The term "leverage" translated from English literally means the action of a small force (leverage)

In economics, leverage means the leverage of certain indicators to change performance indicators

Industrial leverage is characterized by the ability to influence the formation of profit from product sales by changing the volume products sold and the ratio of variable and fixed costs. The latter means that as a result of an increase in the volume of production (sales) of products, the level of fixed costs is reduced, and therefore the profit per unit of product increases. This will have a corresponding impact on the structure and volume of fixed and working capital and the efficiency of their use.

The level of production leverage is determined by the formula:

Where. LP - production leverage;

DP - growth rate of profit from product sales,%;

DP - growth rate of product sales volume,%

Industrial leverage is essentially an elasticity coefficient; those. shows by how many percent profit will change when sales volume changes by one percent. In this way, the level of sensitivity to changes in production (sales) volume is determined. The greater the value of production leverage, the greater the production cost.

However, the change in profits is influenced not only production factors, but also the results financial activities, in particular, changes in the volume and structure of liabilities due to raised funds (long-term loans from the bank, bond issues, etc.). All this is connected with the payment of interest, i.e. certain expenses.

The impact on changes in profit from financial results is characterized by financial leverage

Financial leverage allows you to optimize the ratio between your own and attracted resources and assess their impact on profit

As the share of long-term loans increases, the amount of interest to be paid increases accordingly. This leads to an increase in the level of financial risk due to a possible lack of funds to pay

Financial leverage is calculated as the ratio of the change net profit to total profit before tax:

Where. LV - financial leverage;

DP h - growth rate of net profit;

DP з - growth rate of total profit before tax

The data required to calculate leverage indicators is given in Table 610

According to Table 610, production leverage is:

. Table 610

. Initial data for calculating leverage indicators, thousand UAH

. Table continued 610

This means that during the period under study, for every percent increase in sales volume, sales profit grew by 3.4%. Financial leverage is:

The level of financial leverage shows that with a 1% increase in total profit before tax, net profit increased by 0.66%

A general indicator of leverage is production and financial leverage, which is defined as the product of production and financial leverage:

Where. LVF - production and financial leverage. Based on the above calculations:

Leverage indicators allow you to plan the optimal production volume, calculate the efficiency of raising funds, and predict production and financial risks

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 an enterprise. Types of leverage: production, financial and production-financial.

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

where VR is revenue; IP, IF – production and financial costs, respectively.

Production costs are the costs of producing and selling products (full cost). Depending on the volume of production, they are divided into constant and variable. The ratio between these parts of costs depends on the technological and technical strategy of the enterprise and its investment policy. Investment of capital in fixed assets causes an increase in constants and a relative reduction variable expenses. The relationship between production volume, fixed and variable costs is expressed by the production leverage indicator.

Production leverage- this is a potential opportunity to influence the profit of an enterprise by changing the structure of product costs and the volume of its output. The level of production leverage is calculated by the ratio of the growth rate of gross profit DP% (before interest and taxes) to the growth rate of sales in natural or conditionally natural units (DVPP%): Kp.l. = D P% / DRP%

It shows the degree of sensitivity of gross profit to changes in production volume. When its value is high, even a slight decline or increase in production leads to a significant change in profit. Enterprises with higher technical equipment of production usually have a higher level of production leverage. As the level of technical equipment increases, the share of fixed costs and the level of production leverage increase. With the growth of the latter, the degree of risk of shortfall in revenue necessary to reimburse fixed costs increases.

The second component is financial costs (debt servicing costs). Their size 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 the potential ability to influence profits by changing the volume and structure of equity and debt capital. Its level is measured by the ratio of the growth rate of net profit (DP%) ​​to the growth rate of gross profit (DP%): Kf.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 due to the effect financial leverage, one of the components of which is its leverage (the ratio of debt to equity capital). By increasing or decreasing leverage, depending on the prevailing conditions, you can influence profit and profitability 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 long-term loans and borrowings. A slight change in gross profit and return on invested capital in conditions of high financial leverage can lead to a significant change in net profit, which is dangerous during a decline in production.

7.1. Theoretical introduction

The asset management process aimed at increasing profits is characterized by the category leverage. Leverage is a factor, a small change in which can lead to a significant change in performance indicators. In the practice of financial analysis, three types of leverage are considered.

Industrial Leverage is the potential ability to influence gross income by changing the cost structure and output volume. The level of production leverage (PL) is usually measured by the following indicator:

where TGI is the rate of change gross income(in percentages);

TQ – rate of change in sales volume (in percent).

Using the method of calculating the break-even point (4.3), (4.4) allows you to transform formula (5.1):

(7.2)

Where c is the specific marginal income;

Q – sales volume in physical terms;

GI – gross income.

For a company with a high level of production leverage, a small change in production volume can lead to a significant change in gross income. A high value of the indicator is typical for enterprises with a relatively high level of technical equipment: the higher the level of semi-fixed costs in relation to the level of variable costs, the higher the level of production leverage, which is commensurate with the high production risk.

F financial leverage– this is a potential opportunity to influence the profit of an enterprise by changing the volume and structure of long-term liabilities. The level of financial leverage (Ll) characterizes the relative change in net profit when gross income changes

where TNI is the rate of change in net profit (in percent).

Using the method of determining the break-even point (6.3), (6.4), the formula can be transformed

where In – interest on loans and borrowings;

T – average tax rate.

The UFL coefficient shows how many times gross income exceeds taxable profit. The lower limit of the coefficient is unity. The greater the relative volume of attracted borrowed money, the greater the amount of interest paid on them, the higher the level of financial leverage, which is an indicator of high financial risk.

Production and financial leverage are summarized by the category production and financial leverage(Ul), the level of which, as follows from formulas (7.1) – (7.4), can be assessed by the following indicator:

. (7.5)

Production and financial leverage characterizes the relationship between three indicators: revenue, production and financial expenses, as well as net profit.

Problem 1. Analyze the level of production leverage when increasing production volume from 70 units. up to 77 units, if the product price is 3 thousand rubles, variable costs per unit of production are 1.4 thousand rubles, fixed costs are 81 thousand rubles.

Solution.

1. Calculate the amount of gross income (thousand rubles) with a production volume of 70 units, using formula (6.3):

2. Calculate the amount of gross income (thousand rubles) for a production volume of 120 units:

3. Level of production leverage:

If production volume increases by 10%, gross income will increase by 36%.

Task 2. Determine the level of financial leverage when gross income increases from the base level of 500 thousand rubles. on 10 %. The total capital of the company is 200 thousand rubles, including borrowed capital - 25%. Interest paid for use borrowed capital is 15%. The income tax rate is 24%.

Solution.

1. The amount of borrowed funds is 50 thousand rubles. (200×0.25).

2. Costs for using borrowed funds (thousand rubles):

In = 50 × 0.15 = 7.5.

3. Level of gross income taking into account an increase of 10%:

GI 2 = 500 × 1.1 = 550 (thousand rubles).

4. Let’s determine profit before tax (Pr) and the amount of income tax T (thousand rubles) with a gross income of 500 thousand rubles:

Pr 1 = GI 1 - In = 500 - 7.5 = 492.5; T 1 = Pr × 0.24 = 118.2.

5. Let’s determine profit before tax (Pr) and the amount of income tax T (thousand rubles) with a gross income of 550 thousand rubles:

Pr 2 = GI 1 – In = 550 - 7.5 = 542.5; T 2 = Pr × 0.24 = 130.2.

6. Calculate net profit in both cases (thousand rubles):

NI 1 = Pr 1 - income tax = 492.5 - 118.2 = 374.3;

NI 2 = Pr 2 - income tax = 542.5 - 130.2 = 412.3.

7. The level of financial leverage according to formula (7.4) is equal to:

Thus, if gross income increases by 10%, net income increases by 10.2%.

7.3. Tasks for independent work

Task 1. Determine production leverage if the company produced 40 units of product and sold it at a price of 7 rubles. At the same time, variable costs for the entire volume of production amounted to 120 rubles, and fixed costs 100 rubles.

Task 2. The company produced 20 units of products and received revenue in the amount of 140 rubles. Variable costs are 34 rubles, fixed costs are 34 rubles. Determine marginal income and level of production leverage .

Problem 3. In June, the company produced 5,000 units of products at a price of 180 rubles. Total fixed costs amounted to 120,000 rubles. Specific variable costs – 120 rubles. In July, it was planned to increase gross income by 10%. Determine the level of sales volume to achieve the set goal.

Task 4. The operation of the enterprise is characterized by the following parameters: revenue is 1,200 rubles, gross income is 340 rubles, variable costs are 440 rubles. What will lead to a greater change in gross income: a decrease in variable costs by 1% or an increase in production volume by 1%? Determine the absolute and relative change in the parameter.

Task 5. The price of a unit of production is 1 ruble, sales are 10,000 units, variable costs are 7,000 rubles, fixed costs are 7,000 rubles. Which will move the break-even point more: a 10% reduction in fixed costs or a 10% reduction in variable costs? Calculate the value of the critical output volume in both cases, as well as the current value of the break-even point.

Task 6. The company's revenue amounted to 700 rubles. Variable costs are equal to 200 rubles. for the entire volume of products. Gross income is 450 rubles. Which will change gross income more: a 1% decrease in variable costs or a 1% increase in output.

Problem 7. The company produces 100 thousand units of products. Selling price – 2,570 rubles, average variable costs – 1,800 rubles, fixed costs – 38.5 thousand rubles. Conduct a sensitivity analysis of gross income to the following changes:

10% price change. By how many units should sales volume be reduced without loss of profit?

10% change in variable costs;

10% change in fixed costs;

10% increase in sales volume.

Task 8. Perform financial risk analysis under different capital structures. How does the return on equity indicator change when gross income deviates from basic level 6 million rub. on 10 %?

Task 9. Calculate the level of production and financial leverage for enterprise A when production volume increases from 80 to 88 thousand units. Product price - 3 rubles, unit variable costs - 2 rubles, fixed costs - 30,000 rubles, interest on loans and borrowings - 20,000 rubles.

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: production; financial and production-financial.

To reveal its essence, let us present the factor model of net profit (NP) in the form of the difference between revenue (VR) and production costs (IP) and financial nature (IF):

PE = VR -IP - IF (32)

Production costs are the costs of producing and selling products (full cost). Depending on the volume of production, they are divided into constant and variable. The ratio between these parts of costs depends on the technological and technical strategy of the enterprise and its investment policy. Investment of capital in fixed assets causes an increase in fixed costs and a relative reduction in variable costs. The relationship between production volume, fixed and variable costs is expressed by the production leverage indicator.

Production leverage- this is a potential opportunity to influence the profit of an enterprise by changing the structure of product costs and the volume of its output. The level of production leverage is calculated by the ratio of the growth rate of gross profit DP% (before interest and taxes) to the growth rate of sales volume in natural or conditionally natural units (DVPP%)

It shows the degree of sensitivity of gross profit to changes in production volume. When its value is high, even a slight decline or increase in production leads to a significant change in profit. Enterprises with higher technical equipment of production usually have a higher level of production leverage. As the level of technical equipment increases, the share of fixed costs and the level of production leverage increase. With the growth of the latter, the degree of risk of shortfall in revenue necessary to reimburse fixed costs increases.

The data presented show that the highest value of the production leverage coefficient is that of the enterprise that has a higher ratio of fixed costs to variable ones. Each percent increase in output with the current cost structure ensures an increase in gross profit at the first enterprise - 3%, at the second - 4.26%, at the third - 6%. Accordingly, if production declines, profits at the third enterprise will decline twice as fast as at the first. Consequently, the third enterprise has a higher degree of production risk. The second component is financial costs (debt servicing costs). Their size depends on the amount of borrowed funds and their share in the total amount of invested capital. The relationship between profit and the debt/equity ratio is financial leverage. Potential opportunity to influence profits by changing the volume and structure of equity and debt 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. = PP% / P% (33)

It shows how many times the growth rate of net profit exceeds the growth rate of gross profit. This excess is ensured due to the effect of financial leverage, one of the components of which is its leverage (the ratio of borrowed capital to equity). By increasing or decreasing leverage, depending on the prevailing conditions, you can 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 long-term loans and borrowings. A slight change in gross profit and return on invested capital in conditions of high financial leverage can lead to a significant change in net profit, which is dangerous during a decline in production.

Data show that if an enterprise finances its activities only through own funds, the financial leverage ratio is 1, i.e. There is no leverage effect. IN in this example a 1% change in gross profit results in the same increase or decrease in net profit. With an increase in the share of borrowed capital, the range of variation in return on equity capital (ROE), financial leverage ratio and net profit increases. This indicates an increase in the degree of financial risk of investing with high leverage.

Production and financial leverage- represents the product of the levels of production and financial leverage. It reflects the general risk associated with a possible lack of funds to reimburse production costs and financial costs of servicing external debt.

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

To p.l. = 60 / 20 = 3;

Kf.l = 75 / 60 = 1.25;

Kp-f.l = 3*1.25 = 3.75

Based on this example, we can conclude that, given the current cost structure of the enterprise and the structure of capital sources, an increase in production volume by 1% will ensure an increase in gross profit by 3% and an increase in net profit by 3.75%. Each percent increase in gross profit will result in a 1.25% increase in net profit. These indicators will change in the same proportion during a decline in production. Using this data, you can assess and predict the degree of production and financial investment risk.

In financial terms, the relationship between profit and the valuation of the costs of assets or funds incurred to obtain this profit is characterized by the indicator “leverage”, this is a certain factor, a small change in which can lead to a significant change in a number of performance indicators.
IN financial management The following types of leverage are distinguished: financial, production (operational), production-financial.
Financial leverage characterizes the relationship between changes in net profit and changes in earnings before interest and taxes. The level of financial leverage established in a company is a characteristic potential opportunity influence net profit commercial organization by changing the volume and structure of long-term liabilities.

Production leverage characterizes the relationship between the cost structure, output volume, sales and profit. It shows the change in profit depending on changes in sales volumes.
Production-financial leverage assesses the combined impact of production and financial leverage
1.Estimation of production leverage . Production leverage is a very important characteristic of a company's activities; in particular, its high level suggests that even a slight change in production volumes can lead to significant financial instability. In other words, a relatively higher level of production leverage entails greater profit volatility. There are three main measures of industrial leverage: 1) the share of fixed production costs in total costs, or, which is equivalent, the ratio of fixed and variable costs (DOLd); 2) the ratio of net profit to fixed production costs (DOLр); the ratio of the rate of change in earnings before interest and taxes to the rate of change in sales volume in physical units (DOLr). As follows from the definition, the indicator can be calculated using the formula, where
TGI - rate of change in earnings before interest and taxes (in percent);
TQ is the rate of change in sales volume in natural units (in percent).
The economic meaning of the DOLr indicator shows the degree of sensitivity of profit before interest and taxes of a commercial organization to changes in production volume in natural units. Namely, for a commercial organization with a high level of production leverage, a small change in production volume can lead to a significant change in earnings before interest and taxes. In conclusion, we can note that the level of production leverage is a fairly inertial indicator; its sharp changes are practically extremely rare, since they are often associated with radical changes in the structure of the material and technical base of the enterprise, focused on the specifics of production activities.
2.Financial leverage assessment . By analogy with the production level, the level of financial leverage (LFL) can be measured by several indicators; Two of them are most famous: 1) debt-to-equity ratio (DFLp); 2) the ratio of the rate of change in net profit to the rate of change in earnings before interest and taxes (DFLr). Regarding changes in these indicators for a particular company, we can conclude: other things equal conditions their growth in dynamics is unfavorable (in the sense of an increase in financial leverage, i.e. an increase in financial risk). As follows from the definition, the DFLr value can be calculated using the formula:
,where TNI is the rate of change in net profit (in percent);
TGI is the change in earnings before interest and taxes (in percent).
The DFLr coefficient has a very clear interpretation - it shows how many times the profit before interest and taxes exceeds the taxable profit. The lower limit of the coefficient is unity. The greater the relative volume of borrowed funds attracted by an enterprise, the greater the amount of interest paid on them, the higher the level of financial leverage, and the more variable the net profit. Thus, an increase in the share of borrowed funds 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 the amount of net profit. Since the payment of interest, unlike, for example, the payment of dividends, is mandatory, then with a relatively high level of financial leverage, even a slight decrease in marginal profit can have very unpleasant consequences compared to a situation where the level of financial leverage is low.