costs simultaneously grow, and with a decrease, they decrease, which leads to a slower increase / decrease in profits. The value of operating leverage can be considered an indicator of the riskiness of not only the enterprise itself, but also the type of business that the enterprise is engaged, since the ratio of fixed and variable costs in the overall cost structure is a reflection not only of the characteristics of this enterprise and its accounting policy, but also of industry-specific characteristics of activity.

However, it is impossible to consider that a high share of fixed costs in the cost structure of an enterprise is a negative factor, as well as to absolutize the value of marginal income. An increase in production leverage may indicate an increase in the production capacity of the enterprise, technical re-equipment, and an increase in labor productivity. The profit of an enterprise with a higher level of production leverage is more sensitive to changes in revenue.

With a sharp drop in sales, such an enterprise can very quickly "fall" below the breakeven level. In other words, an enterprise with a higher level of production leverage is more risky. Since operating leverage shows the dynamics of operating profit in response to changes in the company's revenue, and financial leverage characterizes the change in profit before tax after paying interest on loans and borrowings in response to changes in operating profit, total leverage gives an idea of how much percentage change in profit before taxes after interest payment for a change in revenue by 1%.

Thus, a small operating leverage can be increased by raising debt capital. High operating leverage, on the other hand, can be offset by low financial leverage. With the help of these powerful tools - operational and financial leverage - an enterprise can achieve the desired return on invested capital at a controlled level of risk.

In conclusion, we list the tasks that are solved with the help of the operating lever: calculation of the financial result for the whole organization, as well as for types of products, works or services based on the “costs - volume - profit” scheme; determination of the critical point of production and its use when making management decisions and setting prices for work; making decisions on additional orders (an answer to the question: will an additional order lead to an increase in fixed costs?); making a decision to stop the production of goods or services (if the price falls below the level of variable costs); decision tasks of profit maximization due to the relative reduction of fixed costs; the use of the profitability threshold in the development of production programs, setting prices for goods, works or services

A prosperous enterprise is an enterprise that receives a steady profit from its activities. This task can be implemented on a stable basis if the enterprise constantly studies the demand in the market, has a clear pricing policy, and also applies effective methods of planning, accounting, analysis, control and management of production volumes, product quality and costs. All these requirements are fully met by management accounting, the purpose of which is to provide information to enterprise managers responsible for specific areas and activities.

One of the effective methods of management accounting is the methodology for analyzing the ratio “costs - volume - profit” (“Cost - Volume - Profit” or “CVP analysis”), which allows you to determine the break-even point (profitability threshold), i.e. the point at which the company's income fully covers its expenses. Carrying out this analysis is impossible without such an important indicator as production leverage (leverage in literal translation is a lever). With its help, you can predict the change in the result (profit or loss) depending on the change in the company's revenue, as well as determine the break-even point (profitability threshold).

A necessary condition for the application of the mechanism of production leverage is the use of the marginal method based on the division of the company's costs into fixed and variable. As you know, fixed costs do not depend on the volume of production, and variables change with an increase (decrease) in output and sales. The lower the share of fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

is determined using the following formula:

The value of the effect of production leverage found using formula 1 is further used to predict the change in profit depending on the change in the company's revenue. To do this, use the following formula:

For clarity, consider the effect of production leverage on the following example:

Using we will predict the change in the profit of the enterprise depending on the change in revenue, and also determine the break-even point. For our example, the effect of production leverage is 3.5 units (1400:400). This means that with a decrease in the company's revenue by 1%, the profit will decrease by 3.5%, and with a decrease in revenue by 28.57%, we will reach the profitability threshold, i.e. profit will be zero. Let's assume that the revenue will be reduced by 10% and will amount to 4500 thousand rubles. (5000 - 5000 * 10: 100). Under these conditions, the company's profit will be reduced by 35% and amount to 260 thousand rubles. (400 - 400 ґ 35: 100). Production leverage is an indicator that helps managers choose the optimal strategy for the enterprise in managing costs and profits. The amount of production leverage can change under the influence of: price and sales volume; variable and fixed costs; a combination of any of the above factors.

Consider the impact of each factor on the effect of production leverage based on the above example. An increase in the selling price by 10% (up to 2750 rubles per unit) will lead to an increase in sales up to 5500 thousand rubles, marginal income - up to 1900 thousand rubles. (5500 - 3600) and profits up to 900 thousand rubles. (1900 - 1000). At the same time, the marginal income per unit of goods will also increase from 700 rubles. (1400 thousand rubles: 2000 units) up to 950 rubles. (1900 thousand rubles: 2000 units). Under these conditions, a smaller volume of sales will be required to cover fixed costs: the break-even point is 1053 units. (1000 thousand rubles: 770 rubles), and the safety margin of the enterprise will increase to 947 units. (2000 - 1053) or 47%. As a result, the company can receive additional profit in the amount of 500 thousand rubles. (900 - 400). At the same time, the effect of production leverage will decrease from 3.5 to 2.11 units (1900: 900).

Reducing variable costs by 10% (from 3,600 thousand rubles to 3,240 thousand rubles) will lead to an increase in marginal income to 1,760 thousand rubles. (5000 - 3240) and profits up to 760 thousand rubles. (1760 - 1000). As a result, the break-even point (profitability threshold) will increase to 2840.9 thousand rubles. , which in kind will be 1136 pcs. (2840.9: 2.5). As a result, the safety margin of the enterprise will amount to 2159.1 thousand rubles. (5000 - 2840.9) or 864 pcs. (2159.1 thousand rubles: 2.5 thousand rubles). Under these conditions, the effect of production leverage at the enterprise will decrease to 2.3 units (1760: 760).

With a decrease in fixed costs by 10% (from 1000 thousand rubles to 900 thousand rubles), the profit of the enterprise will increase to 500 thousand rubles. (5000 - 3600 - 900) or 25%. Under these conditions, the break-even point in monetary terms will be 3214.3 thousand rubles. , and in physical terms - 1286 pcs. (3214.3: 2.5). At the same time, the safety margin of the enterprise will correspond to 1785.7 thousand rubles. (5000 - 3214.3) or 714 pcs. (1785.7: 2.5). As a result, as a result of a 10% reduction in fixed costs, the effect of production leverage will be 2.8 units (1400: 500) and will decrease by 0.7 units (3.5 - 2.8) compared to the initial level.

The analysis of the above calculations allows us to conclude that the change in the effect of production leverage is based on the change in the share of fixed costs in the total cost of the enterprise. At the same time, it must be borne in mind that the sensitivity of profit to changes in sales volume can be ambiguous in enterprises with a different ratio of fixed and variable costs. The lower the share of fixed costs in the total cost of the enterprise, the more the profit value changes in relation to the rate of change in the enterprise's revenue. It should be noted that in specific situations, the manifestation of the mechanism of production leverage has a number of features that must be taken into account in the process of its use.

These features are as follows: 1. The positive impact of production leverage begins to manifest itself only after the company has overcome the break-even point of its activity. In order for the positive effect of production leverage to begin to manifest itself, the company must first receive a sufficient amount of marginal income to cover its fixed costs. This is due to the fact that the company is obliged to recover its fixed costs regardless of the specific volume of sales, therefore, the higher the amount of fixed costs, the later, other things being equal, it will reach the break-even point of its activities. In this regard, until the enterprise has ensured the break-even of its activities, a high level of fixed costs will be an additional “burden” on the way to reaching the break-even point.

2. As sales increase further and move away from the breakeven point, the effect of production leverage begins to decline. Each subsequent percentage increase in sales will lead to an increasing rate of increase in the amount of profit. 3. The mechanism of industrial leverage also has the opposite direction - with any decrease in sales, the size of the enterprise's profit will decrease even more.

4. There is an inverse relationship between the production leverage and the profit of the enterprise. The higher the profit of the enterprise, the lower the effect of production leverage and vice versa. This allows us to conclude that production leverage is a tool that equalizes the ratio of the level of profitability and the level of risk in the process of carrying out production activities.

5. The effect of production leverage appears only in a short period. This is determined by the fact that the fixed costs of the enterprise remain unchanged only for a short period of time. As soon as the next jump in the amount of fixed costs occurs in the process of increasing sales, the enterprise needs to overcome a new break-even point or adapt its production activities to it. In other words, after such a jump, the effect of production leverage manifests itself in new economic conditions in a new way.

Understanding the mechanism of manifestation of production leverage allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of production and economic activities under various trends in the commodity market and the stage of the life cycle of an enterprise. life cycle of the enterprise, when they have not yet overcome the break-even point, it is necessary to take measures to reduce the fixed costs of the enterprise.

And vice versa, with a favorable commodity market situation and the presence of a certain margin of safety, the requirements for the implementation of a regime of saving fixed costs can be significantly weakened. During such periods, an enterprise can significantly expand the volume of real investments by reconstructing and modernizing fixed production assets. When managing fixed costs, it should be borne in mind that their high level is largely determined by industry-specific characteristics of activity that determine a different level of capital intensity of manufactured products, differentiation of the level of mechanization and labor automation. In addition, it should be noted that fixed costs are less amenable to rapid change, so enterprises with a high value of production leverage lose flexibility in managing their costs.

However, despite these objective constraints, each enterprise has enough opportunities to reduce, if necessary, the amount and proportion of fixed costs. Such reserves include: a significant reduction in overhead costs (management costs) in case of unfavorable commodity market conditions; sale of part of unused equipment and intangible assets in order to reduce the flow of depreciation charges; widespread use of short-term forms of leasing machinery and equipment instead of acquiring them as property; reduction in the volume of a number of consumed utilities and others.

When managing variable costs, the main guideline should be to ensure their constant savings, since there is a direct relationship between the amount of these costs and the volume of production and sales. Providing these savings before the company overcomes the break-even point leads to an increase in marginal income, which allows you to quickly overcome this point. After breaking the break-even point, the amount of savings in variable costs will provide a direct increase in the profit of the enterprise. The main reserves for saving variable costs include: reducing the number of employees in the main and auxiliary industries by ensuring the growth of their labor productivity; reduction in the size of stocks of raw materials, materials and finished products during periods of unfavorable commodity market conditions; provision of favorable conditions for the supply of raw materials and materials for the enterprise, and others.

The use of the mechanism of production leverage, targeted management of fixed and variable costs, the rapid change in their ratio under changing business conditions will increase the potential for generating profits for the enterprise.

Financial leverage

Financial leverage is the ratio between bonds and preferred shares on the one hand and ordinary shares on the other. It is an indicator of the financial stability of a joint-stock company. On the other hand, it is the use of debt (borrowed funds) in order to increase the expected return on equity. In the third interpretation, financial leverage is a potential opportunity to influence the net profit of an enterprise by changing the volume and structure of long-term liabilities: by varying the ratio of own and borrowed funds to optimize interest payments. The question of the expediency of using borrowed capital is connected with the action of financial leverage: an increase in the share of borrowed funds can increase the return on equity.

In other words, it characterizes the relationship between the change in net profit and the change in profit before interest and taxes. In financial management, there are two concepts for calculating and determining the effect of financial leverage. These concepts originated in different schools of financial management.

First concept: Western European concept. The effect of financial leverage is interpreted as an increment to the return on equity, obtained through the use of borrowed capital. Consider the following example:

Conclusion: enterprises 2 and 3 use equity more efficiently; this is evidenced by the indicator of net return on equity (NRSK), and borrowed capital (LC) is used with a greater return than the price of its attraction. Such a strategy for attracting borrowed capital is called a capital speculation strategy. The indicator of profit before interest and taxes is a basic indicator of financial management, which characterizes the income generated by the enterprise on attracted capital. Otherwise, it is called the net result of the exploitation of investments (NREI)

Consider the impact of financial leverage on the net return on equity for an enterprise using both debt capital and equity, and derive a formula that reflects the impact of financial leverage on the economic return on assets (ERA):

So, the effect of financial leverage (EFL) according to 1 calculation concept is determined by:

The second concept: The American concept of calculating financial leverage. This concept considers the effect in the form of an increment in net income (NP) per 1 ordinary share per increment in the net result of the operation of investments (NREI), that is, this effect expresses the increase in net profit obtained by incrementing NREI :

From the above it follows:

This formula shows the degree of financial risk arising from the use of LC, therefore, the greater the impact of financial leverage, the greater the financial risk associated with this enterprise: a) for a banker - the risk of non-repayment of the loan increases, b) for an investor - the risk increases falling dividend and share price. the first concept of calculating the effect allows you to determine the safe amount and terms of the loan, the second concept allows you to determine the degree of financial risk, and is used to calculate the total risk of the enterprise.

Consider two options for financing an enterprise - from its own funds and using its own funds and borrowed capital. Let's assume that the level of return on assets (RA) is 20%. In the second option, due to the use of borrowed funds, the effect of financial leverage (leverage) was obtained - the return on equity increased.

The decision to use borrowed funds in one proportion or another is the subject of financial leverage. The ability to manage sources of financing to increase the return on equity is measured by the “level of financial leverage” indicator. The level of financial leverage is the ratio of the growth rate of net profit to the growth rate of gross income, characterizes sensitivity, the ability to manage net profit

The level of financial leverage increases with an increase in the share of borrowed capital in the asset structure. But, on the other hand, a large financial "lever" means a high risk of loss of financial stability: With an increase in the level of financial leverage, leverage risk increases. Leverage (financial risk) is the ability to become dependent on loans and borrowings in case of insufficient funds for settlements on loans, this is the risk of loss of liquidity / financial stability

the formula for calculating the effect of financial leverage is also applied:

where EFL is the effect of financial leverage, which consists in the increase in the return on equity ratio,%;

Snp - income tax rate, expressed as a decimal fraction; КВРа - coefficient of gross profitability of assets (the ratio of gross profit to the average value of assets),%;

PC - the average amount of interest on a loan paid by the enterprise for the use of borrowed capital,%;

ZK - the average amount of borrowed capital used by the enterprise;

SC - the average amount of equity capital of the enterprise.

Let us consider the mechanism of formation of the effect of financial leverage using the following example (table):

Table (rub.)

Formation of the effect of financial leverage

The analysis of the given data allows us to see that there is no effect of financial leverage for enterprise “A”, since it does not use borrowed capital in its business activities. For enterprise “B”, the effect of financial leverage is:

Accordingly, for the enterprise "B" this figure is:

From the results of the calculations it can be seen that the higher the share of borrowed funds in the total amount of capital used by the enterprise, the greater the level of profit it receives on its own capital. At the same time, it is necessary to pay attention to the dependence of the effect of financial leverage on the ratio of the return on assets and the level of interest for the use of borrowed capital. If the gross return on assets is greater than the level of interest on a loan, then the effect of financial leverage is positive. If these indicators are equal, the effect of financial leverage is equal to zero.

If the level of interest on a loan exceeds the gross return on assets, the effect of financial leverage turns out to be negative. The above formula for calculating the effect of financial leverage allows us to distinguish three main components in it: 1. Financial leverage tax corrector (1 - T&C), which shows the extent to which the effect of financial leverage is manifested due to different levels of profit taxation.2. Financial leverage differential (KVRa - PC), which characterizes the difference between the gross return on assets and the average interest rate for a loan.3. The financial leverage ratio (LC / CK), which characterizes the amount of borrowed capital used by the enterprise, per unit of equity.

The financial leverage tax corrector practically does not depend on the activity of the enterprise, since the profit tax rate is set by law. The financial leverage differential is the main condition that forms the positive effect of financial leverage. This effect appears 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 will be. Due to the high dynamism of this indicator, it requires constant monitoring in the process of managing the effect of financial leverage. First of all, during a period of deterioration in the financial market, the cost of borrowed funds can rise sharply, exceeding the level of gross profit generated by the company's assets.

In addition, a decrease in the financial stability of an enterprise in the process of increasing the share of borrowed capital used leads to an increase in the risk of its bankruptcy, which forces creditors to increase the interest rate for a loan, taking into account the inclusion of a premium for additional financial risk in it. At a certain level of this risk (and, accordingly, the level of the general interest rate for a loan), the financial leverage differential can be reduced to zero (at which the use of borrowed capital will not increase the return on equity), and even have a negative value (at which the return on equity capital will decrease, since part of the net profit generated by equity capital will be spent on the formation of borrowed capital used at high interest rates). Thus, a negative value of the financial leverage differential always leads to a decrease in the return on equity ratio. In this case, the use of borrowed capital by the enterprise has a negative effect.

Financial leverage ratio is the lever that causes a positive or negative effect obtained due to its corresponding differential. With a positive value of the differential, any increase in the financial leverage ratio will cause an even greater increase in the return on equity ratio, and with a negative value of the differential, 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 (positive or negative, depending on the positive or negative value of the financial leverage differential).

Thus, leverage is a complex system for managing the assets and liabilities of an enterprise. Any enterprise strives to achieve two main goals of its activities - increasing profits and increasing the value of the enterprise itself. Under these conditions, leverage becomes the tool that allows you to achieve these goals, through influences on changes in the ratios and return on equity and borrowed capital.

Leverage in financial analysis

The process of optimizing the structure of assets and liabilities of an enterprise in order to increase profits in financial analysis is called leverage. There are three types of leverage: production, financial and production-financial. In the literal sense, "leverage" is a lever, with a little effort which can significantly change the results of the production and financial activities of the enterprise.

To reveal its essence, we present the factor model of net profit (NP) as the difference between revenue (B) and production costs (IP) and financial nature (FI):

By definition, V.V. Kovalev, industrial leverage is a potential opportunity to influence the profit of an enterprise by changing the structure of the cost of production and the volume of its output. The level of industrial leverage is calculated by the ratio of the growth rate of gross profit (P%) (before interest and taxes) to the growth rate sales volume in natural, conditionally natural units or in value terms (VRP%):

The table shows that the largest value of the coefficient of production leverage is the enterprise, which has a higher ratio of fixed costs to variables. Each percentage increase in output under the current cost structure ensures an increase in gross profit at the first enterprise of 3%, at the second - 4.125, at the third - 6%. Accordingly, with a decline in production, profit at the third enterprise will decrease 2 times faster than at the first. Consequently, the third enterprise has a higher degree of production risk. Graphically, this can be represented as follows (Fig. 24.2)

On the abscissa axis, the volume of production is plotted on an appropriate scale, and on the ordinate axis, the increase in profit (in percent). The point of intersection with the abscissa axis (the so-called "dead point", or equilibrium point, or break-even sales volume) shows how much each company needs to produce and sell products in order to reimburse fixed costs. It is calculated by dividing the sum of fixed costs by the difference between the price of the product and specific variable costs. Under the current structure, the break-even volume for the first enterprise is 2000, for the second - 2273, for the third - 2500. The greater the value of this indicator and the angle of the graph to the x-axis, the higher the degree of production risk. The second component of the formula (24.1) is financial costs ( debt service costs). Their value depends on the amount of borrowed funds and their share in the total amount of invested capital. As already noted, an increase in the leverage of financial leverage (the ratio of debt and equity capital) can lead to both an increase and a decrease in net profit.

The relationship between profit and the ratio of own and borrowed capital is what financial leverage is. According to V.V. Kovalev's definition, financial leverage is a potential opportunity to influence the profit of an enterprise by changing the volume and structure of equity and borrowed capital. Its level is measured by the ratio of the growth rate of net profit (NP%) to the growth rate of gross profit (P). It shows how many times the growth rate of net profit exceeds the growth rate of gross profit. This excess is ensured by the effect of financial leverage, one of the components of which is its leverage (the ratio of borrowed capital to equity). By increasing or decreasing the leverage, depending on the prevailing conditions, you can influence the profit and return on equity.

The increase in financial leverage is accompanied by an increase in the degree of financial risk associated with a possible lack of funds to pay interest on loans and borrowings. A slight change in gross profit and return on invested capital in conditions of high financial leverage can lead to a significant change in net profit, which is dangerous during a decline in production. Let's carry out a comparative analysis of financial risk with a different capital structure. According to Table. 24.8 calculate how the return on equity will change when the profit deviates from the baseline by 10%.

If an enterprise finances its activities only from its own funds, the financial leverage ratio is equal to 1, i.e. there is no leverage effect. In this situation, a 1% change in gross profit results in the same increase or decrease in net profit. It is easy to see that with an increase in the share of borrowed capital, the range of variation in the return on equity (RCC), the financial leverage ratio and net profit increases. This indicates an increase in the degree of financial risk of investing with a high leverage. Graphically, this dependence is shown in Fig. 24.3. On the abscissa axis, the gross profit is plotted on an appropriate scale, and on the ordinate axis - the return on equity in percent. The point of intersection with the x-axis is called the financial critical point, which shows the minimum amount of profit required to cover the financial costs of servicing loans. At the same time, it also reflects the degree of financial risk. The degree of risk is also characterized by the steep slope of the graph to the x-axis.

The general indicator is production and financial leverage- the product of the levels of production and financial leverage. It reflects the general risk associated with a possible lack of funds to cover production costs and financial costs for servicing external debt. For example, an increase in sales is 20%, gross profit - 60%, net profit - 75%:

Deleveraging in the global economy

Deleverage is - the process of reducing leverage, i.e. level of debt. There is an opinion that deleveraging is the main reason for the long-term (decade) cyclical decline in economic activity. Deleverage can be achieved in 3 ways: repayment of debts by the entity, increase in the equity capital of the entity, write-off of the debt of the entity by the creditor.

The subjects in this case can be: an ordinary consumer, a company or a bank, the state. That is, the term deleveraging can be applied to the widest range of subjects - from a person to an entire state. Deleverage can be inflationary or deflationary. Inflationary deleveraging: Germany 1920s, Latin America 1980s. Deflationary deleveraging: US Great Depression 1930s, Japan 1990s.

The main difference between the 2008 crisis and previous economic cyclical downturns in the US is that the collapse of the real estate market was the trigger for the beginning of the process of deleveraging (decrease in leverage) at all levels of economic entities. At the same time, American households were hit hardest. Private sector spending forms 70% of US GDP. Deleverage is rare in a historical context: Weimar Republic: 1919-1923, USA: Great Depression in the 1930s, UK: 1950s and 1960s, Japan: last 20 years, USA: 2008 to present, Spain: today. As can be seen, such phenomena in the US economy last took place during the Great Depression of the 1930s. And the latest striking example on a global scale (until 2008) is Japan, which since the early 1990s has not been able to recover from the effects of deleveraging that came after the collapse of the national real estate market.

It is important to distinguish between the concepts of recession (contraction of the economy within short business cycles) and prolonged economic depression (contraction of the economy caused by the process of deleveraging). How to deal with recessions is well known for the reason that they happen quite often. While depressions and deleveraging remain poorly understood processes and are extremely rare in a historical context.

A recession is a slowdown in the economy due to a reduction in the growth rate of private sector debt arising from the tightening of central bank monetary policy (usually for inflation control purposes). A recession usually ends when the central bank makes a series of interest rate cuts to stimulate demand for goods/services and the growth of credit that finances this demand. Low rates allow: 1) to reduce the cost of servicing debt 2) to increase the prices of stocks, bonds and real estate through the effect of increasing the level of net present value from discounting expected cash flows at lower rates. This has a positive effect on the well-being of households and increases the level of consumption.

Deleverage is the process of reducing the debt burden (debt and payments on this debt in relation to income) within the framework of a long-term credit cycle. A long-term credit cycle occurs when debts grow faster than income and ends when the cost of servicing the debt becomes prohibitive for the borrower. At the same time, it is impossible to solve the problem exclusively by monetary methods, because interest rates tend to drop to zero during deleveraging. A depression is a phase of economic contraction in the process of deleveraging. A depression occurs when the reduction in the growth rate of private sector debt cannot be prevented by lowering the value of money on the part of the central bank. In times of depression, a large number of borrowers do not have enough funds to repay obligations, traditional monetary policy is ineffective in reducing debt service costs and stimulating credit growth.

Within the framework of deleveraging, the following processes take place: debt reduction (of households, businesses, etc.), the introduction of austerity measures, the redistribution of wealth, and the monetization of public debt. The preponderance of the first two processes leads to deflationary deleveraging, the preponderance of the last two leads to inflationary deleveraging.

According to Ray Dalio, there are three types of deleveraging:

-“ugly deflationary deleveraging” (“ugly deflationary deleveraging”): economic depression – the central bank “printed” not enough money, so there are serious deflationary risks, and nominal interest rates are higher than nominal GDP growth rates;

- “beautiful deleveraging” (“beautiful deleveraging”): the “printing” press covers deflationary effects from debt reduction and austerity measures, positive economic growth, declining debt/income ratio, nominal GDP growth above nominal interest rates;

- “ugly inflationary deleveraging” (“ugly inflationary deleveraging”): the “printing” press is out of control, far outweighs deflationary forces, creating the risk of hyperinflation. In countries with a reserve currency, it can come with too long stimulation in order to overcome “deflationary deleveraging”.

A depression usually ends when central banks print money in the process of monetizing public debt in amounts that offset the deflationary depressive effects of debt reduction and austerity measures. Properly managing the amount of monetization of public debt against the backdrop of reducing private and corporate debt puts deleveraging into a phase “ beautiful deleveraging.” This is typical of the current state of the US economy today, with “ugly deflationary deleveraging” taking place from late 2008 to mid-2009. economy.

For example, during deleveraging, central banks lower rates to zero (ZIRP) and pursue unconventional monetary policies, creating an overhang of excess liquidity by expanding the monetary base through large-scale purchases of long-term assets (Quantitative Easing). This creates serious pressure on government bond yields (especially on the long section of the curve), which largely determine the dynamics of interest rates in the economy. During periods of deleveraging, national governments tend to spend huge budgetary funds to replace the shortfall in private sector demand, sharply increasing the external debt burden. You will never see such actions during recessions within short business cycles.

However, the unconventional policy of central banks only helps mitigate deleveraging, but cannot directly affect this process. Coordinated actions of the monetary and fiscal authorities are needed. Besides, it takes a lot of time. History shows that the deleveraging process usually takes about 10 years. Sometimes this period is referred to as the “lost decade”. To fully understand the essence of the deleveraging process, it is necessary to carefully analyze the structure and changes in the balance sheets of the main US economic entities, which are published quarterly in the Z.1 “Flow of Funds Accounts” report of the Federal Reserve System (FRS). ) (latest data as of December 2012). The focus of our study is on households.

Loans secured by real estate (mortgage) ($9.4 trillion) account for 70% of liabilities ($13.4 trillion) of American households. Subtracting from total assets ($79.52 trillion) all liabilities ($13.4 trillion), we get the net asset value ( or equity, net worth) of households ($66.0 trillion). The data shows that real estate for an American household is the most important asset, and the mortgage is the most important liability. Can you imagine the impact US households suffered in 2008? This shock provoked the launch of deleveraging, i.e. a reduction in the level of leverage (or the level of debt load) of households in the segment of mortgage debt. Let's look at the process of deleveraging and clearing household balance sheets in detail. The data published in the US Federal Reserve's Z.1 reports date back to the 1950s. An analysis of the structure and dynamics of US households will show that situations similar to 2008 have not been in the US for at least the last 65 years (but it was during the Great Depression of the 1930s).

Today, the US economy is in a fairly “comfortable” stage of deleveraging (“beautiful delevereging”), when the amount of monetization of public debt outweighs the deflationary effects from reducing the level of debt burden of economic entities, and especially households. This creates the basis for nominal GDP growth to remain above the level of nominal interest rates.

Although traditional methods of monetary policy do not work in times of deleveraging, since the beginning of the acute phase of the 2008 crisis, the US Federal Reserve has been making every possible effort through the use of non-traditional tools to fulfill its dual mandate of ensuring price stability at full employment. Nearly five years after the start of the financial crisis, we can say that the Fed managed to prevent deflation and indirectly influence the economic recovery.

If in 2008 economic agents (whether it is debtors or creditors) did not have someone who would provide money behind their backs, then fire sales (forced emergency sales of assets) would have reached significant proportions, pledges would have passed from hand to hand and sold with significant discount, thus starting a deflationary spiral. The Fed, given the negative experience of the Great Depression of the 1930s, just offered the system as much money as was necessary to regain control over the money supply and inflationary processes in the economy. In addition, the Fed managed to significantly reduce the value of money, creating a favorable basis for the stock market. Household financial assets account for almost 70% of total assets. The recovery of US household wealth to pre-crisis levels largely depended on growth in financial markets. But not only the policy of "financial repression" brought the S&P 500 index to new historical heights in early 2013 - corporate profits in the United States at historical highs.

In order to replace the falling demand of the private sector during deleveraging, the government begins to increase the debt burden and expand the budget deficit. Under these conditions, it is extremely important for the financial authorities to have an agent behind their back, who will be guaranteed to buy new issues of debt obligations. This agent is the Fed, which is buying up treasuries as part of quantitative easing (QE) programs, and as a result has become the largest holder of the US government debt. However, monetary policy tools can only partially smooth out the deleveraging process. The linkage of the central bank with the actions of the government is very important. It's safe to say that the Fed did everything it could. Today, the ball is on the side of politicians, Democrats and Republicans, who, since 2008, have not been able to actually prove their sincere desire and focus on solving the structural problems of the American economy. Half-hearted decisions are made, negotiations on the most important bills (on the fiscal cliff, the ceiling of the state debt, etc.), which are of paramount importance, are constantly frustrated. All this delays the process of deleveraging and negatively affects the US economy.

However, deleveraging at the household level, most affected by the 2008 crisis, has passed its equator. The "combat" power of the American authorities today is aimed at restoring the real estate market. Real estate is the largest household asset, mortgages are the largest liability. The essence of deleveraging lies precisely in the mortgage segment. The big positive shifts in the US real estate market took place in 2012 (largely under the influence of the Fed's “Twist” program). The positive scenario assumes that the deleveraging of households will end by mid-2015 and the economy will enter the stage of natural recovery, as before based on credit . At the same time, the Fed plans to withdraw from the accommodative monetary policy. But there are still many questions and difficulties along the way.

Today, it is extremely important for the US authorities to prevent a reduction in the level of debt at the household level. Reducing the volume of debt against the backdrop of rising household disposable income for the US economy, built on credit, can have very negative consequences. The savings rate continues to rise.

If we talk about the US stock market, then the most interesting strategy in the conditions of “financial repression”, in my opinion, is “buy the dip” (buying out the first drawdowns, corrections in the S&P 500). Today, all conditions have been created for the continued growth of shares through the passage of “traditional” seasonal corrections. Particular attention should be paid to American companies working for the US domestic market.

Who needs leverage on ESM?

It hasn't been long since the ECB cheered the markets up with a program of unlimited buying of troubled countries' bonds, and now there are reports of the European Stability Mechanism (ESM) leveraging from 500 billion euros to 2 trillion euros.

This step will significantly increase the fund's capacity in the event of the rescue of such large countries as Spain and Italy. Despite the fact that at this stage there is no talk of helping Italy at all, and Spain (if their prime minister nevertheless decides to apply for financial assistance) needs much less money.

By analogy with the European Financial Stability Fund (EFSF), the ESM will attract funds from EU member states (this money will be used, among other things, to buy bonds of problem countries), as well as funds from private investors that can be used for less risky transactions. I wonder how they are going to lure private investors, who probably still have the Greek version of “calculation” still fresh in their memory?

As reported in the press, most EU countries support this idea, but some, such as Finland, traditionally oppose it. Given that the share of the same Finland in the "Eurozone box office" is quite small. But Germany is great, and not everything is as simple as we would like. The press service of the German Ministry of Finance said that a fourfold increase in ESM is unrealistic. Although it was previously reported that Germany is in favor of an increase. However, the ministry confirmed that they approve of this theory and that discussions of additional injections into the Mechanism are possible, but there is no talk of any specifics.

The complex relationship between the Bundesbank and the ECB is no secret. Everyone knows the attitude of the head of the German central bank to unlimited purchases of bonds by the ECB. And for shopping in general. But the Constitutional Court of Germany supported Mario Draghi's plan, recognizing the legitimacy of the country's financial injections into the Mechanism. But there is another piece of news: the Bundesbank and the ECB are bringing in lawyers to assess the legality of bond purchases. It is not clear whether this is such a procedure, or the head of the German central bank is not going to give up and is trying with all his might to “put spokes in the wheels” of the ECB. But that is not the point. The news about ESM leverage is still alarming. Is it really so bad that eurozone officials see a need for a quadrupling of ESM? Let's hope not. And leverage is needed so, just in case, it will suddenly come in handy.

Sources and links

en.wikipedia.org - the free encyclopedia

audit-it.ru - financial analysis according to reporting data

elitarium.ru - Elitarium - financial management

vedomosti.ru - Vedomosti - business dictionary

ibl.ru - institute of business and law

academic.ru - Academician - dictionary of terms of anti-crisis management

forum.aforex.ru - investor community forum

su.urbc.ru - Ural Business Consulting - information and analytical agency

afdanalyse.ru - analysis of the financial condition of the enterprise

mevriz.ru - magazine "Management in Russia and abroad"

Leverage - means the action of a small force (lever), with which you can move fairly heavy objects.

Operating leverage.

Operating (production) leverage is the ratio of the relationship between the structure of production costs and the amount of profit before interest and taxes. This operating profit management mechanism is also called "operating leverage". The operation of this mechanism is based on the fact that the presence in the composition of operating costs of any amount of their constant types leads to the fact that when the volume of sales of products changes, the amount of operating profit always changes even faster. In other words, fixed operating costs (expenses) by the very fact of their existence cause a disproportionately higher change in the amount of the enterprise's operating profit with any change in the volume of sales of products, regardless of the size of the enterprise, industry specifics of its operating activities and other factors.

However, the degree of such sensitivity of operating profit to changes in the volume of product sales is ambiguous at enterprises with a different ratio of fixed and variable operating costs. The higher the share of fixed costs in the total operating costs of the enterprise, the more the amount of operating profit changes in relation to the rate of change in the volume of sales.

The ratio of fixed and variable operating costs of the enterprise, which means the level of production leverage is characterized by "operational leverage ratio", which is calculated using the following formula:

Where:
Number - operating leverage ratio;

Ipost - the amount of fixed operating costs;

Io - the total amount of transaction costs.

The higher the value of the operating leverage ratio at the enterprise, the more it is able to accelerate the growth rate of operating profit in relation to the growth rate of sales volume. Those. at the same rate of growth in sales volume, an enterprise with a higher operating leverage ratio, ceteris paribus, will always increase the amount of its operating profit to a greater extent compared to an enterprise with a lower value of this ratio.

The specific ratio of the increase in the amount of operating profit and the amount of sales volume, achieved at a certain operating leverage ratio, is characterized by the indicator "operational leverage effect". The principal formula for calculating this indicator is:

Eol - the effect of operating leverage, achieved at a specific value of its coefficient at the enterprise;

ΔVOP - growth rate of gross operating profit, in %;

ΔOR - growth rate of sales volume, in%.

The effect of the impact of the production leverage (operating leverage) is a change in sales proceeds leading to a change in profit

The growth rate of the volume expressed in% is determined by the formula:

I - change, meaning the growth rate, in%;
P.1 – volume indicator obtained in the 1st period, in rubles;

P.2 - volume indicator obtained in the 2nd period, in rubles.

financial leverage.

Financial leverage is the relationship between the structure of sources of funds and the amount of net profit.

financial leverage characterizes the use of borrowed funds by the enterprise, which affects the change in the return on equity. Financial leverage arises with the advent of borrowed funds in the amount of capital used by the enterprise and allows the enterprise to receive additional profit on equity.

An indicator that reflects the level of additional return on equity with a different share of the use of borrowed funds is called the effect of financial leverage (financial leverage).

The effect of financial leverage is calculated by the formula:

EFL - the effect of financial leverage, which consists in the increase in the return on equity ratio,%;

C - income tax rate, expressed as a decimal fraction;

KVR - gross profitability ratio of assets (the ratio of gross profit to the average value of assets),%;

PC - the average amount of interest on a loan paid by an enterprise for the use of borrowed capital (the price of borrowed capital), %;

ZK - the amount of borrowed capital used by the enterprise;

SC - the amount of equity capital of the enterprise.

The formula has three components.

1. Tax corrector of financial leverage (1 - C).

2. Differential financial leverage (KVR - PC).

3. Coefficient of financial leverage or "shoulder" of financial leverage (LC / SC).

Using the effect of financial leverage allows you to increase the level of profitability of the company's own capital. When choosing the most appropriate structure of sources, it is necessary to take into account the scale of current income and profits when expanding activities through additional investment, capital market conditions, interest rate dynamics and other factors.

dividend policy.

The term "dividend policy" is associated with the distribution of profits in joint-stock companies.

Dividend - part of the profit of a joint-stock company, annually distributed among shareholders in accordance with the number (amount) and type of shares they own. Typically, a dividend is expressed as a dollar amount per share. The total amount of net profit payable as a dividend is established after taxes, deductions to the funds for expansion and modernization of production, replenishment of insurance and other reserves, payment of interest on bonds and additional remuneration to the directors of the joint-stock company.

Dividend policy - the policy of a joint-stock company in the field of profit use. The dividend policy is formed by the board of directors, depending on the goals of the joint-stock company, and determines the profit shares that: are paid to shareholders in the form of dividends; remain in the form of retained earnings and are also reinvested.

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 overall profit management policy, which consists in optimizing the proportions between consumed and capitalized parts in order to maximize the market value of the enterprise.

The following factors influence the size of the dividend:

The amount of net profit;

The possibility of directing profits to pay dividends, taking into account other costs;

The share of preferred shares and the fixed level of dividends declared on them;

The value of the authorized capital and the total number of shares.

Net profit that can be directed to the payment of dividends is determined by the formulas:

NPdoa \u003d (CHP × Dchp / 100) - (Kpa × Dpa / 100)

NPDOA - net profit directed to the payment of dividends on ordinary shares;

PE - net profit;

DPP - the share of net profit directed to the payment of dividends on preferred shares;

Kpa - the nominal value of the number of preferred shares;

Dpa - the level of dividends on preferred shares (as a percentage of the nominal value).

Doa \u003d (NPd / (Ka - Kpa)) × 100

Doa - the level of dividends on ordinary shares;

NPI - net profit directed to the payment of dividends on shares;

Ka - the nominal value of the number of all shares;

Kpa - the nominal value of the number of preferred shares.

Factors influencing the development of a dividend policy:

Legal factors (the payment of dividends is regulated by the Law of the Russian Federation "On Joint Stock Companies");

Conditions of contracts (restrictions related to the minimum share of reinvested profits when concluding loan agreements with banks);

Liquidity (payment not only in cash, but also in other property, such as shares);

Expansion of production (restrictions on the payment of dividends);

Interests of shareholders (ensuring a high level of market value of the company);

Information effect (information about non-payment of dividends may lead to a decrease in share prices).

Dividend policy directly depends on the chosen dividend payment methodology, reflected in various types of dividend policy (table).

Table

Similar information.

Leverage(English - leverage) is a key factor in the company's activities, a small change in which can lead to a significant change in performance indicators.

There are two types of leverage: production (or operating) and financial. Production leverage- the potential to influence the profit from sales by changing the structure of costs and output. Production leverage is greatest in companies that have a high share of fixed costs in the cost structure of products (works, services). If a company has high operating leverage, then its sales profit is very sensitive to changes in sales volumes.

The effect of production leverage is that any change in sales revenue leads to an even greater change in profits. Force of influence (Effect) production leverage calculated by the formula

where EPL is the effect of production leverage; MD - marginal income (profit); - revenue from sales.

If a company with an EPL value of 7 increases its sales revenue by, say, 1%, then its sales profit will increase by 7%. Conversely, with a reduction in sales revenue, for example, by 3%, its sales profit will decrease by 21%. Thus, the effect of production leverage shows the degree of entrepreneurial risk. The greater the operating leverage, the greater the risk. In practice, the following dependencies appear:

1) if the company operates near the break-even point, it has a relatively large share of changes in profits or losses with changes in sales volumes;
2) for profitable companies with a large volume of sales, high profits can be observed even with a slight increase in profitability;
3) a company with a high operating leverage is exposed to a significantly greater degree of risk with sharp fluctuations in sales volumes than with stable sales volumes;
4) the greater the share of fixed costs in the total costs of the company, the higher the strength of the operating leverage at a certain volume of production, the greater the risk of reducing production volumes;
5) companies that provide significant sales volumes and are confident in the prospective stable demand for their products, works or services can work with high operating leverage.

In addition, to analyze the relationship between profit and the ratio of equity and debt capital, financial leverage or financial leverage can be used. Financial leverage allows you to potentially influence the company's profit by changing the volume and structure of equity and debt capital. It is calculated according to the formula

where FL is financial leverage; – growth rate of net profit; - Gross profit growth rate.

The excess of the growth rate of net profit over the growth rate of gross profit is ensured by the effect of financial leverage (lever), one of the components of which is its leverage. By increasing or decreasing the leverage, depending on the prevailing conditions, you can influence the profit and return on equity. Leverage ratios reflect the relative size of claims on the company's assets by its co-owners and creditors. Borrowed money allows you to multiply the financial strength of the borrower by investing in projects that can bring profit. The increase in financial leverage is accompanied by an increase in the degree of financial risk associated with a possible lack of funds to pay interest on loans and borrowings.

where - the overall profitability of the enterprise, calculated as the ratio of net profit to the average annual amount of the total capital and expressed as a percentage; – weighted average interest rate on borrowed funds; PFR is the leverage of financial leverage as the ratio of borrowed and own funds.

The effect of financial leverage shows by what percentage the return on equity increases by attracting borrowed funds into circulation:

The economic meaning of the positive value of the effect of financial leverage is that an increase in the return on equity can be achieved by expanding debt financing (restructuring capital and debts). At the same time, excessive borrowing can have both positive and negative consequences for the company.