Definition of production and financial leverage. Production (operational) leverage. Leverage is the management of assets and liabilities of an enterprise for profit, deleveraging is the process of reducing leverage

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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 Grade 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 was named 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 fluctuation 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 Money. 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 producing and selling products ( total 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, constants and variable costs is expressed as an indicator of production leverage (operating leverage). According to V.V. Kovalev, production 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 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 natural, conditionally natural 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, an increase in the share 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. 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 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, the increase in financial leverage(debt-to-equity ratio) can lead to both an increase and a decrease in net profit. The relationship between profit and the ratio of equity to debt capital - this 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 an environment of high financial leverage can lead to a significant change in net income, 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 obtain 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 fluctuation 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 company for a long time binds itself with the obligation 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: the first stage determines the needs for financing, the second - the possibilities for mobilizing sources of funds, the third - financial instruments which it is possible and expedient to use in the process of financing. 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 issue 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 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, since the costs of expanding this source increase, the amount of fixed current expenses required to be paid increases, the probability of bankruptcy increases, etc.

Practical actions for managing leverage are not amenable to rigid formalization and depend on a number of factors: sales stability, the degree of saturation of the market with the products of a given company, the availability of reserve borrowing potential, the pace of the company's development, the current structure of assets and liabilities, the tax policy of the state in relation to investment activities, the current and prospective situation stock markets and 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 clear that companies at the stage 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 financial manager financial leverage plays a particularly important role.

2. Types of potential leverage

2.1 Positive potential (or effect) of financial leverage

predetermined by the fact that the amount of funds raised from landers ( borrowed capital), as a rule, is cheaper than that raised from the owners (ownership). 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 the 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 spatio-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 V more uses borrowed capital; 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 are given on companies with the same amount of capital, but different structure sources (tg.).

Solution

In table. 2 shows the results of calculations, allowing you to make comparative characteristic changes in the net income of the 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 cost of maintaining borrowed sources of funds is lower, Negative influence decrease in profit 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 Make a comparative analysis of financial risk when different structure capital 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 comparative analysis influence 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 earnings before interest and taxes, i.e., the change working 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 the situation when 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 option The 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. Risk associated with a change in structure production capacity, 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 securities The firms representing them 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 proportion of conditionally permanent 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 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 height in the dynamics of indicators DOL r And DOL d , and 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 more plain sight. 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 A




Company IN




Company C

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

company A-- 30 thousand units.

company IN-- 36 thousand units.

company WITH-- 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 A

Company IN

Company WITH

The enterprise has the highest value of the level of production leverage WITH; 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 A this indicator is equal to 0.3 (for 100 rubles of variable costs, there are 30 rubles of conditionally fixed costs); For the company IN -- 0.72; For the company WITH -- 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 A -- by 16%. For the company IN-- by 18.2%, for the company WITH -- 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...

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Leverage(eng. - 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 more specific gravity fixed costs in the total cost 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.

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

Factor model of net profit (NP): NP \u003d BP - IP - IF

where BP - revenue; IP, IF - production and financial costs, respectively.

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 technological and technical strategy of the enterprise and its investment policy. Investing capital 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.

Production leverage- this is a potential opportunity to influence the profit of the 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 DП % (before interest and taxes) to the growth rate of sales volume in physical or conventional natural units (DVPP%): Kp.l. \u003d D P% / DRP%

The second component is financial costs (debt servicing costs). Their value depends on the amount of borrowed funds and their share in the total amount of invested capital. The relationship between profit and debt to equity ratio reflects financial leverage.

Financial leverage is a potential opportunity to influence profit 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 (DNP%) to the growth rate of gross profit (DП%): Cf.l. = DP% / DP%

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). Increasing or decreasing the leverage, depending on the prevailing conditions, can affect 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 long-term loans and borrowings. A slight change in gross profit and return on invested capital in an environment of high financial leverage can lead to a significant change in net income, which is dangerous during a decline in production.

The relationship between profit and valuation the cost of assets or funds incurred to obtain this profit is characterized by the indicator "leverage"(lever arm). This is a certain factor, a small change in which can lead to a significant change in a number of performance indicators.

Production (operating) leverage quantitatively characterized by the ratio between fixed and variable costs in their total amount and the variability of the indicator "profit before taxes". It is this profit indicator that makes it possible to isolate and evaluate the impact of operating leverage on financial results firm's activities.

The level of production leverage is calculated by the formula:

where FС - fixed costs in monetary units;

VC - full variable costs in monetary units.

z - specific variable costs per unit of production;

Q is the sales volume in real terms.

The concept of operating leverage is related to the effect of operating leverage. It is due to the fact that any change in sales revenue leads to a greater change in profits, obtained due to the stabilization of fixed costs for the entire volume of production.

The effect of production leverage is calculated by the formula:

, Where

P- profit of the enterprise for the reporting period;

R- the company's revenue for the period;

R- selling price of a unit of production;

cont– the value of the contribution;

If the share of fixed costs is high, the company is said to have a high level of operating leverage. For such a company, 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. Thus, the variability in earnings before interest and taxes due to changes in operating leverage quantifies production risk. The higher the level of operating leverage, the higher the company's production risk.

However, it cannot be considered that a high share of fixed costs in the cost structure of an enterprise is a negative factor. An increase in production leverage may indicate an increase in the production capacity of the enterprise, technical re-equipment, an increase in labor productivity, as well as the implementation of research and development projects. All these factors, which are undoubtedly positive, are manifested in an increase in fixed costs and lead to an increase in the effect of production leverage.

Production leverage effect manifests itself in the fact that with an increase in the company's revenue, the profit also changes, and the higher the level of production leverage, the stronger this effect,

An analysis of the values of fixed and variable costs of an enterprise allows you to identify the level of risk, which is necessary step planning and making managerial decisions.

So, the level of production leverage that has developed in the company is a characteristic of the potential opportunity to influence profit before interest and taxes by changing the cost structure and output volume.

Financial leverage

Quantitatively, this characteristic is measured by the ratio between borrowed and own capital; the level of financial leverage directly proportionally affects the degree of financial risk of the company and the rate of return required by shareholders. The higher the amount of interest payable, which, by the way, is a permanent obligatory expense, the lower the net profit. Thus, the higher the level of financial leverage, the higher the financial risk of the company.

The level of financial leverage of a company is calculated by the formula:

Where ZK- borrowed capital;

SC- equity.

A company that has a significant share of debt capital is called a company with a high level of financial leverage, or a financially dependent company. ; a company that finances its activities only from its own funds is called financially independent .

The costs of servicing loans are fixed, since they are obligatory for the enterprise to pay, regardless of the level of production and sales of products. It is obvious that if the market situation develops unsuccessfully, and the company's revenue turns out to be low, then an enterprise with a higher level of financial leverage (and, accordingly, with high financial costs) will lose much earlier financial stability and become unprofitable than an enterprise that preferred to finance its activities from its own sources and thus retained a low level of financial dependence on external creditors. Therefore, a high level of financial leverage is a reflection of the high risk inherent in this enterprise.

So, the level of financial leverage that has developed in the company is a characteristic of the potential opportunity to influence the net profit of a commercial organization by changing the volume and structure of long-term liabilities.