The level of production leverage is measured as a ratio. Leverage. Concept, essence, meaning. Leverage is the definition

The process of optimizing the structure of assets and liabilities of an enterprise in order to increase profits in financial analysis is called leverage. There are three types: production; financial and production-financial.

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

PE = VR -IP - IF (32)

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

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

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

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

Kf.l. = PP% / P% (33)

It shows how many times the growth rate of net profit exceeds the growth rate of gross profit. This excess is ensured due to the effect of financial leverage, one of the components of which is its leverage (the ratio of borrowed capital to equity). By increasing or decreasing leverage, depending on the prevailing conditions, you can influence the profit and return on equity. An increase in financial leverage is accompanied by an increase in the degree of financial risk associated with a possible lack of funds to pay interest on long-term loans. A slight change in gross profit and return on invested capital in conditions of high financial leverage can lead to a significant change in net profit, which is dangerous during a decline in production.

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

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

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

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

Kf.l = 75 / 60 = 1.25;

Kp-f.l = 3*1.25 = 3.75

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

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

PE = VR -IP - IF

Product price, thousand rubles. 800 800 800

Product cost thousand rubles. 500 500 500

Specific variable costs, thousand rubles. 300 250 200

Amount of fixed costs, million rubles. 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 increase, % 20 20 20

Revenue, million rubles

option 1 2400 2400 2400

option 2 2880 2880 2880

Amount of costs million rubles

option 1 1900 2000 2100

option 2 2080 2150 2220

Profit, million rubles

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 second component is financial costs (debt servicing costs). Their size depends on the amount of borrowed funds and their share in the total amount of invested capital.

The relationship between profit and the debt/equity ratio is financial leverage. Potential opportunity to influence profits by changing the volume and structure of equity and debt capital. Its level is measured by the ratio of the growth rate of net profit (NP%) to the growth rate of gross profit (P%)

Kf.l. = PE% / P%

Example: Let's compare financial risk for different capital structures. Let's calculate how return on equity will change if profit deviates from the base level by 10%.


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

RSC range, %

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

To p.l. = 60 / 20 = 3; Kf.l = 75 / 60 = 1.25; Kp-f.l = 3*1.25 = 3.75

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 repay your payment obligations in a timely manner with cash resources.

Solvency analysis is necessary not only for an enterprise for the purpose of assessing and forecasting financial activities, but also for external investors (banks). Before issuing a loan, the bank must verify the borrower's creditworthiness. Enterprises that want to enter into economic relations with each other must do the same. You especially need to know about your partner’s financial capabilities if the question arises of providing him with a commercial loan or deferred payment.

The assessment of solvency is carried out on the basis of the liquidity characteristics of current assets, i.e. the time required 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 balance sheet liquidity. At the same time, liquidity characterizes not only the current state of settlements, but also the future. The analysis of balance sheet liquidity consists of comparing assets for assets, grouped by the degree of decreasing liquidity, with short-term liabilities for liabilities, which are grouped according to 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 products, shipped goods and accounts receivable. The liquidity of current assets depends on the timeliness of shipment of products, execution of bank documents, speed of payment document flow in banks, demand for products, their competitiveness, solvency of buyers, forms of payment, etc. The third group includes the transformation of inventories and work in progress into finished products.

Table 13. Grouping of current assets by degree of liquidity.

Current assets	To the beginning

Cash
Short-term financial investments
Total for the first group
Finished products
Goods shipped
Accounts receivable
Total for the second group
Productive reserves
Unfinished production
Future expenses
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 whose payment terms have already arrived. The second group includes debt that should be repaid in the near future. The third group includes long-term debt.

To determine current solvency, it is necessary to compare the liquid funds of the first group with the payment obligations of the first group. The ideal option is 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 company makes payments to creditors every day. Therefore, for the operational analysis of current solvency, daily control over the receipt of funds from the sale of products, from the repayment of receivables and other cash inflows, as well as for monitoring 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 calculated, 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 the shipment and sale of products, purchases of capital goods, documents on payment of wages, advances to employees, bank account statements, etc. To assess the prospects for solvency, liquidity indicators are calculated: absolute; intermediate; general.

The absolute indicator of liquidity is determined by the ratio of liquid funds of the first group to the entire amount of short-term debts of the enterprise (III section of the liabilities side of the balance sheet). Its value is considered sufficient if it is above 0.25 - 0.30. If a company can currently pay off all its debts, then its solvency is considered normal. The ratio of liquid funds of the first two groups to the total amount of short-term debts of the enterprise is an intermediate liquidity ratio. Usually a 1:1 ratio is satisfactory. However, it may be insufficient if a large share of liquid funds consists of receivables, part of which is difficult to collect in a timely manner. In such cases, a ratio of 1.5:1 is required. The general liquidity ratio is calculated by the ratio of the total amount of current assets, including inventories and work in progress (Section III assets), to the total amount of short-term liabilities (Section III liabilities). A coefficient of 1.5 - 2.0 usually satisfies.

Table 14. Enterprise liquidity indicators.

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

Current profit Balance sheet profit

Click = * = X1 * X2

Balance sheet profit Short-term debts

where X1 is an indicator characterizing the value of current assets per ruble of profit; X2 is an indicator indicating the ability of an enterprise to repay its debts through the results of its activities. It characterizes financial stability. The higher its value, the better the financial condition of the enterprise. To calculate the influence of these factors, you can use chain formulation or absolute difference methods.

When determining solvency, it is advisable to consider the structure of the entire capital, including the fixed capital. If shares, bills and other securities are quite significant and are quoted on the stock 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 working capital can be stabilized by selling part of the fixed capital.

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

These ratios can be calculated by the ratio of self-financed income to value added. It shows the extent to which an enterprise finances its own activities. You can also determine how much self-financed income falls on one employee of the enterprise. When analyzing the state of solvency of an enterprise, 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 production and sales of products, an increase in its cost; failure to fulfill the profit plan and, as a result, a lack of own sources of self-financing of the enterprise, a high percentage of taxation. One of the reasons for the deterioration of solvency may be the improper use of working capital: diversion of funds into accounts receivable, investment in excess reserves and for other purposes that temporarily do not have sources of financing.

The solvency of an enterprise is very closely related to the concept of creditworthiness. Creditworthiness- this is a financial condition that allows you to receive a loan and repay it in a timely manner. In the context of the reorganization of the banking system, the transition of banks to economic accounting, the strengthening of the role of credit, the approach to credit consumers is radically changing. The borrower has also changed significantly. Expanded independence, new forms of ownership - all this increases the risk of loan repayment and requires an assessment of creditworthiness when concluding loan agreements, resolving issues about the possibility and conditions of lending. When assessing creditworthiness, the borrower’s reputation, the size and composition of his property, economic and market conditions, financial stability, and others are taken into account.

At the first stage Bank credit analysis studies diagnostic information about the client. The information includes the accuracy of paying bills to creditors and other investors, the development trends of the enterprise, the motives for applying for a loan, the composition and amount of the enterprise’s debts. If this is a new enterprise, then its business plan is studied.

Information about the composition and size of the enterprise's assets (property) is used to determine the loan amount that can be issued to the client. Studying the composition of assets will allow us to establish the share of highly liquid funds that can, if necessary, be quickly sold and converted into money (shipped goods, accounts receivable).

Second phase Determining creditworthiness involves assessing the financial condition of the borrower and its stability. This takes into account not only solvency, but also a number of other indicators, the level of profitability of production, the working capital turnover ratio, 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 with growth rates of bank loans, amounts and terms of overdue loans, and others.

When assessing the solvency and creditworthiness of an enterprise, it must be taken into account that the intermediate liquidity ratio should not fall below 0.5, and the overall ratio - 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 the company is classified as first class, this means that the bank is dealing with an uncreditworthy company. The bank can give him a loan only on special conditions or at a high interest rate. In terms of profitability level, 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 assessment can also be carried out expertly by bank employees. If necessary, specialists may be involved as experts.

The calculated value of the risk level P for a specific enterprise is determined by the simple arithmetic average: P = e Pi/n

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

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

7.1. Theoretical introduction

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

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

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

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

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

(7.2)

Where c is the specific marginal income;

Q – sales volume in physical terms;

GI – gross income.

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

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

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

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

where In – interest on loans and borrowings;

T – average tax rate.

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

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

. (7.5)

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

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

Solution.

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

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

3. Level of production leverage:

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

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

Solution.

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

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

In = 50 × 0.15 = 7.5.

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

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

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

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

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

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

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

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

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

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

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

7.3. Tasks for independent work

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

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

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

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

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

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

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

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

10% change in variable costs;

10% change in fixed costs;

10% increase in sales volume.

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

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

The process of optimizing the structure of assets and liabilities of an enterprise in order to increase profits in financial analysis is called leverage.

There are three types of leverage: production, financial and production-financial. In the literal sense, “leverage” is a lever that, with a little effort, can significantly change the results of the production and financial activities of an enterprise.

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

PE=V-IP-IF

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

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

Kp.l = (∆П%) / (∆VРП%)

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

The table shows that the enterprise that has the highest ratio of fixed costs to variable costs has the greatest value of production leverage. Each percent increase in output under the current cost structure ensures an increase in gross profit at the first enterprise of 3%, at the second - 4.125%, and at the third - 6%. Accordingly, if production declines, profits at the third enterprise will decline 2 times faster than at the first. Consequently, the third enterprise has a higher degree of production risk. Graphically it can be represented like this:

The x-axis shows the volume of production on the appropriate scale, and the y-axis shows the increase in profit (as a percentage). The point of intersection with the abscissa axis (the so-called “dead point”, or equilibrium point, or break-even sales volume) shows how much each enterprise needs to produce and sell products in order to recoup fixed costs. It is calculated by dividing the sum of fixed costs by the difference between the price of the product and specific variable costs. With the current structure, the break-even volume for the first enterprise is 2000, for the second - 2273, for the third - 2500. The greater the value of this indicator and the angle of the graph to the abscissa, the higher the degree of production risk.

The second component of the formula PE=V-IP-IF- financial costs (debt servicing costs). Their size depends on the amount of borrowed funds and their share in the total amount of invested capital. As already noted, an increase in financial leverage (the ratio of debt to equity capital) can lead to either an increase or a decrease in net profit.

The relationship between profit and the ratio of equity and debt capital is financial leverage. According to V.V. Kovalev, 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%):

Kf.l = (∆PP%/∆P%)

An increase in financial leverage is accompanied by an increase in the degree of financial risk associated with a possible lack of funds to pay interest on loans and borrowings. A slight change in gross profit and return on invested capital in conditions of high financial leverage can lead to a significant change in net profit, which is dangerous during a decline in production.

Let's conduct a comparative analysis of financial risk for different capital structures. According to the table below, we calculate how return on equity will change if profit deviates from the base level by 10%:

If an enterprise finances its activities only from its own funds, the financial leverage ratio is equal to 1, i.e. There is no leverage effect. In this situation, a one percent change in gross profit results in 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 return on equity capital (REC), financial leverage ratio and net profit increases. This indicates an increase in the degree of financial risk of investing with high leverage. Graphically, this relationship is shown in the figure below:

The x-axis shows the gross profit on the appropriate scale, and the y-axis shows the return on equity as a percentage. The point of intersection with the x-axis is called the financial critical point, which shows the minimum amount of profit required to cover the financial costs of servicing loans. At the same time, it reflects the degree of financial risk. The degree of risk is also characterized by the steepness of the graph’s slope to the x-axis.

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

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

Kp.l= 60/20=3, Kf.l=75/60=1.25, Kp-f.l=3x 1.25=3.75

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

Production leverage is identified by assessing the relationship between the total revenue of a commercial organization, its earnings before interest and taxes and production expenses.

The main elements of product cost are variable and fixed costs, and the relationship between them can be different and is determined by the technical and technological policy chosen by the enterprise. Changing the cost structure can significantly affect profit margins. Investing 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 nonlinear, so finding the optimal combination of fixed and variable costs is not easy. This relationship is characterized by the category of production or operational leverage, the level of which also determines the amount of production risk associated with the company.

Production leverage is quantitatively characterized by the ratio between fixed and variable expenses in their total amount and the variability of the “earnings before interest and taxes” indicator. It is this profit indicator that allows us to isolate and evaluate the impact of variability in operating leverage on the financial performance of the company.

The graph of changes in sales volume reflects the relationship between these indicators (Fig. 1.1.).

The analytical relationship between the parameters of the graph is represented by the following formula:

where S is sales in value terms;

VС - variable production costs;

FC - semi-fixed production costs;

GI is earnings before interest and taxes.

Fig. 1.1. Volume change graph

Converting this formula to the form

shows the sales volume of products Q in natural units.

It is called specific marginal profit, where p is the price of a unit of production, v is the variable production costs per unit of production.

Using this formula, setting the required profit, you can calculate the amount of products that need to be produced. For profit G/ = 0, the quantity of products in the “dead point”, or the profitability threshold (threshold sales volume), is calculated.

Such calculations are called the critical sales volume method - determining for each specific situation the volume of product sales in accordance with existing production costs and profits.

Production leverage is the relationship between changes in net profit and changes in sales volume.

Production leverage is a progressive increase in the amount of net profit with an increase in sales volume, due to the presence of fixed costs that do not change with an increase in production volume and sales of products 11 Kovalev V.V. Introduction to financial management. M.: Finance and Statistics 2008. p. 91.

There are three main indicators of industrial leverage: DOL d, DOL p, DOL r

Let's take a closer look at them.

The share of fixed production costs in total costs, or, equivalently, the ratio of fixed and variable costs (DOL d) is the first indicator of production leverage:

If the share of fixed costs is high, the company is said to have a high level of operating leverage. For such a company, sometimes even a slight change in production volumes can lead to a significant change in profit, since the company is forced to bear fixed costs in any case, whether the product is produced or not.

The ratio of net profit to fixed production costs (DOL p) is the second indicator of production leverage:

where P n - net profit;

FC- fixed production costs.

The ratio of the rate of change in earnings before interest and taxes to the rate of change in sales volume in physical units (DOL r) is the third indicator of production leverage.

As follows from the definition, the indicator can be calculated by the formula:

where ДGI is the rate of change in earnings before interest and taxes (percentage);

D Q - rate of change in sales volume in natural percentage units).

The main purpose of these indicators is control and analysis; dynamics of the state of production.

All other things being equal, growth in the dynamics of DOL r indicators and DOL d as well as a decrease in DOL p mean an increase in the level of production leverage and an increase in the likelihood of achieving a given level of profit.

The third indicator after some transformations can be written using the equation:

Economic meaning of the DOL r indicator is quite simple - it shows the degree of sensitivity of profit before interest and taxes of a commercial organization to changes in production volume in natural units. Namely, for a commercial organization with a high level of production leverage, a small change in production volume can lead to a significant change in earnings before interest and taxes.

As can be seen from the equation, in the region of the “dead point”, when the GI profit approaches zero, the DOL r coefficient increases significantly.

The DOL r indicator is called the operating leverage. It is concluded that at a short distance from the profitability threshold, the strength of the operating leverage will be maximum, and then begin to decrease again; and so on until a new jump in fixed costs with overcoming a new profitability threshold.

The impact of production leverage is associated with entrepreneurial risk.

Entrepreneurial risk is the danger of shortfall in profit before interest and taxes. Risk is the likelihood of a potential loss of invested funds, or less income compared to the project or plan. Risk can be assessed using statistical methods based on calculating the standard deviation of a variable, such as sales or profit. In practice, methods of risk assessment using the leverage effect have found wide application. According to the concept of leverage

Total leverage = Operating leverage x Financial leverage

The assessment of the strength of production leverage depends on the ratio of fixed costs and profit of the enterprise. The strength of the impact is expressed as the percentage change in gross profit caused by each percentage change in sales revenue. The level of production leverage is calculated as the following ratio:

Gross Profit + Fixed Costs/Gross Profit = 1 + Fixed Costs/Gross Profit

The strength of the impact of operating leverage indicates the level of entrepreneurial risk of the enterprise: with a high value of the strength of operating leverage, each percent decrease in revenue results in a significant decrease in profit 11 Kovalev V.V. Workshop on financial management. Lecture notes with tasks. M.: Finance and Statistics, 2007, p. 59.

An analysis of the level of industrial leverage is presented in the next chapter of this course work.

Production and financial leverage

The general category is production and financial leverage. Its influence is determined by assessing the relationship between three indicators: revenue, production expenses and financial expenses of net profit 11 Enterprise Financier's Handbook, 2nd ed. - M.: Infra-M, 2007, p. 152.

In Fig. 1.2. a diagram of the relationship between these indicators and the types of leverage related to them is presented.

Conditionally fixed expenses of a production and financial nature largely determine the final financial results of the enterprise. The choice of more or less capital-intensive activities determines the level of operating leverage. The choice of the optimal structure of sources of funds is associated with financial leverage. As for the relationship between the two types of leverage, it is quite common to believe that they should be inversely related - a high level of operating leverage in a company implies the desirability of a relatively low level of financial leverage and vice versa.

It is believed that the combination of powerful operating leverage with powerful financial leverage can be disastrous for an enterprise, as business and financial risks mutually multiply, multiplying adverse effects.

The task of reducing the overall risk associated with an enterprise comes down mainly to choosing one of three options.

1. A high level of financial leverage effect combined with a weak operating leverage effect.

2. Low level of financial leverage combined with strong operating leverage.

3. Moderate levels of financial and operating leverage effects - and this option is often the most difficult to achieve.

Rice. 1.2. Relationship between income and leverage

Industrial and financial leverage summarizes the categories of industrial and financial leverage. Level it (DTL) can be assessed by the following indicator:

where I n - interest on loans and borrowings.

It follows that production and financial risks are accumulated in the form of a general risk, which is understood as the risk associated with a possible lack of funds to cover current expenses and expenses for servicing external sources 11 Financial management: Textbook / Ed. G. B. Polyak. - M.: Finance, UNITY, 2007, p. 80.

The calculation of production and financial leverage is also presented in the next chapter of the course work.

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