The key element determining the effect of financial leverage is. Financial leverage of the enterprise

Financial lever characterizes the ratio of all assets to equity, and the effect of financial leverage is calculated by multiplying it by the economic profitability indicator, that is, it characterizes the return on equity (the ratio of profit to equity).

The effect of financial leverage is an increment to the return on equity obtained through the use of a loan, despite the payment of the latter.

An enterprise using only its own funds limits their profitability to about two-thirds of economic profitability.

РСС - net profitability of own funds;

ER - economic profitability.

An enterprise using a loan increases or decreases the return on equity, depending on the ratio of own and borrowed funds in liabilities and on the interest rate. Then there is the effect of financial leverage (EFF):

(3)

Consider the mechanism of financial leverage. In the mechanism, a differential and a shoulder of financial leverage are distinguished.

Differential - the difference between the economic return on assets and the average calculated interest rate (AMIR) on borrowed funds.

Due to taxation, unfortunately, only two-thirds of the differential remain (1/3 is the profit tax rate).

Shoulder of financial leverage - characterizes the strength of the impact of financial leverage.

(4)

Let's combine both components of the effect of financial leverage and get:

(5)

(6)

Thus, the first way to calculate the level of financial leverage effect is:

(7)

The loan should lead to an increase in financial leverage. In the absence of such an increase, it is better not to take a loan at all, or at least calculate the maximum maximum amount of credit that leads to growth.

If the loan rate is higher than the level of economic profitability of the tourist enterprise, then increasing the volume of production due to this loan will not lead to the return of the loan, but to the transformation of the enterprise from profitable to unprofitable.

There are two important rules here:

1. If a new borrowing brings the company an increase in the level of financial leverage, then such borrowing is profitable. But at the same time, it is necessary to monitor the state of the differential: when increasing the leverage of financial leverage, a banker is inclined to compensate for the increase in his risk by increasing the price of his “commodity” - a loan.

2. The creditor's risk is expressed by the value of the differential: the larger the differential, the lower the risk; the smaller the differential, the greater the risk.

You should not increase the financial leverage at any cost, you need to adjust it depending on the differential. The differential must not be negative. And the effect of financial leverage in world practice should be equal to 0.3 - 0.5 of the level of economic return on assets.

Financial leverage allows you to assess the impact of the capital structure of the enterprise on profit. The calculation of this indicator is expedient from the point of view of assessing the effectiveness of the past and planning the future financial activities of the enterprise.

The advantage of rational use of financial leverage lies in the possibility of extracting income from the use of capital borrowed at a fixed percentage in investment activities that bring a higher interest than paid. In practice, the value of financial leverage is affected by the scope of the enterprise, legal and credit restrictions, and so on. Too high financial leverage is dangerous for shareholders, as it involves a significant amount of risk.

Commercial risk means uncertainty about a possible result, the uncertainty of this result of activity. Recall that risks are divided into two types: pure and speculative.

Financial risks are speculative risks. An investor, making a venture capital investment, knows in advance that only two types of results are possible for him: income or loss. A feature of financial risk is the likelihood of damage as a result of any operations in the financial, credit and exchange areas, transactions with stock securities, that is, the risk that follows from the nature of these operations. Financial risks include credit risk, interest rate risk, currency risk, risk of lost financial profit.

The concept of financial risk is closely related to the category of financial leverage. Financial risk is the risk 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 degree of riskiness of this enterprise. This is manifested in the fact that for two tourism enterprises with the same volume of production, but a different level of financial leverage, the variation in net profit due to a change in the volume of production will not be the same - it will be greater for an enterprise with a higher value of the level of financial leverage.

The effect of financial leverage can also be interpreted as the change in net income per ordinary share (as a percentage) generated by a given change in the net result of the operation of investments (also as a percentage). This perception of the effect of financial leverage is typical mainly for the American school of financial management.

Using this formula, they answer the question of how many percent the net profit per ordinary share will change if the net result of the operation of investments (profitability) changes by one percent.

After a series of transformations, you can go to the formula of the following form:

Hence the conclusion: the higher the interest and the lower the profit, the greater the strength of the financial leverage and the higher the financial risk.

When forming a rational structure of sources of funds, one must proceed from the following fact: to find such a ratio between borrowed and own funds, in which the value of the enterprise's share will be the highest. This, in turn, becomes possible with a sufficiently high, but not excessive effect of financial leverage. The level of debt is for the investor a market indicator of the well-being of the enterprise. An extremely high proportion of borrowed funds in liabilities indicates an increased risk of bankruptcy. If the tourist enterprise prefers to manage with its own funds, then the risk of bankruptcy is limited, but investors, receiving relatively modest dividends, believe that the enterprise does not pursue the goal of maximizing profits, and begin to dump shares, reducing the market value of the enterprise.

There are two important rules:

1. If the net result of the operation of investments per share is small (and at the same time the financial leverage differential is usually negative, the net return on equity and the dividend level are lower), then it is more profitable to increase equity by issuing shares than to take out a loan: attracting borrowed funds funds costs the company more than raising its own funds. However, there may be difficulties in the process of initial public offering.

2. If the net result of exploitation of investments per share is large (and at the same time the financial leverage differential is most often positive, the net return on equity and the dividend level are increased), then it is more profitable to take a loan than to increase own funds: raising borrowed funds costs the enterprise cheaper than raising own funds. Very important: it is necessary to control the strength of the impact of financial and operational leverage in the event of their possible simultaneous increase.

Therefore, you should start by calculating the net return on equity and net earnings per share.

(10)

1. The pace of increasing the turnover of the enterprise. Increased turnover growth rates also require increased funding. This is due to the increase in variable, and often fixed costs, the almost inevitable swelling of receivables, as well as many other very different reasons, including cost inflation. Therefore, on a steep rise in turnover, firms tend to rely not on internal, but on external financing, with an emphasis on increasing the share of borrowed funds in it, since share issue costs, initial public offering costs and subsequent dividend payments most often exceed the value of debt instruments;

2. Stability of turnover dynamics. An enterprise with a stable turnover can afford a relatively larger share of borrowed funds in liabilities and higher fixed costs;

3. Level and dynamics of profitability. It is noted that the most profitable enterprises have a relatively low share of debt financing on average over a long period. The enterprise generates sufficient profits to finance development and pay dividends, and is increasingly self-sufficient;

4. Structure of assets. If an enterprise has significant general-purpose assets that, by their very nature, can serve as collateral for loans, then increasing the share of borrowed funds in the liability structure is quite logical;

5. The severity of taxation. The higher the income tax, the less tax incentives and opportunities to use accelerated depreciation, the more attractive debt financing for the enterprise due to attributing at least part of the interest for the loan to the cost;

6. Attitude of creditors to the enterprise. The play of supply and demand in the money and financial markets determines the average terms of credit financing. But the specific conditions for granting this loan may deviate from the average, depending on the financial and economic situation of the enterprise. Whether bankers compete for the right to provide a loan to an enterprise, or money has to be begged from creditors - that is the question. The real possibilities of the enterprise to form the desired structure of funds largely depend on the answer to it;

8. Acceptable degree of risk for the leaders of the enterprise. The people at the helm may be more or less conservative in terms of risk tolerance when making financial decisions;

9. Strategic target financial settings of the enterprise in the context of its actually achieved financial and economic position;

10. The state of the market for short- and long-term capital. With an unfavorable situation in the money and capital market, it is often necessary to simply obey the circumstances, postponing until better times the formation of a rational structure of sources of funds;

11. Financial flexibility of the enterprise.

Example.

Determination of the value of the financial leverage of the economic activity of the enterprise on the example of the hotel "Rus". Let us determine the expediency of the size of the attracted credit. The structure of enterprise funds is presented in Table 1.

Table 1

The structure of the financial resources of the enterprise hotel "Rus"

Index	Value
Initial values
Hotel asset minus credit debt, mln. rub.	100,00
Borrowed funds, million rubles	40,00
Own funds, million rubles	60,00
Net result of investment exploitation, mln. rub.	9,80
Debt servicing costs, million rubles	3,50
Estimated values
Economic profitability of own funds, %	9,80
Average calculated interest rate, %	8,75
Financial leverage differential excluding income tax, %	1,05
Financial leverage differential including income tax, %	0,7
Financial Leverage	0,67
Effect of financial leverage, %	0,47

Based on these data, the following conclusion can be drawn: the Rus Hotel can take out loans, but the differential is close to zero. Minor changes in the production process or higher interest rates can reverse the effect of leverage. There may come a time when the differential becomes less than zero. Then the effect of financial leverage will act to the detriment of the hotel.

Economic analysis Litvinyuk Anna Sergeevna

30. Leverage (financial leverage). The effect of financial leverage

Financial leverage (“financial leverage”) is a financial mechanism for managing the return on equity by optimizing the ratio of used own and borrowed funds. Thus, financial leverage allows you to influence profit through optimization of the capital structure.

The effect of financial leverage is an indicator that reflects the increase in the return on equity obtained through the use of a loan, despite the payment of the latter. It is calculated using the following formula:

EFL \u003d (1? NP)? (R A?% Av.) ZK / SK,

where EFL is the effect of financial leverage, which consists in the increase in the return on equity ratio,%; PN - income tax rate, expressed as a decimal fraction; R A - gross profit margin of assets (the ratio of gross profit to the average value of assets),%; % cf.- the average amount of interest on a loan paid by the enterprise for the use of borrowed capital,%; 3K - the average amount of borrowed capital used by the enterprise; SC - the average amount of equity capital of the enterprise.

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-TP), which shows the extent to which the effect of financial leverage is manifested due to different levels of taxation of profits.

2. Financial leverage differential (РА?%av.) which reflects the difference between the gross return on assets and the average interest rate for a loan.

3. Leverage of the financial leverage of SC / SC, which characterizes the amount of borrowed capital used by the enterprise, per unit of equity.

The tax corrector of financial leverage practically does not depend on the activity of the enterprise, since the income tax rate is established by law. In the process of managing financial leverage, the differential tax corrector can be used in the following cases:

Differentiation of the profit tax rate or the availability of tax incentives for various types of enterprise activities;

Carrying out activities of subsidiaries of the enterprise in offshore zones or countries with a different tax climate. Financial leverage differential is the main

a condition that generates a positive effect of financial leverage, 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.

The financial leverage leverage is the leverage that causes the positive or negative effect obtained through the 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. Thus, with the differential unchanged, the financial leverage leverage is the main generator of both the increase in the amount and level of return on equity, and the financial risk of losing this profit. Similarly, with the leverage of financial leverage unchanged, the positive or negative dynamics of its differential generates both an increase in the amount and level of return on equity, and the financial risk of its loss.

Knowledge of the mechanism of the impact of financial capital on the level of profitability of equity and the level of financial risk allows you to purposefully manage both the value and the capital structure of the enterprise.

The quantitative value of the influence of factors on the change in the resulting indicator is found by applying one of the special methods of economic analysis.

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Financial Leverage The third lever of influence on ROE is financial. The company improves this ratio by increasing the ratio of debt to equity to finance the business. Unlike return on sales and asset turnover ratio,

Any commercial activity is associated with certain risks. If they are determined by the structure of capital sources, then they belong to the group of financial risks. Their most important characteristic is the ratio of own funds to borrowed funds. After all, attracting external financing is associated with the payment of interest for its use. Therefore, in case of negative economic indicators (for example, with a decrease in sales, personnel problems, etc.), the company may have an unbearable debt burden. At the same time, the price for additionally attracted capital will increase.

Financial occurs when the company uses borrowed funds. Normal is the situation in which the payment for borrowed capital is less than the profit that it brings. When adding this additional profit to the income received from equity, an increase in profitability is noted.

In the commodity and stock market, financial leverage is a margin requirement, i.e. the ratio of the deposit amount to the total value of the transaction. This ratio is called leverage.

The financial leverage ratio is directly proportional to the financial risk of the enterprise and reflects the share of borrowed funds in financing. It is calculated as the ratio of the amount of long-term and short-term liabilities to the company's own funds.

Its calculation is necessary to control the structure of sources of funds. The normal value for this indicator is from 0.5 to 0.8. A high value of the coefficient can be afforded by companies that have a stable and well-predictable dynamics of financial indicators, as well as enterprises with a high share of liquid assets - trading, marketing, banking.

The effectiveness of borrowed capital largely depends on the return on assets and the loan interest rate. If the profitability is below the rate, then it is unprofitable to use borrowed capital.

Calculation of the effect of financial leverage

To determine the correlation between financial leverage and return on equity, an indicator called the effect of financial leverage is used. Its essence lies in the fact that it reflects how much interest increases equity capital when using borrowings.

There is an effect of financial leverage due to the difference between the return on assets and the cost of borrowed funds. For its calculation, a multifactorial model is used.

The calculation formula is as follows DFL = (ROAEBIT-WACLC) * (1-TRP/100) * LC/EC. In this formula, ROAEBIT is the return on assets calculated through earnings before interest and taxes (EBIT),%; WACLC - weighted average price of borrowed capital, %; EC - average annual amount of own capital; LC - average annual amount of borrowed capital; RP - income tax rate, %. The recommended value of this indicator is in the range from 0.33 to 0.5.

The coefficient of financial leverage (financial leverage) gives an idea of the real ratio of own and borrowed funds in the enterprise. Based on the data on the financial leverage ratio, one can judge the stability of the economic entity, the level of its profitability.

What does financial leverage mean

The financial leverage ratio is often called financial leverage, which is able to influence the level of profit of the organization by changing the ratio of own and borrowed funds. It is used in the process of analyzing the subject of economic relations to determine the level of its financial stability in the long term.

The values of the financial leverage ratio help the company's analysts to identify additional potential for profitability growth, assess the degree of possible risks and determine the dependence of the level of profit on external and internal factors. With the help of financial leverage, it is possible to influence the organization's net profit by managing financial liabilities, and there is also a clear idea of the appropriateness of using credit funds.

Types of financial leverage

According to the efficiency of use, there are several types of financial leverage:

Positive. It is formed when the benefit from borrowing exceeds the fee (interest) for using the loan.
Negative. It is typical for a situation where the assets acquired by obtaining a loan do not pay off, and the profit is either absent or below the listed percentages.
Neutral. Financial leverage, in which the income from investments is equivalent to the costs of obtaining borrowed funds.

Financial Leverage Formulas

The financial leverage ratio is the ratio of debt to equity. The calculation formula is as follows:

FL = ZK / SK,

where: FL is the financial leverage ratio;

ZK - borrowed capital (long-term and short-term);

SC is equity capital.

This formula also reflects the financial risks of the enterprise. The optimal value of the coefficient ranges from 0.5-0.8. With such indicators, it is possible to maximize profits with minimal risks.

For some organizations (trading, banking), a higher value is acceptable, provided that they have a guaranteed cash flow.

Most often, when determining the level of the coefficient value, they use not the book (accounting) cost of equity, but the market value. The indicators obtained in this case will most accurately reflect the current situation.

A more detailed version of the financial leverage ratio formula is as follows:

FL \u003d (GK / SA) / (IK / SA) / (OA / IK) / (OK / OA) × (OK / SK),

where: ZK is borrowed capital;

SA is the sum of assets;

IC is invested capital;

ОА is current assets;

OK is working capital;

SC is equity capital.

The ratio of indicators presented in brackets has the following characteristics:

(ZK / SA) is the coefficient of financial dependence. The lower the ratio of borrowed capital to total assets, the more stable the company financially.
(IC / SA) is a coefficient that determines the financial independence of a long-term nature. The higher the score, the more stable the organization.
(OA / IC) is the coefficient of maneuverability of the IC. Preferably, its lower value, which determines financial stability.
(OK / ОА) is the coefficient of provision with working capital. High rates characterize the greater reliability of the company.
(OK / SC) is the SC maneuverability coefficient. Financial stability increases with decreasing coefficient.

Example 1

The company at the beginning of the year has the following indicators:

ZK - 101 million rubles;
SA - 265 million rubles;
OK - 199 million rubles;
OA - 215 million rubles;
SK - 115 million rubles;
IC - 118 million rubles.

Calculate the financial leverage ratio:

FL = (101 / 265) / (118 / 265) / (215 / 118) / (199 / 215) × (199 / 115) = 0.878.

Or FL \u003d ZK / SK \u003d 101 / 115 \u003d 0.878.

The conditions characterizing the profitability of IC (equity capital) are greatly influenced by the amount of borrowed funds. The value of the profitability of the equity capital (equity) is determined by the formula:

RSK = CHP / SK,

NP is net profit;

For a detailed analysis of the financial leverage ratio and the reasons for its changes, all 5 indicators included in the considered formula for its calculation should be considered. As a result, the sources will be clear due to which the indicator of financial leverage has increased or decreased.

The effect of financial leverage

Comparison of indicators of the financial leverage ratio and profitability as a result of the use of SC (own capital) is called the effect of financial leverage. As a result, you can get an idea of how the profitability of the insurance company depends on the level of borrowed funds. The difference between the cost of return on assets and the level of receipt of funds from the outside (that is, borrowed) is determined.

IA is gross income or profit before tax and interest;
PSP - profit before taxes, reduced by the amount of interest on loans.

The PD indicator is calculated as follows:

VD \u003d C × O - I × O - PR,

where: C is the average price of manufactured products;

O is the output volume;

And - costs based on 1 unit of goods;

PR is fixed costs of production.

The effect of financial leverage (EFL) is considered as the ratio of profit indicators before and after interest payments, that is:

EFL \u003d VD / PSP.

In more detail, EFL is calculated based on the following values:

EFL \u003d (RA - CZK) × (1 - SNP / 100) × ZK / SK,

where: RA - return on assets (measured as a percentage excluding taxes and interest on the loan payable);

CPC is the cost of borrowed funds, expressed as a percentage;

SNP is the current income tax rate;

ZK is borrowed capital;

SC is equity capital.

Return on assets (RA) as a percentage, in turn, is equal to:

RA = IA / (SC + SC) × 100%.

Example 2

Calculate the effect of financial leverage using the following data:

IA \u003d 202 million rubles;
SC = 122 million rubles;
ZK = 94 million rubles;
CZK = 14%;
SNP = 20%.

Using the formula EFL \u003d EFL \u003d (RA - CZK)× (1 - SNP / 100)× ZK / SK, we get the following result:

EFL = (202 / (122 + 94)× 100) - 14,00)% × (1 - 20 / 100) × 94 / 122= (93,52% - 14,00%) × (1 - 0,2) × 94 / 122 =79,52% × 0,8 × 94 / 122 = 49,01%.

Example 3

If, under the same conditions, there is an increase in borrowed funds by 20% (up to 112.8 million rubles), then the EFL indicator will be equal to:

EFL = (202 / (122 + 112.8)× 100 - 14,00)% × (1 - 20 / 100) × 112,8 / 122 = (86,03% - 14,00%) × 0,8 × 112,8 / 122 = 72,03% × 0,8 × 112,8 / 122 = 53,28%.

Thus, by increasing the level of borrowed funds, it is possible to achieve a higher EFL, that is, to increase the return on equity by attracting borrowed funds. At the same time, each company conducts its own assessment of financial risks associated with difficulties in repaying credit obligations.

The factors characterizing the return on equity are also affected by the factors of attracting borrowed funds. The formula for determining the return on equity will be:

RSK = CHP / SK,

where: RSK - return on equity;

NP is net profit;

SC is the amount of own capital.

Example 4

The balance sheet profit of the organization amounted to 18 million rubles. The current income tax rate is 20%, the size of the equity capital is 22 million rubles, the credit card (attracted) is 15 million rubles, the amount of interest on the loan is 14% (2.1 million rubles). What is the profitability of the IC with and without borrowed funds?

Solution 1 . Net profit (NP) is equal to the sum of balance sheet profit minus the cost of borrowed funds (interest equal to 2.1 million rubles) and income tax from the remaining amount: (18 - 2.1)× 20% = 3.18 million rubles.

PE \u003d 18 - 2.1 - 3.18 \u003d 12.72 million rubles.

The profitability of the IC in this case will have the following value: 12.72 / 22× 100% = 57,8%.

Solution 2 The same indicator without attracting funds from outside will be equal to 14.4 / 22 = 65.5%, where:

NP = 18 - (18× 0.2) = 14.4 million rubles.

Results

Analyzing the data of indicators of the financial leverage ratio and the effect of financial leverage, it is possible to manage the enterprise more efficiently, based on attracting a sufficient amount of borrowed funds, without going beyond conditional financial risks. The formulas and examples given in our article will help you calculate the indicators.

Financial leverage is considered to be the potential opportunity to manage the profit of the organization by changing the amount and components of capital

own and borrowed.
Financial leverage (leverage) is used by entrepreneurs when the goal arises to increase the income of the enterprise. After all, it is financial leverage that is considered one of the main mechanisms for managing the profitability of an enterprise.
In the case of using such a financial instrument, the company attracts borrowed money by making credit transactions, this capital replaces its own capital and all financial activities are carried out only with the use of credit money.
But it should be remembered that in this way the enterprise significantly increases its own risks, because regardless of whether the invested funds brought profit or not, it is necessary to pay on debt obligations.
When using financial leverage, one cannot ignore the effect of financial leverage. This indicator is a reflection of the level of additional profit on the equity capital of the enterprise, taking into account the different share of the use of credit funds. Often, when calculating it, the formula is used:

EFL \u003d (1 - Cnp) x (KBRa - PC) x ZK / SK,
Where

EFL- effect of financial leverage, %;
Cnp- income tax rate, which is expressed as a decimal fraction;
KBPa- coefficient of gross profitability of assets (characterized by the ratio of gross profit to the average value of assets),%;
PC- the average amount of interest on the loan, which the company pays for the use of attracted capital,%;
ZK- the average amount of attracted capital used;
SC- the average amount of own capital of the enterprise.

Components of financial leverage

This formula has three main components:
1. Tax corrector (1-Cnp)- a value indicating how the EFL will change when the level of taxation changes. The enterprise has practically no effect on this value, tax rates are set by the state. But financial managers can use the change in the tax corrector to obtain the desired effect if some branches (subsidiaries) of the enterprise are subject to different tax policies due to the territorial location, types of activities.
2.Financial leverage differential (KBRa-PC). Its value fully reveals the difference between the gross return on assets and the average interest rate on a loan. The higher the value of the differential, the greater the likelihood of a positive effect from the financial impact on the enterprise. This indicator is very dynamic, constant monitoring of the differential will allow you to control the financial situation and not miss the moment of reducing the profitability of assets.
3. Financial leverage ratio (LC/LC), which characterizes the amount of credit capital attracted by the enterprise, per unit of equity. It is this value that causes the effect of financial leverage: positive or negative, which is obtained due to the differential. That is, a positive or negative increase in this coefficient causes an increase in the effect.
The combination of all components of the effect of financial leverage will allow you to determine exactly the amount of borrowed funds that will be safe for the enterprise and will allow you to get the desired increase in profits.

Financial leverage ratio

The leverage ratio shows the percentage of borrowed funds in relation to the company's own funds.
Net borrowings are bank loans and overdrafts minus cash and other liquid resources.
Equity is represented by the balance sheet value of shareholders' funds invested in the company. This is the issued and paid-in authorized capital, accounted for at the nominal value of shares, plus accumulated reserves. The reserves are the retained earnings of the company since incorporation, as well as any increment resulting from the revaluation of property and additional capital, where available.
It happens that even listed companies have a leverage ratio of more than 100%. This means that creditors provide more financial resources for the operation of the company than shareholders. In fact, there have been exceptional cases where listed companies had a leverage ratio of around 250% - temporarily! This may have been the result of a major takeover that required significant borrowing to pay for the acquisition.

In such circumstances, however, it is highly likely that the Chairman's report presented in the annual report contains information on what has already been done and what remains to be done in order to significantly reduce the level of financial leverage. In fact, it may even be necessary to sell some lines of business in order to reduce leverage to an acceptable level in a timely manner.
The consequence of high financial leverage is a heavy burden of interest on loans and overdrafts, which are charged to the profit and loss account. In the face of deteriorating economic conditions, profits may well be under a double yoke. There may be not only a reduction in trading revenue, but also an increase in interest rates.
One way to determine the impact of financial leverage on profits is to calculate the interest coverage ratio.
The rule of thumb is that the interest coverage ratio should be at least 4.0, and preferably 5.0 or more. This rule should not be neglected, because the loss of financial well-being can become a retribution.

Leverage ratio (Debt ratio)

Leverage ratio (debt ratio, debt-to-equity ratio)- an indicator of the financial position of the enterprise, characterizing the ratio of borrowed capital and all assets of the organization.
The term "financial leverage" is also used to characterize a principled approach to business financing, when, with the help of borrowed funds, an enterprise forms a financial leverage to increase the return on its own funds invested in a business.
Leverage(Leverage - “lever” or “lever action”) is a long-term factor, the change of which can lead to a significant change in a number of performance indicators. This term is used in financial management to characterize a relationship showing how an increase or decrease in the share of any group of semi-fixed costs affects the dynamics of the income of the company's owners.
The following term names are also used: autonomy coefficient, financial dependence coefficient, financial leverage coefficient, debt burden.
The essence of the debt burden is as follows. Using borrowed funds, the company increases or decreases the return on equity. In turn, the decrease or increase in ROE depends on the average cost of borrowed capital (average interest rate) and makes it possible to judge the effectiveness of the company in choosing sources of financing.

Method for calculating the coefficient of financial dependence

This indicator describes the capital structure of the company and characterizes its dependence on . It is assumed that the amount of all debts should not exceed the amount of equity capital.
The calculation formula for the financial dependency ratio is as follows:
Liabilities / Assets
Liabilities are considered both long-term and short-term (whatever is left after subtracting from the equity balance). Both components of the formula are taken from the balance sheet of the organization. However, it is recommended to make calculations based on the market valuation of assets, and not financial statements. Since a successfully operating enterprise, the market value of equity capital may exceed the book value, which means a lower value of the indicator and a lower level of financial risk.
As a result, the normal value of the coefficient should be 0.5-0.7.

Coefficient 0.5 is optimal (equal ratio of own and borrowed capital).
0.6-0.7 - is considered a normal coefficient of financial dependence.
A ratio below 0.5 indicates an organization's too cautious approach to raising debt capital and missed opportunities to increase the return on equity by using the effect of financial leverage.
If the level of this indicator exceeds the recommended number, then the company has a high dependence on creditors, which indicates a deterioration in financial stability. The higher the ratio, the greater the company's risks regarding the potential for bankruptcy or a shortage of cash.

Conclusions from the value of the Debt ratio
The financial leverage ratio is used to:
1) Comparisons with the average level in the industry, as well as with indicators from other firms. The value of the financial leverage ratio is influenced by the industry, the scale of the enterprise, as well as the method of organizing production (capital-intensive or labor-intensive production). Therefore, the final results should be evaluated in dynamics and compared with the indicator of similar enterprises.
2) Analysis of the possibility of using additional borrowed sources of financing, the efficiency of production and marketing activities, the optimal decisions of financial managers in matters of choosing objects and sources of investment.
3) Analysis of the debt structure, namely: the share of short-term debts in it, as well as arrears in paying taxes, wages, and various deductions.
4) Determination by creditors of financial independence, stability of the financial position of an organization that plans to attract additional loans.

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