Leverage. Concept, essence, meaning. Production and financial leverage Production leverage Normative value

Operating leverage is closely related to a company's cost structure. Operating leveror production leverage (leverage - leverage) is a mechanism for managing the company's profit, based on improving the ratio of fixed and variable costs.

With its help, you can plan the change in the organization's profit depending on the change in the volume of sales, and also determine the break-even point. A prerequisite for the application of the operating leverage mechanism is the use of a marginal method based on the division of costs into fixed and variable costs. The lower the proportion of fixed costs in the total costs of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

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

Production (operational) leverage is quantitatively characterized by the ratio between fixed and variable costs in their total amount and the value of the “Profit before interest and taxes” indicator. Knowing the production leverage, you can predict the change in profit when the revenue changes. Distinguish between price and natural price leverage.

Price operating (production) leverage

The price operating leverage (Pc) is calculated using the formula:

Rts \u003d V / P
Where,
В - sales proceeds;
P - profit from sales.

Considering that B \u003d P + Zper + Zpost, the formula for calculating the price operating leverage can be written as:

Rts \u003d (P + Zper + Zpost) / P \u003d 1 + Zper / P + Zpost / P
Where,
Zper - variable costs;
Zpost - fixed costs.

Natural operating (production) leverage

Natural operating leverage (Рн) is calculated by the formula:

Rn \u003d (V-Zper) / P \u003d (P + Zpost) / P \u003d 1 + Zpost / P Where,
В - sales proceeds;
P - profit from sales;
Zper - variable costs;
Zpost - fixed costs.

Operating leverage is not measured as a percentage, as it is the ratio of profit margin to profit from sales. And since the marginal income, in addition to the profit from sales, also contains the amount of fixed costs, the operating leverage is always greater than one.

The quantity operating leverage can be considered an indicator of the riskiness of not only the enterprise itself, but also the type of business in which this enterprise is engaged, since the ratio of fixed and variable costs in the overall cost structure is a reflection of not only the characteristics of this enterprise and its accounting policy, but also the industry-specific features of the activity.

However, it is impossible to assume that a high share of fixed costs in the structure of an enterprise's costs is a negative factor, just as the value of marginal income cannot be absolute. An increase in production leverage may indicate an increase in the production capacity of an enterprise, technical re-equipment, and an increase in labor productivity. The profit of an enterprise with a higher level of production leverage is more sensitive to changes in revenue. With a sharp drop in sales, such an enterprise can very quickly "fall" below the break-even level. In other words, an enterprise with a higher level of production leverage is more risky.

Since operating leverage shows the dynamics of operating profit in response to a change in the company's revenue, and financial leverage characterizes the change in profit before tax after interest on loans and borrowings in response to a change in operating profit, the cumulative leverage gives an idea of \u200b\u200bhow much of the change in profit before taxes. after interest payment when revenue changes by 1%.

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

In conclusion, let us list the tasks that are solved using the operating lever (production leverage):

calculation of the financial result for the organization as a whole, as well as for the types of products, works or services based on the "costs - volume - profit" scheme;

determination of the critical point of production and its use in making management decisions and setting prices for work;

making decisions on additional orders (answering the question: will an additional order lead to an increase in fixed costs?);

making a decision to stop the production of goods or the provision of services (if the price falls below the level of variable costs);

solving the problem of maximizing profits due to the relative reduction of fixed costs;

use of the profitability threshold when developing production programs, setting prices for goods, works or services.

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 it: production, financial and production and financial. In the literal sense, leverage is understood as a lever, with a little effort of which you can significantly change the results of the production and financial activities of an enterprise.

To reveal its essence, we present a factorial model of net profit ( PE) in the form of the difference between revenue ( BP) and production costs ( IP) and financial ( IF):

State of emergency = VR-IP-IF (157)

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

By definition Kovalev V.The. production leverage - it 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 by the ratio of the growth rate of gross profit P% (before interest and taxes) to the growth rate of sales in natural or conditionally natural units (VRP%).

It shows the degree of sensitivity of gross profit to changes in production. With its high value, even a slight decline or increase in production leads to a significant change in profit. Enterprises with a higher level of technical equipment of production usually have a higher level of production leverage. With an increase in the level of technical equipment, there is an increase in the share of fixed costs and the level of production leverage. With the growth of the latter, the degree of risk of not receiving the proceeds necessary to reimburse fixed costs increases. You can verify this with the following example:


Product price, thousand rubles
Cost of the product, thousand rubles
Specific variable costs, thousand rubles
Fixed costs, RUB mln
Break-even sales volume, pcs.
Production volume, pcs:
option 1
option 2
Production growth,%
Revenue, million rubles:
option 1
option 2
Cost amount, million rubles:
option 1
option 2
Profit, million rubles:
option 1
option 2
Gross profit growth,%
Production leverding ratio

The above data show that the highest value of the production leverage ratio is the enterprise with a higher ratio of fixed costs to variables. Each percent of the increase in production with the existing structure of costs provides an increase in the gross profit of the first enterprise - 3%, the second - 4.26%, and the third - 6%. Accordingly, with a decline in production, the profit of the third enterprise will decrease twice as fast as in the first. Consequently, the third plant has a higher degree of production risk .

Graphically, this relationship can be depicted as follows (Fig. 11). The abscissa shows the volume of production in the corresponding scale, and the ordinate shows the increase in profit (in percent). The point of intersection with the axis (the so-called "dead center" or equilibrium point or break-even sales volume) shows how much needs to be produced and sold products to each enterprise in order to recover fixed costs. It is calculated by dividing the sum of fixed costs by the difference between the price of the product and the specific variable costs. With the existing structure, the break-even volume for the first enterprise is 2000, and for the second - 2273, for the third - 2500. The greater the value of this indicator and the slope of the graph to the abscissa axis, the higher the degree of occupational risk.

Fig. 11. Dependency of production leverage

from the cost structure of the enterprise

The second component of formula (157) is financial costs (debt service costs). Their value depends on the amount of borrowed funds and their share in the total amount of invested capital. As already noted, an increase in the leverage (the ratio of borrowed and equity capital) can lead to both an increase ”and a decrease in net profit.

The relationship between profit and the ratio of equity and debt - this is financial leverage. According to V.V. Kovalev, financial leverage is a potential opportunity to influence profit 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 (  PE%) : to the rate of growth of gross profit (  P%):

Kfl \u003d PE% / P% (159)

It shows how many times the growth rate of net profit exceeds the growth rate of gross profit. This excess, as can be seen from the previous paragraph, is provided due to the effect of financial leverage, one of the components of which is its leverage (the ratio of debt to equity). By increasing or decreasing the 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 an environment of high financial leverage can lead to a significant change in net profit, which is dangerous in the event of a decline in production.

Let's conduct a comparative analysis of financial risk with different capital structures. Let's calculate how the return on equity will change when the profit deviates from the baseline by 10%.


Total capital
Share of borrowed capital,%
Gross profit
Interest paid
Tax (30%)
Net profit

DGC range,%

The above data show that if the company finances its activities only from its own funds, the financial leverage ratio is 1, i.e. there is no leverage effect. In this situation, a 1% change in gross profit 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 of the return on equity (RAC), the ratio of financial leverage and net profit increases, This indicates an increase in the degree of financial risk of investment with a high leverage. Graphically, this dependence can be shown as follows (Fig. 12).

P, million rubles

50 75 100 150 200

Fig. 12. Dependence of return on equity and financial leverage on capital structure

The abscissa shows the value of gross profit in the corresponding scale, and the ordinate shows the return on equity in percent. The point of intersection with the abscissa 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 reflects the degree of financial risk . The degree of risk is also characterized by the slope of the graph towards the abscissa axis.

The generalizing indicator is production and financial leverage, which represents the product of the levels of production and financial leverage. It reflects the general risk associated with a possible lack of funds to recover production costs and financial costs of servicing external debt.

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

Kp.l \u003d 60/20 \u003d 3; CF.L \u003d 75/60 \u200b\u200b\u003d 125; Kp-ph.l \u003d 3 1.25 \u003d 3.75... Based on these data, it can be concluded that with the existing structure of costs at the enterprise and the structure of capital sources, an increase in production by 1% will provide 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 an increase in net profit of 1.25%. These indicators will change in the same proportion in the event of a decline in production. Using this data, you can estimate and predict the degree of production and financial investment risk.

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 and financial.

To reveal its essence, we present the factor model of net profit (PP) in the form of the difference between revenue (BP) and production costs (IP) and financial nature (IF):

PE \u003d VR -IP - IF

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

Production leverage - this 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 DP% (before interest and taxes) to the growth rate of sales in natural or conditionally natural units (DVPP%)

It shows the degree of sensitivity of gross profit to changes in 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 is usually found in enterprises with a higher technical equipment of production. With an increase in the level of technical equipment, there is an increase in the share of fixed costs and the level of production leverage. With the growth of the latter, the degree of risk of shortfall in the proceeds required to reimburse fixed costs increases.

Product price, thousand rubles 800 800 800

Product cost, thousand rubles 500 500 500

Specific variable costs, thousand rubles 300 250 200

Fixed costs, RUB mln 1000 1250 1500

Break-even sales volume, pcs. 2000 2273 2500

Production volume, pcs.

option 1 3000 3000 3000

option 2 3600 3600 3600

Production growth,% 20 20 20

Revenue, RUB mln

option 1 2400 2400 2400

option 2 2880 2880 2880

Amount of expenses mln. Rub.

option 1 1900 2000 2100

option 2 2080 2150 2220

Profit, RUB mln

option 1 500 400 300

option 2 800 730 660

Gross profit growth,% 60 82.5 120

Production leverage ratio 3 4.26 6

The above data show that the highest value of the production leverage ratio has the company, which has a higher ratio of fixed costs to variables. Each percent of the increase in output with the existing structure of costs provides an increase in gross profit at the first enterprise - 3%, at the second - 4.26%, at the third - 6%. Accordingly, with a decline in production, the profit at the third enterprise will decrease 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 service 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 ratio of equity and debt capital is financial leverage. Potential opportunity to influence profit 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. \u003d PE% / P%

It shows how many times the growth rate of net profit exceeds the growth rate of gross profit. This excess is provided due to the effect of financial leverage, one of the components of which is its leverage (the ratio of debt to equity). By increasing or decreasing the 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 an environment of high financial leverage can lead to a significant change in net profit, which is dangerous in the event of a decline in production.

Example: Let's compare financial risk with different capital structures. Let's calculate how the return on equity will change when the profit deviates from the baseline by 10%.


Total capital
Share of borrowed capital,%
Gross profit
Interest paid
Tax (30%)
Net profit

DGC range,%

The data show that if the company finances its activities only from its own funds, the leverage ratio is 1, i.e. there is no leverage effect. In this example, a 1% change in gross profit leads to the same increase or decrease in net profit. With an increase in the share of borrowed capital, the range of variations in the return on equity (RAC), the financial leverage ratio and net profit increases. This indicates an increase in the degree of financial risk of investment with a high leverage.

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

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

To p.l. \u003d 60/20 \u003d 3; CF.L \u003d 75/60 \u200b\u200b\u003d 1.25; Kp-ph.l \u003d 3 * 1.25 \u003d 3.75

Based on this example, we can conclude that with the existing structure of costs at the enterprise and the structure of capital sources, an increase in production by 1% will provide 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 an increase in net profit of 1.25%. These indicators will change in the same proportion in the event of a decline in production. Using this data, you can estimate and predict the degree of production and financial investment risk.

Analysis of the solvency and creditworthiness of the enterprise.

One of the indicators characterizing the financial condition of an enterprise is its solvency, i.e. the ability to timely pay off your payment obligations in cash.

Solvency analysis is necessary not only for an enterprise in order to assess and forecast financial activities, but also for external investors (banks). Before issuing a loan, the bank must verify the borrower's creditworthiness. The same should be done by enterprises that want to enter into economic relations with each other. You especially need to know about the financial capabilities of a partner if there is a question about granting him a commercial loan or deferred payment.

Solvency is assessed based on the liquidity characteristics of current assets, i.e. the time it takes to convert them into cash. The concepts of solvency and liquidity are very close, but the second is more capacious. Solvency depends on the degree of liquidity of the balance. At the same time, liquidity characterizes not only the current state of settlements, but also the prospects. The analysis of balance sheet liquidity consists in comparing funds for an asset, grouped by the degree of diminishing liquidity, by short-term liabilities for liabilities, which are grouped by the degree of urgency of their repayment. The most mobile part of liquid funds is money and short-term financial investments, they belong to the first group. The second group includes finished goods, goods shipped and accounts receivable. The liquidity of current assets depends on the timeliness of the shipment of products, the execution of bank documents, the speed of payment documents in banks, the demand for products, their competitiveness, the solvency of buyers, forms of payment, etc. The third group includes the transformation of inventories and work in progress into finished goods.

Table 13. Grouping of current assets according to the degree of liquidity.

Current assets	To the beginning

Cash
Short-term financial investments
Total for the first group
Finished products
Goods shipped
Receivables
Total in the second group
Productive reserves
Unfinished production
Future spending
Total for the third group
Total current assets

Accordingly, the payment obligations of the enterprise are divided into three groups. The first group includes debts, the due dates for which have already arrived. The second group includes debts that should be repaid in the near future. The third group includes long-term debt.

To determine the current solvency, it is necessary to compare the liquid funds of the first group with the payment obligations of the first group. Ideal if the coefficient is one or a little more. According to the balance sheet, this indicator can be calculated only once a month or quarter. The enterprise makes settlements with creditors every day. Therefore, for the operational analysis of the current solvency, daily control over the receipt of funds from the sale of products, from the repayment of receivables and other cash receipts, as well as to control the fulfillment of payment obligations to suppliers and other creditors, a payment calendar is drawn up, in which, on the one hand, cash and expected means of payment are counted, and on the other hand, payment obligations for the same period (1, 5, 10, 15 days, month). The operational payment calendar is compiled on the basis of data on shipment and sales of products, on purchases of means of production, documents on payments for labor, for the issuance of advances to employees, bank statements, etc. To assess the prospects for solvency, liquidity indicators are calculated: absolute; intermediate; general.

The absolute liquidity ratio is determined by the ratio of the liquid assets of the first group to the total amount of the company's short-term debts (Section III of the balance sheet liability). Its value is considered sufficient if it is higher than 0.25 - 0.30. If the company can currently pay off all its debts, then its solvency is considered normal. The ratio of liquid assets of the first two groups to the total amount of short-term debts of the enterprise is an intermediate liquidity ratio. Usually the ratio is 1: 1. However, it may not be sufficient if a large proportion of the liquidity is accounts receivable, some of which are difficult to collect on time. In such cases, a 1.5: 1 ratio is required. The total liquidity ratio is calculated by the ratio of the total amount of current assets, including inventories and work in progress (section III of the asset), to the total amount of short-term liabilities (section III of the liability). Usually the coefficient of 1.5 - 2.0 is satisfied.

Table 14. Indicators of enterprise liquidity.

Liquidity ratios are relative indicators and do not change for some time if the numerator and denominator of the fraction increase proportionally. The financial situation may change over time. For example: decrease in profit, profitability level, turnover ratio, etc. For a more complete and objective assessment of liquidity, the following factor model can be used:

Current profit Balance sheet profit

K face \u003d * \u003d X1 * X2

Balance sheet profit Short-term debt

where X1 is an indicator characterizing the value of current assets attributable to the ruble of profit; X2 is an indicator that indicates the company's ability to pay off its debts at the expense of the results of its activities. It characterizes the sustainability of finance. The higher its value, the better the financial condition of the enterprise. To calculate the influence of these factors, you can use the methods of chain staging or absolute differences.

When determining solvency, it is advisable to consider the structure of the entire capital, including the main one. If stocks, bills and other securities are fairly substantial, listed on the exchange, they can be sold with minimal losses. Securities provide better liquidity than some commodities. In such a situation, the company does not need a very high liquidity ratio, since the working capital can be stabilized by selling part of the fixed capital.

Another liquidity indicator is the self-financing ratio - the ratio of the amount of self-financed income (profit + amortization) to the total amount of internal and external sources of financial income:

This ratio can be calculated as the ratio of self-funded income to value added. It shows the extent to which the enterprise itself finances its activities. You can also determine how much self-financed income is accounted for by one employee of the enterprise. Analyzing the state of the company's solvency, it is necessary to consider the causes of financial difficulties, often their formation and the duration of overdue debts. The reasons for insolvency may be failure to fulfill the plan for the production and sale of products, an increase in its cost; non-fulfillment of the profit plan and, as a result, lack of own sources of self-financing of the enterprise, a high percentage of taxation. One of the reasons for the deterioration in solvency may be the improper use of working capital: the diversion of funds into accounts receivable, investment in excess stocks and for other purposes that temporarily do not have sources of funding.

The solvency of an enterprise is very closely related to the concept of creditworthiness. Creditworthiness - this is a financial condition that allows you to get a loan and return it on time. In the context of the reorganization of the banking system, the transition of banks to business accounting, the strengthening of the role of credit, it radically changes the approach to credit consumers. The borrower has also changed significantly. Expansion of independence., New forms of ownership - all this increases the risk of loan repayment and requires an assessment of creditworthiness when concluding loan agreements, deciding on the possibility and conditions of lending. When assessing the creditworthiness, the reputation of the borrower, the size and composition of his property, the state of the economic and market conditions, the stability of the financial condition, and others are taken into account.

At the first stage bank credit analysis examines diagnostic information about the client. The information includes the accuracy of payment of accounts of creditors and other investors, trends in the development of the enterprise, motives for applying for a loan, the composition and amount of the company's debts. If it is a new venture, then its business plan is studied.

Information on the composition and size of the company's assets (property) is used to determine the amount of the loan that can be issued to the client. Studying the composition of assets will make it possible to establish the proportion of highly liquid funds that can be quickly sold and converted into money, if necessary (goods shipped, accounts receivable).

Second phase determining the creditworthiness provides for an assessment of the financial condition of the borrower and its stability. It takes into account not only the solvency, but also a number of other indicators, the level of profitability of production, the turnover ratio of working capital, the effect of financial leverage, the availability of own working capital, the stability of the implementation of production plans, the share of debt on loans in gross income, the ratio of the growth rate of gross output to the growth rate of bank loans, the amount and terms of overdue debt on loans and others.

When assessing the solvency and creditworthiness of an enterprise, it should be borne in mind that the intermediate liquidity ratio should not fall below 0.5, and the overall ratio should not fall below 1.5. With a general liquidity ratio< 1 предприятие относится к первому классу, при 1 - 1,5 относится ко второму классу, а при > 1.5 to third grade. If an enterprise belongs to the first class, it means that the bank is dealing with an insolvent enterprise. The bank can give him a loan only on special conditions or at a high interest rate. In terms of profitability, the first class includes enterprises with an indicator of up to 25%, the second class - 25-30%, and the third class - 30%. And so on for each indicator. The same assessment can be carried out by expert advice by bank employees. If necessary, specialists can be involved as experts.

The calculated value of the degree of risk P for a particular enterprise is determined by the arithmetic mean simple: P \u003d e Pi / n

The minimum value of the indicator of the degree of risk equal to 1 means that when issuing a loan, the bank takes risks, and with the maximum value equal to 3, there is almost no risk. This indicator is used when deciding on the issue of a loan and the interest payment for a loan. If the bank is very risky, then it takes a higher interest on the loan.

When assessing the creditworthiness of economic entities and the degree of risk by suppliers of financial and other resources, a multidimensional comparative analysis of various enterprises can be used for a whole range of economic indicators.

The relationship between profit and the cost estimate of the costs of assets or funds incurred to obtain this profit is characterized using the indicator "Leverage" (lever arm). This is a factor, a small change in which can lead to a significant change in a number of effective indicators.

Production (operational) 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 indicator of profit that makes it possible to single out and evaluate the influence of operating leverage on the financial results of a firm.

The level of production leverage is calculated using the formula:

where FС - fixed costs in monetary units;

VС - full variable costs in monetary units.

z - specific variable costs per unit of production;

Q - sales volume in kind.

The concept of operating leverage is related to the effect of operating leverage. It is connected with the fact that any change in the proceeds from the sale of products 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 using the formula:

where

P - the profit of the enterprise for the reporting period;

R - the company's revenue for the period;

R - the selling price of a unit of production;

Cont - the amount of the contribution;

If the proportion of fixed costs is high, the company is said to have a high level of production 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 the product is produced or not. So, volatility 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 production risk of the company.

However, it cannot be considered that a high share of fixed costs in the structure of an enterprise's costs is a negative factor. An increase in production leverage may indicate an increase in the production capacity of an enterprise, technical re-equipment, an increase in labor productivity, as well as the implementation of scientific research and experimental design developments. 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 effectmanifests itself in the fact that with an increase in the company's revenue, profit also changes, and the higher the level of production leverage, the stronger this effect,

Analysis of the values \u200b\u200bof fixed and variable costs of the enterprise allows to identify the level of risk, which is a necessary stage in planning and making management decisions.

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

Financial leverage

Quantitatively, this characteristic is measured by the ratio between borrowed and equity capital; the level of financial leverage directly 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 fixed compulsory 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 using the formula:

where ZK- borrowed capital;

SC- equity.

A company with a significant amount 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 constant, since they are obligatory for the enterprise to be paid regardless of the level of production and sales of products. Obviously, if the market situation is unsuccessful, 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 financial stability much earlier and become unprofitable than an enterprise that preferred to finance its activities from its own sources and thus maintained a low level of financial dependence on external creditors. Consequently, the high level of financial leverage is a reflection of the high risk inherent in this enterprise.

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

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

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

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Leverage is, definition

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

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

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

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

Leverage (translated from English - leverage) is barbarism, i.e. direct borrowing of the American term "leverage", which is already widely used in Russian special literature; Note that in the UK the term "Gearing" is used for the same purpose. Some monographs use the term "lever", which is hardly a good thing even in a linguistic sense, since the literal translation in English is "lever", but not " 1еverege ".

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

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

Leverage is a double-edged sword: it increases the income of the owners, while increasing their financial risks. Identification of the level of leverage is a characteristic of the potential danger of not reaching the target profit values \u200b\u200bdue to the need to incur significant conditionally fixed costs that are not commensurate with the generated income. The specificity of conditionally fixed costs is in their long-term nature and certainty for the future. This means that leverage is a long-term factor; in addition, a small change in the factor itself or in the conditions in which it operates can lead to a significant change in a number of performance indicators. The concept of leverage is also used in lending operations, when the purchase of a certain asset (for example, a financial one) is carried out with the involvement of credit resources (say , 30% at own expense, 70% at the expense of the bank).

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

High leverage pressure

All companies use financial leverage to one degree or another. The whole question is to what extent it is advisable to increase the loan, what is the reasonable ratio between equity and borrowed capital. It is clear that too large a loan increases the risks, which, in turn, leads to higher interest rates. The basic rule of leverage is that if a company borrows at an interest rate lower than the return on assets, the return on equity will increase; If the company borrows money at an interest rate higher than the return on assets, the return on equity will fall. Leveraging is a very risky business for those enterprises whose activities are cyclical (these include, for example, construction and the automotive industry). In these enterprises, the volume of sales fluctuates from year to year. As a result, several consecutive years of low sales can lead to high leverage businesses going bankrupt.

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

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

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

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

At the moment, it is still too early to make forecasts at what level of “cash injection” the process of world deleveraging will stop. After all, the bankruptcy of even one large corporation automatically generates volumes of obligations under default swaps in the amount of up to several hundred billion dollars (default swaps are financial instruments used to speculate on the company's ability to pay off its debt.

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

Financial leverage

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

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

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

risk

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

Production (operational);

Financial.

Production leverage (from English leverage) is

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

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

Production leverage is determined using one of two formulas:

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

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

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

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

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

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

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

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

This is due to the fact that the company is obliged to reimburse its fixed costs regardless of the specific volume of sales, therefore, the higher the amount of fixed costs, the later, other things being equal, it will reach the break-even point of its activities. Therefore, while the company has not ensured the break-even of its activities, the high level of fixed costs will be an additional "burden" on the way to reaching the break-even point.

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

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

Understanding the mechanism of manifestation of production leverage allows you to purposefully manage the ratio of fixed and variable costs in order to increase the efficiency of production and economic activity under various trends in the commodity market and the stage of the enterprise life cycle.

In case of unfavorable conjuncture of the commodity market, which determines a possible decrease in sales, as well as in the early stages of an enterprise's life cycle, when it has not yet crossed the break-even point, it is necessary to take measures to reduce the company's fixed costs. And vice versa, with a favorable conjuncture of the commodity market and the presence of a certain margin of safety, the requirements for the implementation of the regime of saving fixed costs can be significantly weakened. During such periods, the enterprise can significantly expand the volume of real investments, carrying out the reconstruction and modernization of fixed assets.

When managing fixed costs, it must be borne in mind that their high level largely depends on the sectoral features of the activity, which determine the different level of capital intensity of the products produced, the differentiation of the level of mechanization and automation of labor. In addition, it should be noted that fixed costs are less susceptible to rapid changes, so enterprises with a high value of production leverage lose flexibility in managing their costs.

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

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

Operating leverage is closely related to a company's cost structure. Operating leverage or production leverage is a mechanism for managing the company's profit, based on improving the ratio of fixed and variable costs. With its help, you can plan the change in the organization's profit depending on the change in sales volume, and also determine the break-even point. A prerequisite for the application of the operating leverage mechanism is the use of a marginal method based on the division of costs into fixed and variable costs. The lower the proportion of fixed costs in the total cost of the enterprise, the more the amount of profit changes in relation to the rate of change in the company's revenue.

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

The operating lever is a tool for identifying and analyzing this relationship. In other words, it is intended to establish the effect of profit on the change in the volume of sales. The essence of its action lies in the fact that with an increase in the volume of proceeds, a higher rate of growth in the volume of profits is observed, but this higher rate of growth is limited by the ratio of fixed and variable costs. The lower the share of fixed costs, the less this limitation will be. Production (operating) leverage is quantitatively characterized by the ratio between fixed and variable costs in their total amount and the value of the “Profit before interest and taxes” indicator. Knowing the production leverage, you can predict the change in profit when the revenue changes. Distinguish between price and natural price leverage. The price operating leverage (Рц) is calculated by the formula:

The natural operating leverage is calculated using the formula:

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

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

With a sharp drop in sales, such an enterprise can very quickly "fall" below the break-even level. In other words, an enterprise with a higher level of production leverage is more risky because operating leverage shows the dynamics of operating profit in response to changes in the company's revenue, and financial leverage characterizes the change in profit before tax after interest on loans and borrowings in response to changes in operating profit. cumulative leverage gives an idea of \u200b\u200bhow much the percentage change in pre-tax profit after interest will change when revenue changes by 1%.

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

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

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

One of the effective methods of management accounting is the method of analysis of the ratio “costs - volume - profit” (“Cost - Volume - Profit” or “CVP – analysis”), which allows you to determine the point of no-loss (profitability threshold), i.e. the moment from which the income of the enterprise fully covers its expenses. This analysis is impossible without such an important indicator as production leverage (leverage literally means leverage). With its help, you can predict the change in the result (profit or loss) depending on the change in the company's revenue, as well as determine the break-even point (profitability threshold).

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

is determined using the following formula:

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

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

Using we will predict the change in the company's profit depending on the change in revenue, and also determine the break-even point. For our example, the effect of production leverage is 3.5 units (1400: 400). This means that with a decrease in the company's revenue by 1%, the profit will decrease by 3.5%, and with a decrease in revenue by 28.57%, we will reach the profitability threshold, i.e. the profit will become zero. Let's assume that the revenue will decrease by 10% and will amount to 4,500 thousand rubles. (5000 - 5000 * 10: 100). In these conditions, the profit of the enterprise will decrease by 35% and amount to 260 thousand rubles. (400 - 400 ґ 35: 100). Production leverage is an indicator that helps managers choose the optimal strategy for the enterprise in managing costs and profits. The amount of production leverage may change under the influence of: price and volume of sales; variable and fixed costs; a combination of any of the above factors.

Let us consider the influence of each factor on the effect of production leverage based on the above example. An increase in the selling price by 10% (up to RUB 2,750 per unit) will lead to an increase in sales to RUB 5,500 thousand, and margin income to RUB 1,900 thousand. (5500 - 3600) and profit up to 900 thousand rubles. (1900 - 1000). At the same time, the marginal income per unit of goods will also increase from 700 rubles. (1400 thousand rubles: 2000 pieces) up to 950 rubles. (1900 thousand rubles: 2000 pcs.). Under these conditions, less sales will be required to cover fixed costs: the break-even point is 1,053 units. (1000 thousand rubles: 770 rubles), and the safety margin of the enterprise will increase to 947 units. (2000 - 1053) or 47%. As a result, the company can receive additional profit in the amount of 500 thousand rubles. (900 - 400). At the same time, the effect of production leverage will decrease from 3.5 to 2.11 units (1900: 900).

A 10% decrease in variable costs (from RUB 3,600,000 to RUB 3,240,000) will lead to an increase in marginal income to RUB 1,760,000. (5000 - 3240) and profit up to 760 thousand rubles. (1760 - 1000). As a result, the break-even point (profitability threshold) will increase to 2840.9 thousand rubles. , which in kind will amount to 1136 pcs. (2840.9: 2.5). As a result, the safety margin of the enterprise will be 2,159.1 thousand rubles. (5000 - 2840.9) or 864 pcs. (2159.1 thousand rubles: 2.5 thousand rubles). Under these conditions, the effect of production leverage at the enterprise will decrease to 2.3 units (1760: 760).

With a decrease in fixed costs by 10% (from 1000 thousand rubles to 900 thousand rubles), the profit of the enterprise will increase to 500 thousand rubles. (5000 - 3600 - 900) or 25%. Under these conditions, the break-even point in monetary terms will be 3214.3 thousand rubles. , and in kind - 1286 pcs. (3214.3: 2.5). At the same time, the safety margin of the enterprise will correspond to 1,785.7 thousand rubles. (5000 - 3214.3) or 714 pcs. (1785.7: 2.5). As a result, as a result of a 10% decrease in fixed costs, the effect of production leverage will be 2.8 units (1400: 500) and will decrease by 0.7 units (3.5-2.8) compared to the initial level.

These features are as follows: 1. The positive effect of production leverage begins to manifest itself only after the enterprise has passed the break-even point of its activity. In order for the positive effect of production leverage to begin to manifest itself, the enterprise must first receive sufficient margin income to cover its fixed costs. This is due to the fact that the company is obliged to reimburse its fixed costs regardless of the specific volume of sales, therefore, the higher the amount of fixed costs, the later, other things being equal, it will reach the break-even point of its activities. In this regard, while the company has not ensured a break-even point of its activities, a high level of fixed costs will be an additional “burden” on the way to reaching the break-even point.

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

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

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

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

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

However, in spite of these objective limitations, each enterprise has enough opportunities to reduce, if necessary, the amount and specific weight of fixed costs. These reserves include: a significant reduction in overhead costs (management costs) in an unfavorable conjuncture of the commodity market; sale of a part of unused equipment and intangible assets in order to reduce the flow of depreciation deductions; widespread use of short-term forms of leasing of machinery and equipment instead of acquiring ownership; reducing the volume of a number of consumed utilities and others.

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

The use of the mechanism of production leverage, the purposeful management of fixed and variable costs, the prompt change in their ratio under changing economic conditions will increase the potential for generating the company's profit.

Financial leverage

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

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

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

Conclusion: company 2 and 3 use equity capital more efficiently; this is evidenced by the indicator of net profitability of equity capital (CHRK), and borrowed capital (ZK) is used with a greater return than the price of its attraction. This strategy of raising borrowed capital is called a capital speculation strategy. The profit before interest and taxes is a basic indicator of financial management, which characterizes the return on capital raised by the enterprise. Otherwise, it is called the net result of the exploitation of investments (NREI)

Consider the effect of financial leverage on the net return on equity for an enterprise using both borrowed capital and equity, and derive a formula reflecting the effect of financial leverage on the economic return on assets (ERA):

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

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

From the above it follows:

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

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

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

The level of financial leverage increases with an increase in the share of borrowed capital in the structure of assets. But, on the other hand, a large financial "leverage" means a high risk of loss of financial stability: With an increase in the level of financial leverage, the leverage risk increases. loans, this is the risk of loss of liquidity / financial stability

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

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

SNP is the rate of income tax expressed in decimal fraction; КВРа - coefficient of gross return on assets (the ratio of gross profit to average asset value),%;

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

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

SK is the average amount of the company's equity capital.

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

Table (rub.)

Formation of the effect of financial leverage

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

Accordingly, for enterprise "B" this indicator is:

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

If the level of interest on a loan exceeds the gross return on assets, the effect of financial leverage turns out to be negative. The above formula for calculating the effect of financial leverage allows us to distinguish three main components in it: 1. Financial leverage tax corrector (1 - SNP), which shows the extent to which the effect of financial leverage manifests itself in connection with different levels of taxation of profits. 2. Financial leverage differential (CWRa - PC), which characterizes the difference between the gross return on assets ratio and the average interest on a loan. 3. Financial leverage ratio (ZK / SK), which characterizes the amount of borrowed capital used by the company, per unit of equity capital.

The tax corrector of financial leverage practically does not depend on the activities of the company, since the income tax rate is established by law. The differential of financial leverage is the main condition that forms the positive effect of financial leverage. This effect manifests itself only if the level of gross profit generated by the assets of the enterprise exceeds the average rate of interest on the loan used. The higher the positive value of the financial leverage differential, the higher, other things being equal, will be its effect. Due to the high dynamics of this indicator, it requires constant monitoring in the process of managing the effect of financial leverage. First of all, during a period of deteriorating financial market conditions, the cost of borrowed funds may increase sharply, exceeding the level of gross profit generated by the company's assets.

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

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

Thus, leverage is a complex system for managing the assets and liabilities of an enterprise. Any company seeks to achieve two main goals of its activities - increasing profits and increasing the value of the company itself. In these conditions, leverage becomes the tool that allows you to achieve these goals by influencing changes in the ratio and profitability of equity and borrowed capital.

Leverage in financial analysis

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

To disclose its essence, we represent the factor model of net profit (PP) in the form of the difference between revenue (B) and production costs (IP) and financial costs (IF):

Production costs are the costs of producing and selling products (full cost). Depending on the volume of production, they are subdivided 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 leads to 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 indicator of production leverage (operating leverage).

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

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

The abscissa shows the volume of production in the corresponding scale, and the ordinate shows the increase in profit (in percent). The point of intersection with the abscissa axis (the so-called "dead center", or the point of equilibrium, or break-even sales volume) shows how much you need to produce and sell products to each enterprise to recover fixed costs. It is calculated by dividing the sum of fixed costs by the difference between the price of the product and the specific variable costs. With the existing 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 inclination of the graph to the abscissa axis, the higher the degree of production risk. The second component of formula (24.1) is financial costs ( debt service costs). Their value depends on the amount of borrowed funds and their share in the total amount of invested capital. As already noted, an increase in the leverage (the ratio of debt and equity capital) can lead to both an increase and a decrease in net profit.

The relationship between profit and the ratio of equity and debt capital - this is financial leverage. According to V.V. Kovalev's definition, financial leverage is a potential opportunity to influence the profit of an enterprise by changing the volume and structure of equity and 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%) .It shows how many times the growth rate of net profit exceeds the growth rate of gross profit. This excess is provided 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 the leverage depending on the prevailing conditions, you can influence the profit and return on equity.

The increase in financial leverage is accompanied by an increase in the degree of financial risk associated with a possible lack of funds to pay interest on loans and borrowings. An insignificant 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 in the event of a decline in production. Let's conduct a comparative analysis of financial risk with different capital structures. According to the table. 24.8 we will calculate how the return on equity will change when the profit deviates from the base level by 10%.

If the company finances its activities only from its own funds, the financial leverage ratio is 1, i.e. there is no leverage effect. In this situation, a 1% change in gross profit 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 leverage ratio and net profit increases. This indicates an increase in the degree of financial risk of investment with a high leverage. This dependence is shown graphically in Fig. 24.3 The abscissa shows the value of gross profit in the corresponding scale, and the ordinate shows the return on equity in percent. The point of intersection with the abscissa 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 reflects the degree of financial risk. The degree of risk is also characterized by the slope of the graph towards the abscissa axis.

A generalizing indicator is production and financial leverage - product of levels of production and financial leverage. It reflects the overall risk associated with a possible lack of funds to reimburse production costs and financial costs of servicing external debt. For example, sales growth is 20%, gross profit - 60, net profit - 75%:

Based on these data, it can be concluded that with the existing structure of costs at the enterprise and the structure of capital sources, an increase in production by 1% will provide 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 an increase in net profit of 1.25%. These indicators will change in the same proportion in the event of a decline in production. Using them, you can assess and predict the degree of production and financial investment risk.

Deleveraging in the world economy

Deleverage is - the process of reducing leverage, i.e. the level of debt load. It is believed that deleveraging is the main reason for a long-term (decade) cyclical decline in economic activity. Deleveraging can be achieved in 3 ways: debt repayment by the entity, increase in the entity's equity capital, and cancellation of the entity's debt by the creditor.

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

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

It is important to distinguish between the concepts of recession (economic contraction within short business cycles) and prolonged economic depression (economic contraction caused by the deleveraging process). How to deal with recessions is well known because they happen quite often. At the same time, depression and deleveraging remain poorly understood processes and are rarely observed in a historical context.

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

Deleveraging is the process of reducing the debt burden (debt and payments on this debt in relation to income) within a long-term credit cycle. A long-term credit cycle occurs when debt grows faster than income and ends when the cost of servicing the debt becomes prohibitive for the borrower. At the same time, it is impossible to solve the problem exclusively by monetary methods, since interest rates during deleveraging tend to drop to zero. Depression is the phase of economic contraction in the deleveraging process. Depression occurs when the decline in private sector debt growth cannot be prevented through the depreciation of money by the central bank. In times of depression, a large number of borrowers do not have sufficient funds to pay off obligations, and traditional monetary policy is ineffective in reducing debt service costs and stimulating credit growth.

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

According to Ray Dalio's concept, deleveraging is of three types:

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

- “beautiful deleveraging”: the “printing” press covers deflationary effects from debt reduction and austerity measures, economic growth is positive, debt / income ratio is decreasing, nominal GDP growth is higher than nominal interest rates;

- “ugly inflationary deleveraging”: the printing press is out of control, far outweighing deflationary forces, creating the risk of hyperinflation. In countries with reserve currencies, it can occur with too long stimulus in order to overcome “deflationary deleveraging”.

Depression usually ends when central banks “print” money in the process of monetizing public debt in amounts that cover the deflationary depressive effects of debt reduction and the introduction of austerity measures. Competent regulation of the volume of public debt monetization against the background of private and corporate sector debt reduction puts deleveraging into the phase “ beautiful deleveraging ”. This is typical of the current state of the US economy today, with “ugly deflationary deleveraging” taking place from late 2008 to mid-2009. Differences in how governments behave during recession and deleveraging are key to understanding what is happening now. economy.

For example, during deleveraging, central banks lower rates to zero (ZIRP) and adhere to unconventional monetary policies, creating a canopy of excess liquidity by expanding the monetary base through large-scale buyouts of long-term assets (Quantitative Easing). This creates serious pressure on government bond yields (especially on the long section of the curve), which largely determines the dynamics of interest rates in the economy. During periods of deleveraging, national governments tend to spend huge fiscal resources to replace falling demand from the private sector, sharply increasing the external debt burden. You will never see this kind of action in short business cycles during recessions.

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

Loans secured by real estate (mortgages) ($ 9.4 trillion) make up 70% of the liabilities ($ 13.4 trillion) of American households. Subtracting all liabilities ($ 13.4 trillion) from total assets ($ 79.52 trillion), we get the net asset value ( or equity, net worth) of households ($ 66.0 trillion) From the above data, it can be seen that real estate for the American household is the most important asset, and the mortgage is the most important obligation. Can you imagine the shock that US households suffered in 2008? This shock triggered the launch of the deleveraging, i.e. reduction in the level of leverage (or the level of debt load) of households in the segment of mortgage debt. Let's consider the process of deleveraging and clearing household balance sheets in detail. The data published in the US Federal Reserve Z.1 reports date back to the 1950s. An analysis of the structure and dynamics of US households will show that there have been no situations like 2008 in the US for at least the last 65 years (but it was during the Great Depression of the 1930s).

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

Despite the fact that traditional methods of monetary policy do not work in the era of deleveraging, the US Federal Reserve, from the very beginning of the acute phase of the 2008 crisis, has made every possible effort to use unconventional instruments to fulfill its dual mandate - to ensure price stability at full employment. Almost five years after the start of the financial crisis, we can say that the Fed has managed to prevent deflation and indirectly affect the economic recovery.

If in 2008 economic agents (no matter debtors or creditors) would not have behind their backs the one who would provide the money, then fire sales (forced emergency sales of assets) would have reached a significant scale, collateral would change hands and be sold from a significant discount, thus spinning a deflationary spiral. The Fed, given the negative experience of the Great Depression of the 1930s, just offered the system as much money as was needed to regain control over the money supply and inflationary processes in the economy. In addition, the Fed was able to significantly reduce the value of money, creating a favorable basis for the stock market. Household financial assets account for almost 70% of total assets. The recovery in American household wealth to pre-crisis levels was largely dependent on growth in financial markets. But it was not only the policy of "financial repression" that brought the S&P 500 index to new historic highs in early 2013 - corporate profits in the US at historic highs.

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

Nonetheless, the deleveraging at the household level, most affected by the 2008 crisis, has passed its equator. The "fighting" power of the American authorities today is aimed at restoring the real estate market. Real estate is the largest household asset, and mortgages are the largest liability. The essence of deleveraging lies precisely in the mortgage segment. Big positive shifts in the US real estate market took place in 2012 (largely influenced by the Fed's “Twist” program). The positive scenario assumes that household deleveraging will be completed by mid-2015 and the economy will enter the stage of natural recovery, as it was previously based on credit ... At the same time, the FRS is planning a way out of the accommodative monetary policy. But many questions and difficulties remain on this path.

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

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

Who needs leverage on ESM?

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

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

By analogy with the European Financial Stability Fund (EFSF), ESM will attract funds from EU member states (this money will also be used to buy bonds of troubled countries), as well as funds from private investors that can be used for less risky operations. I wonder how they are going to lure private investors, who, I suppose, still have a fresh memory of the Greek version of the "calculation"?

As reported in the press, most EU countries support this idea, but some, for example Finland, traditionally oppose it. Despite the fact that the share of the same Finland in the "Eurozone cash desk" is quite small. But Germany is large, and with her not everything is as simple as we would like. The press service of the Ministry of Finance of Germany said that increasing the ESM by four times is unrealistic. Although previously reported that Germany is in favor of an increase. Nevertheless, the ministry confirmed that they approve of this theory and that discussions of additional injections into the Mechanism are not excluded, but there is no question of any specifics.

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

Sources and links

ru.wikipedia.org - the free encyclopedia

audit-it.ru - financial analysis based on reporting data

elitarium.ru - Elitarium - financial management

vedomosti.ru - Vedomosti - business dictionary

ibl.ru - Institute of Business and Law

academic.ru - Academician - a glossary of anti-crisis management terms

forum.aforex.ru - investor community forum

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

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

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

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