Reasonable use of financial leverage brings additional benefits to the equity capital of enterprises, that is, financial leverage benefits.
Due to the influence of many factors, financial leverage income is accompanied by inestimable financial risks.
Therefore, a careful study of financial leverage, an analysis of various factors affecting financial leverage, and a clear understanding of its function, nature and its impact on the return on equity capital of enterprises are the basic prerequisites for rational use of financial leverage to serve enterprises.
Financial leverage is a widely used concept.
In physics, there is a lever and a fulcrum, and heavy objects can be lifted with very little force, but what is a financial lever? From western financial management to the understanding of financial leverage in China's current accounting circles, there are generally the following viewpoints: First, financial leverage is defined as "the use of debt financing by enterprises when making capital structure decisions".
So financial leverage can also be called financing leverage, capital leverage or debt management.
This definition emphasizes that financial leverage is an application of liabilities.
Secondly, financial leverage refers to appropriate borrowing in fund-raising and capital structure adjustment, which brings additional benefits to enterprises.
If the debt management makes the profit per share of the enterprise rise, it is called positive financial leverage; If the profit per share of an enterprise decreases, it is usually called negative financial leverage.
Obviously, in this definition, financial leverage emphasizes the result of debt management.
In addition, some financial scholars believe that financial leverage refers to the great influence on the return of sovereign capital of enterprises due to the use of debt funds with fixed interest rate in the total capital of enterprises.
Compared with the second view, this definition also focuses on the results of debt management, but limits the object of debt management to debt funds with fixed interest rates. The author thinks that the scope of its definition is narrow.
The author will discuss later, enterprises can actually choose some debt funds with floating interest rates, so as to achieve the purpose of transferring financial risks.
In the first two definitions, the author prefers to define financial leverage as the use of liabilities, and the result is called financial leverage interest (loss) or positive (negative) financial leverage interest.
There is no essential difference between these two definitions, but the author thinks that the former definition has played a systematic role in defining the concepts of financial risk, operating leverage, operational risk and even the whole leverage theory system, which is convenient for financial scholars to further study and communicate.
On the basis of defining the concept of financial leverage, this paper further discusses the financial leverage gains (losses) and financial risks that accompany debt management, the factors that affect the financial leverage gains (losses) and financial risks, and how to make better use of financial leverage to reduce financial risks.
I. Financial Leverage Income (Loss) From the previous discussion, we already know that the so-called financial leverage income (loss) refers to the impact of debt financing operations on owners' income.
After debt management, the profits that an enterprise can obtain are: return on capital = enterprise investment rate × total capital-debt interest rate × debt capital = enterprise investment rate × (equity capital+debt capital)-debt capital = enterprise investment rate × equity capital-(enterprise investment rate-debt interest rate) × debt capital (here, enterprise investment rate = income before interest and tax ÷ capital). Therefore, that is, The calculation formula of the return on equity capital of the whole company can be obtained as follows: return on equity capital = return on enterprise investment+(return on enterprise investment-debt interest rate) × debt capital/equity capital ② It can be seen that as long as the return on enterprise investment is greater than debt interest rate, financial leverage will increase the absolute value of return on capital due to debt management, thus making the return on equity capital greater than the return on enterprise investment. Moreover, the higher the proportion of property rights (debt capital/equity capital), the greater the financial leverage benefit, so the essence of financial leverage benefit is that the return on investment of enterprises is greater than the interest rate of liabilities, and part of the profits obtained from liabilities are converted into equity capital, thus increasing the return on equity capital.
However, if the return on investment of an enterprise is equal to or less than the interest rate of debt, then the profit generated by debt can only or cannot make up for the interest required by debt, and even the profit obtained by using equity capital is not enough to make up for the interest, so we have to reduce equity capital to repay the debt, which is the essence of financial leverage loss.
The Degree of Financial Leverage (DFL) is usually used to measure the degree of financial leverage of liabilities, and the degree of financial leverage refers to the multiple of the change of equity capital income relative to the change rate of pre-tax profit.
Its theoretical formula is: degree of financial leverage = change rate of equity capital gains/change rate of earnings before interest and tax; ③ After mathematical deformation, the formula can be changed into: degree of financial leverage = interest and tax benefits/(earnings before interest and tax debt ratio × interest rate) = profit rate before interest and tax/(profit rate before interest and tax debt ratio× interest rate) ④ The degree of financial leverage calculated according to these two formulas, the latter reveals the relationship between debt ratio, earnings before interest and tax and debt interest rate, while the former can.
The use of debt funds by enterprises can not only improve the return rate of sovereign funds, but also make the return rate of sovereign funds lower than the profit rate before interest and tax, which is the financial leverage gain (loss) generated by financial leverage.
Second, financial risk is a concept related to loss, and loss is an uncertainty or possible loss.
Financial risk refers to the extra risk that sovereign capital bears when the future income is uncertain due to the use of debt capital by enterprises.
If the enterprise is in good operating condition, making the return on investment greater than the debt interest rate, it will gain financial leverage benefits; If the enterprise is in poor operating condition, which makes the return on investment less than the interest rate of liabilities, it will gain financial leverage loss and even lead to bankruptcy of the enterprise. This uncertainty is the financial risk that enterprises bear when using liabilities.
The financial risk of an enterprise mainly depends on the level of financial leverage.
Generally speaking, the greater the degree of financial leverage, the greater the elasticity of the return on sovereign capital to the profit rate before interest and tax. If the profit rate before interest and tax rises, the rate of return on sovereign capital will rise faster. If the profit rate before interest and tax decreases, the rate of return on sovereign capital will decrease faster, which will lead to greater risks.
On the contrary, the smaller the financial risk.
The essence of the existence of financial risk is that the part of operating risk borne by debt is passed on to equity capital because of debt operation.
The following examples will help to understand the relationship between financial leverage and financial risk.
Assuming that the enterprise income tax rate is 35%, the calculation table of the net interest rate of equity capital is as follows: Table 1: The debt ratio of the project bank is 0% 50% 80% of the total capital ①10001000, in which: debt ② = ①× debt ratio 0,500,800. Equity capital ③ = ①-② 1000 500 200 EBITDA ④ 150 150 Interest expense ⑤ = ②× 10% 0 5080 EBITDA ⑤ = ④-⑤ 1. 50 100 70 income tax ⑦ = ⑥× 35% 52.5 35 24.5 net profit after tax ⑧ = ⑧ 97.565 45.5 net interest rate of equity capital ⑨ =⑧③ 9.75% 13% 22.75% financial leverage ⑩ 0/. Assuming that the enterprise fails to achieve the expected operating benefits, earnings before interest and then the net interest rate of equity capital are calculated as shown in Table 2: project debt ratio 0% 50%8 0% earnings before interest and tax 90 90 90 interest expense 0 50 80 profit before tax 90 40 10 income tax 310.514. 3.5 Net profit after tax 58.5 26.5 Net interest rate of equity capital 5.85% 5.2% 3.25% Degree of financial leverage 1 2.25 9 Comparison table 1 and table 2 show that the higher the debt ratio, the greater the financial leverage and the higher the net profit of equity capital.
Under the condition that the profit rate before interest and tax of all capital of an enterprise is 9%, the situation is just the opposite.
Taking the debt ratio of 80% as an example, if the profit rate before interest and tax of all capital is increased by one percentage point compared with the debt cost, the net interest rate of equity capital will be increased by 2.6 percentage points [(22.75%-9.75%)] (15-10)], and if the profit rate before interest and tax of all capital is decreased by one percentage point compared with the debt cost, the net interest rate of equity capital will be increased.
If the earnings before interest and tax drop to a certain level (taking the earnings before interest and tax of all capital equal to the cost of liabilities as the turning point), the financial leverage will change from positive to negative.
At this point, the use of financial leverage, on the contrary, reduces the level of income that should have been obtained without the use of financial leverage. The more financial leverage is used, the greater the loss.
In the case of 900,000 yuan in earnings before interest and tax and 80% debt ratio, the financial leverage is as high as 9. In other words, if the income before interest and tax is reduced by 65,438+0% on the basis of 900,000 yuan, the net profit of equity capital will be reduced by 9 times, which shows the high financial risk.
If you don't use financial leverage, you won't have the above losses and financial risks, but you can't get leverage income under the condition of good business conditions.
Three. The factors affecting financial leverage interest (loss) and financial risk increase with the increase of financial leverage, which is the embodiment of financial leverage. The factors affecting financial leverage will inevitably affect financial leverage interest (loss) and financial risk.
The following are three main factors that affect them: 1, and the profit rate before interest and tax: As can be seen from the above formula ④ for calculating the degree of financial leverage, the higher the profit rate before interest and tax, the smaller the degree of financial leverage, while other factors remain unchanged; Conversely, the greater the financial leverage.
Therefore, the influence of pre-tax profit rate on the degree of financial leverage is reversed.
From the formula ② for calculating the return on equity capital, it can be seen that the impact of the profit rate before interest and tax on the return on sovereign capital is the same when other factors remain unchanged.
2. Debt interest rate: The same formula ② ④ shows that the higher the debt interest rate, the greater the financial leverage, and vice versa, when the profit rate before interest and tax and the debt ratio are fixed.
For the degree of financial leverage, the debt interest rate always changes in the same direction, but for the return of sovereign capital, the debt interest rate changes in the opposite direction.
That is, the lower the debt interest rate, the higher the return on sovereign capital, while the higher the debt interest rate, the lower the return on sovereign capital.
It is one-sided to think that financial risk refers to the risk brought by the change of debt-to-capital ratio in all capital.
3. Capital structure: According to the previous formula ① ②, we can know that the debt ratio, that is, the ratio of debt to total capital, is also one of the factors that affect financial leverage and financial risk, and the debt ratio has the same influence on the degree of financial leverage as the debt interest rate.
That is, the higher the debt ratio, the greater the degree of financial leverage when the profit rate before interest and tax and the debt interest rate remain unchanged; On the contrary, the smaller the financial leverage, that is to say, the influence of debt ratio on the financial leverage always changes in the same direction.
However, the influence of debt ratio on the return on sovereign capital is different from the influence of debt interest rate and the influence of profit rate before interest and tax. The debt ratio has both positive and negative effects on the return on sovereign capital. When the profit rate before interest and tax is greater than the debt interest rate, it is positive, and vice versa.
The above factors not only affect the income of financial leverage, but also affect financial risks.
Financial risk management is an extremely complicated task for enterprises, because in addition to the above-mentioned main factors, there are many other factors affecting financial risk, and many of them are uncertain. Therefore, enterprises must take measures from all aspects to strengthen the control of financial risks. Once financial risks are expected to occur, measures should be taken to avoid and transfer them.
The main way to avoid financial risks is to reduce the debt ratio and control the amount of debt funds.
The premise of avoiding risks is the correct prediction of risks, which is based on the expectation of future operating income. If it is predicted that the future business situation of the enterprise is not good and the profit rate before interest and tax is lower than the debt rate, then the debt should be reduced and the debt ratio should be reduced, so as to avoid the financial risks to be encountered.
Risk transfer refers to the practice of taking certain measures to transfer risks to others. The specific way is to choose debt funds with floating interest rate and flexible repayment period, so that creditors and enterprises can bear some financial risks.
In addition, to determine the degree of financial leverage, we should not only consider the income (loss) and financial risk of financial leverage, but also pay attention to the influence of operating leverage United financial leverage on corporate composite leverage and risk, so as to achieve a certain composite leverage, and choose different financial leverage according to the different roles of operating leverage.
To sum up, financial leverage can bring additional benefits to enterprises and may also cause additional losses, which is an important factor that constitutes financial risks.
Financial leverage benefits do not increase the wealth of the whole society, but the distribution of established wealth between investors and creditors; Financial risk has not increased the risk of the whole society, but transferred the commercial risk to investors.
Financial leverage interests and financial risks are important factors in enterprise capital structure decision-making, and capital structure decision-making needs to make a reasonable balance between leverage interests and related risks.
Any improper use of financial leverage that only pays attention to the benefits of financial leverage and ignores financial risks is a major mistake in corporate financial decision-making, which ultimately harms the interests of investors.