Financial leverage or financial collapse?

Over the years, technology has changed,culture, way of life and beliefs, but only one thing remained unchanged - money. For centuries, they are present daily in people's lives, performing their functions. However, during the time of the Order of the Templars, the development of the financial sphere acquired special meaning, the systems and laws that have been used up to now have been developed. We will talk about one of these systems today.

financial leverage
The financial lever is a joint impact on thethe amount of profit with the help of own and borrowed funds. In order to better clarify this concept, let's consider the following example: the company management decided to implement one of the projects, which is guaranteed to bring profit, but own sources of funding is not enough, because Profit is limited and often located in various assets. Borrowed funds help to get the necessary amount in the right amount in a timely manner - this is the financial lever.

It should be understood that such measures areobjective necessity and are called upon to increase the profitability of your capital. It is important to realize that the financial lever (leverage) is not an ordinary situation for taking a loan for vague purposes. At such a step, all possible options are carefully calculated, it is checked whether the firm is ready for the requirements for this stage. For example, in margin trading, a financial lever is available only if the share of capital is at least 50% of equity.

financial lever is
In the modern world this tool is most oftenIt is used by traders of assets, resources, currency or simply speculators. Often, in order to get a good profit on transactions in this area, they do not have enough equity, and therefore they resort to the services of investors and creditors. In addition to objective reasons, calculations are made related to possible losses or acquisitions after the completion of the entire project. It is this fact that shows how much a financial lever is really needed. The calculation formula is very simple and it looks like this:

EFR = (1 - T) x (PA - RD) x (DE), where:

Т - the tax to profit (the decimal expression);

RA - profitability of the firm's assets in% (pages 190 and 300 of Form No. 2);

RD - interest on the loan;

D - loan amount;

E is the total amount of your capital (page 490 of Form No. 1).

financial lever formula
There can be only two results. If the answer is obtained with a minus, then the financial lever only aggravates the state of affairs in your company, if with a plus sign, then you have a good chance to multiply your profit.

I would also like to say a few words about the very essence and significance of such a tool for you:

1) the more money you borrow, the greater the risk of failure;

2) financial leverage makes your firm dependent on lenders or investors;

3) such agreements oblige you to make monthly and other payments, which, with a decrease in profits and minus taxes, may force you to liquidate part of the assets;

4) even a small increase in profit due to borrowed capital can significantly increase your "white" proceeds.

If you do not use the financial lever and the wholeyour activity is carried out at the expense of own capital and profit, then, by all the rules of finance science, your firm is recognized as financially independent.