Financial leverage: what is it and what opportunities does it provide for business. Leverage (financial leverage): what is it and how to use it? What does a company's financial leverage show?

The effect of financial leverage this is an indicator that reflects the change in the return on equity obtained through the use of borrowed funds and is calculated using the following formula:

Where,
DFL - effect of financial leverage, in percent;
t - income tax rate, in relative terms;
ROA - return on assets (economic return on EBIT) in%;

D - borrowed capital;
E - equity.

The effect of financial leverage is manifested in the difference between the cost of borrowed and allocated capital, which allows you to increase the return on equity and reduce financial risks.

The positive effect of financial leverage is based on the fact that the bank rate in a normal economic environment is lower than the return on investment. The negative effect (or the reverse side of financial leverage) occurs when the return on assets falls below the rate on the loan, which leads to accelerated losses.

Incidentally, the common theory is that the US mortgage crisis was a manifestation of the negative effect of financial leverage. When the program of non-standard mortgage lending was launched, interest rates on loans were low, while real estate prices were growing. The low-income strata of the population were involved in financial speculation, since almost the only way for them to repay the loan was the sale of housing that had risen in price. When housing prices crept down, and loan rates rose due to increasing risks (the leverage began to generate losses, not profits), the pyramid collapsed.

Components effect of financial leverage are shown in the figure below:

As can be seen from the figure, the effect of financial leverage (DFL) is the product of two components, adjusted by the tax coefficient (1 - t), which shows the extent to which the effect of financial leverage is manifested due to different levels of income tax.

One of the main components of the formula is the so-called financial leverage differential (Dif) or the difference between the return on the company's assets (economic profitability), calculated on EBIT, and the interest rate on borrowed capital:

Dif = ROA - r

Where,
r - interest rate on borrowed capital, in %;
ROA - return on assets (economic return on EBIT) in%.

The financial leverage differential is the main condition that forms the growth of return on equity. For this, it is necessary that the economic profitability exceed the interest rate of payments for the use of borrowed sources of financing, i.e. the financial leverage differential must be positive. If the differential becomes less than zero, then the effect of financial leverage will only act to the detriment of the organization.

The second component of the effect of financial leverage is the coefficient of financial leverage (shoulder of financial leverage - FLS), which characterizes the strength of the impact of financial leverage and is defined as the ratio of borrowed capital (D) to equity (E):

Thus, the effect of financial leverage consists of the influence of two components: differential and lever arm.

The differential and lever arm are closely interconnected. As long as the return on investment in assets exceeds the price of borrowed funds, i.e. the differential is positive, the return on equity will grow the faster, the higher the ratio of borrowed and own funds. However, as the share of borrowed funds grows, their price rises, profits begin to decline, as a result, the return on assets also falls and, therefore, there is a threat of obtaining a negative differential.

According to economists, based on a study of the empirical material of successful foreign companies, the optimal effect of financial leverage is within 30-50% of the level of economic return on assets (ROA) with a financial leverage of 0.67-0.54. In this case, an increase in the return on equity is ensured not lower than the increase in the profitability of investments in assets.

The effect of financial leverage contributes to the formation of a rational structure of the sources of funds of the enterprise in order to finance the necessary investments and obtain the desired level of return on equity, in which the financial stability of the enterprise is not violated.

Using the above formula, we will calculate the effect of financial leverage.

Indicators	Ed. rev.	Value
Equity	thousand roubles.	45 879,5
Borrowed capital	thousand roubles.	35 087,9
Total equity	thousand roubles.	80 967,4
Operating profit	thousand roubles.	23 478,1
Interest rate on borrowed capital	%	12,5
The amount of interest on borrowed capital	thousand roubles.	4 386,0
Income tax rate	%	24,0
Taxable income	thousand roubles.	19 092,1
Income tax amount	thousand roubles.	4 582,1
Net profit	thousand roubles.	14 510,0
Return on equity	%	31,6%
Effect of financial leverage (DFL)	%	9,6%

The calculation results presented in the table show that by attracting borrowed capital, the organization was able to increase the return on equity by 9.6%.

The financial lever characterizes the possibility of increasing the return on equity and the risk of loss of financial stability. The higher the share of borrowed capital, the higher the sensitivity of net income to changes in balance sheet profit. Thus, with additional borrowing, the return on equity may increase, provided:

if ROA > i, then ROE > ROA and ΔROE = (ROA - i) * D/E

Therefore, it is advisable to attract borrowed funds if the achieved return on assets, ROA exceeds the interest rate for the loan, i. Then an increase in the share of borrowed funds will increase the return on equity. However, it is necessary to monitor the differential (ROA - i), since with an increase in the leverage of financial leverage (D / E), lenders tend to compensate for their risk by increasing the rate for the loan. The differential reflects the lender's risk: the larger it is, the lower the risk. The differential should not be negative, and the effect of financial leverage should optimally be equal to 30 - 50% of the return on assets, since the stronger the effect of financial leverage, the higher the financial risk of loan default, falling dividends and share prices.

The level of associated risk characterizes the operational and financial leverage. Operating and financial leverage, along with the positive effect of increasing the return on assets and equity as a result of growth in sales and borrowings, also reflects the risk of lower profitability and incurring losses.

Financial leverage characterizes the ratio of all assets to equity, and the effect of financial leverage is calculated accordingly 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 the increase in production volume 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 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 through the issuance of shares than to take out a loan: attracting borrowed 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 financing. 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 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"

Indicator	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.

The financial leverage of the company arises as a result of raising debt capital to finance its activities. The most common forms of borrowing for companies are bank loans and the issuance of bonds. The funds raised can be used to expand the scale of activities, replace or modernize industrial equipment, implement investment projects, etc., which is aimed at obtaining additional profit.

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

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

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

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

* Borrowed capital of Company B is the result of the issue of bonds with a fixed interest rate of 7% per annum.

** Income tax for both companies is 30%.

*** The par value of one ordinary share for both companies is the same and amounts to 10 USD.

Let's look at the impact of financial leverage on both companies under two alternative scenarios.

A) Sales will increase by 3%.

B) Sales will decrease by 5%.

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

EBIT \u003d 30000000 * 1.03 + 20000000 * 1.03-7000000 \u003d 3300000 c.u.

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

EBT Company B = 3300000-420000=2880000 c.u.

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

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

Net profit Company B = 2880000 * 0.7 = 2016000 c.u.

Company A's earnings per share will be CU3.30 and Company B's will be CU5.04.

EPS Company A = 2310000/1000000=2.31 c.u.

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

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

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

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

The difference in the growth rate of earnings per share is due to the financial leverage that has arisen from the use of debt capital by Company B.

The influence of financial leverage will also manifest itself in the development of the second scenario, when the sales volume of both companies will decrease by 5%. Since the amount of total variable costs will decrease in proportion to the volume of sales, the operating income for both companies will be 2500000 USD.

EBIT \u003d 30000000 * 0.95 + 20000000 * 0.95-7000000 \u003d 2500000 c.u.

The amount of profit before tax for Company A will be equal to the amount of operating income of 2500000 cu, and for Company B its size will be less by the amount of interest 420000 cu.

EBT Company B = 2500000-420000=2080000 c.u.

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

Net profit Company A \u003d 2500000 * 0.7 \u003d 1750000 c.u.

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

Therefore, Company A's earnings per share would be CU1.75 and Company B's would be CU3.64.

EPS Company A = 1750000/1000000=1.75 c.u.

EPS Company B = 1456000/400000=3.64 c.u.

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

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

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

In this scenario, the effect of financial leverage caused Company B's earnings per share to fall more than Company A's.

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

As we can see, for Company A, which does not use financial leverage, earnings per share are less sensitive to changes in operating income. In contrast, Company B, which uses financial leverage, changes earnings per share at a faster rate as operating income changes. In other words, a company with higher financial leverage will see earnings per share grow faster as operating income grows. However, if it decreases, the rate of decline in earnings per share will also be faster.

Financial leverage (credit leverage, financial leverage, credit leverage, financial leverage) for margin trading participants in the global Forex currency market, as well as the stock, commodity and futures markets, is the ratio of borrowed funds to equity (in other words, the ratio between borrowed capital and own capital). In addition, financial leverage, as well as the effect of financial leverage, is the degree of effectiveness from the use of borrowed capital in order to increase the volume of trading operations and profits in the absence of sufficient own capital for this.

At its core, the size of the ratio of borrowed funds to own funds characterizes the financial stability of the bidder or the degree of risk taken by him. The payment for borrowed capital, as a rule, is less than the amount of additional profit that it provides. The mentioned additional profit is added to the profit received from the use of equity, which ultimately makes it possible to increase its profitability ratio. It is also worth adding that in the Forex currency market, financial leverage in practical terms is also called a coefficient that shows the ratio of the price of a trade transaction to the financial resources that a trader must have to conclude it.

It is also important to note that financial leverage can only appear when a currency trading participant uses borrowed funds (most often when trading on margin). As a rule, in the commodity market, according to its rules, financial security is required at least 50% of the transaction amount. Thus, to conclude a transaction, for example, for 200 thousand dollars, a trader must have a deposit of at least 100 thousand dollars. As for the securities market or the currency exchange market, the conclusion of a contract here requires, as a rule, the introduction of a guarantee in the amount of 2 to 15% of the total transaction amount. That is, to make a transaction for 200 thousand dollars, you must have available, respectively, from 4 to 30 thousand dollars.

In practice, which is accepted in margin trading, the value of financial leverage is recorded as a coefficient showing the ratio of the amount of collateral deposited by the trader to the amount of the loan provided to him. For example, a margin requirement of 25% would correspond to a leverage of 1:5 (pronounced "one in five"), while a requirement of 1% would correspond to a leverage of 1:100 (pronounced "one in a hundred"). In these cases, the trader is said to have received for trading operations an amount /, 5 (100) times the amount of his own security deposit. It is obvious that the use of leverage not only increases the possibility of making a profit, but also increases the degree of risk of a trading operation.

For any enterprise, the priority is the rule that both own and borrowed funds must provide a return in the form of profit (income). The action of financial leverage (leverage) characterizes the expediency and efficiency of the use of borrowed funds by the enterprise as a source of financing of economic activity.

The effect of financial leverage is that the company, using borrowed funds, changes the net profitability of own funds. This effect arises from the discrepancy between the profitability of assets (property) and the "price" of borrowed capital, i.e. average bank rate. At the same time, the company must provide for such a return on assets so that the funds are sufficient to pay interest on the loan and pay income tax.

It should be borne in mind that the average calculated interest rate does not coincide with the interest rate accepted under the terms of the loan agreement. The average settlement rate is set according to the formula:

SP \u003d (FIk: amount of AP) X100,

joint venture - the average settlement rate for a loan;

Fick - actual financial costs for all loans received for the billing period (the amount of interest paid);

AP amount - the total amount of borrowed funds attracted in the billing period.

The general formula for calculating the effect of financial leverage can be expressed as:

EGF \u003d (1 - Ns) X(Ra - SP) X(GK:SK),

EGF - the effect of financial leverage;

Ns – income tax rate in fractions of a unit;

Ra – return on assets;

joint venture - average calculated interest rate for a loan in %;

ZK - borrowed capital;

SC - equity.

The first component of the effect is tax corrector (1 - Hs), shows the extent to which the effect of financial leverage is manifested in connection with different levels of taxation. It does not depend on the activities of the enterprise, since the income tax rate is approved by law.

In the process of managing financial leverage, a differentiated tax corrector can be used in cases where:

differentiated tax rates have been established for various types of enterprise activities;

for certain types of activities, enterprises use income tax benefits;

individual subsidiaries (branches) of the enterprise operate in free economic zones, both in their own country and abroad.

The second component of the effect is differential (Ra - SP), is the main factor that forms the positive value of the effect of financial leverage. Condition: Ra > SP. The higher the positive value of the differential, the more significant, other things being equal, the value of the effect of financial leverage.

Due to the high dynamism of this indicator, it requires systematic monitoring in the management process. The dynamism of the differential is due to a number of factors:

in a period of deterioration in the financial market, the cost of raising borrowed funds may increase sharply and exceed the level of accounting profit generated by the company's assets;

the decrease in financial stability, in the process of intensive attraction of borrowed capital, leads to an increase in the risk of bankruptcy of the enterprise, which makes it necessary to increase interest rates for a loan, taking into account the premium for additional risk. The financial leverage differential can then be reduced to zero or even to a negative value. As a result, the return on equity will decrease, as part of the profit it generates will be used to service the debt received at high interest rates;

during a period of deterioration in the situation on the commodity market, a decrease in sales and the amount of accounting profit, a negative value of the differential can form even at stable interest rates due to a decrease in the return on assets.

Thus, the negative value of the differential leads to a decrease in the return on equity, which makes its use inefficient.

The third component of the effect is debt ratio or financial leverage (GK: SK) . It is a multiplier that changes the positive or negative value of the differential. With a positive value of the differential, any increase in the debt ratio will lead to an even greater increase in the return on equity. With a negative value of the differential, the increase in the debt ratio will lead to an even greater drop in the return on equity.

So, with a stable differential, the debt ratio is the main factor affecting the return on equity, i.e. it generates financial risk. Similarly, with a fixed debt ratio, a positive or negative value of the differential generates both an increase in the amount and level of return on equity, and the financial risk of losing it.

Combining the three components of the effect (tax corrector, differential and debt ratio), we obtain the value of the effect of financial leverage. This method of calculation allows the company to determine the safe amount of borrowed funds, that is, acceptable lending conditions.

To realize these favorable opportunities, it is necessary to establish the relationship and contradiction between the differential and the debt ratio. The fact is that with an increase in the amount of borrowed funds, the financial costs of servicing the debt increase, which, in turn, leads to a decrease in the positive value of the differential (with a constant return on equity).

From the above, the following can be done conclusions:

if new borrowing brings to the enterprise an increase in the level of the effect of financial leverage, then it is beneficial for the enterprise. At the same time, it is necessary to control the state of the differential, since with an increase in the debt ratio, a commercial bank is forced to compensate for the increase in credit risk by increasing the “price” of borrowed funds;

the creditor's risk is expressed by the value of the differential, since the higher the differential, the lower the bank's credit risk. Conversely, if the differential becomes less than zero, then the leverage effect will act to the detriment of the enterprise, that is, there will be a deduction from the return on equity, and investors will not be willing to buy shares of the issuing enterprise with a negative differential.

Thus, an enterprise's debt to a commercial bank is neither good nor evil, but it is its financial risk. By attracting borrowed funds, an enterprise can more successfully fulfill its tasks if it invests them in highly profitable assets or real investment projects with a quick return on investment.

The main task for a financial manager is not to eliminate all risks, but to take reasonable, pre-calculated risks, within the positive value of the differential. This rule is also important for the bank, because a borrower with a negative differential is distrustful.

Financial leverage is a mechanism that a financial manager can master only if he has accurate information about the profitability of the company's assets. Otherwise, it is advisable for him to treat the debt ratio very carefully, weighing the consequences of new borrowing in the loan capital market.

The second way to calculate the effect of financial leverage can be viewed as a percentage (index) change in net profit per ordinary share, and the fluctuation in gross profit caused by this percentage change. In other words, the effect of financial leverage is determined by the following formula:

leverage strength = percentage change in net income per ordinary share: percentage change in gross income per ordinary share.

The smaller the impact of financial leverage, the lower the financial risk associated with this enterprise. If borrowed funds are not involved in circulation, then the force of the financial leverage is equal to 1.

The greater the force of financial leverage, the higher the level of financial risk of the enterprise in this case:

for a commercial bank, the risk of non-repayment of the loan and interest on it increases;

for the investor, the risk of reducing dividends on the shares of the issuing enterprise with a high level of financial risk that he owns increases.

The second method of measuring the effect of financial leverage makes it possible to perform an associated calculation of the strength of the impact of financial leverage and establish the total (general) risk associated with the enterprise.

In terms of inflation if the debt and interest on it are not indexed, the effect of financial leverage increases, since debt servicing and the debt itself are paid for with already depreciated money. It follows that in an inflationary environment, even with a negative value of the differential of financial leverage, the effect of the latter can be positive due to non-indexation of debt obligations, which creates additional income from the use of borrowed funds and increases the amount of equity capital.