Ratio of debt to equity: formula. Calculation of financial independence
Every enterprise is obliged to conduct researchits main financial and economic indicators. This allows you to organize the available resources as efficiently as possible. Therefore, the monitoring of sources of funds is ongoing.
Allows you to evaluate the correctness of the structureratio of debt to equity. The formula of the indicator is necessarily used by analysts during the research. Based on the findings, conclusions are drawn about the financial stability of the enterprise, measures are being developed to improve profitability and sustainability.
Debt-to-equity ratiomeans, the formula of which will be presented further, is calculated on the basis of the liabilities of the balance sheet of the enterprise. It displays all the financial sources that participate in the company's activities.
The passive balance consists of equity,as well as long-term and short-term borrowed funds. Their ratio should be such that the organization was able to get the most profit by using the least amount of resources.
Own sources of property formationcompanies show the level of its stability. But using borrowed capital, an enterprise can increase its net profit and profitability of operating activities. Therefore, a certain part of the sources of capital formation of the company should consist of investors' funds.
The financial independence of the organization isin the organization of their production activities at the expense of the owners' funds. These are the sources of financing that the enterprise fully owns. They are not refundable to investors, therefore they are considered to be free.
The company's own funds are formed fromseveral sources. First of all, this is the authorized capital. This organization forms an organization in the process of its creation. Its size is established by law. The founder or founders contribute a certain part of their property to the authorized capital. According to their contribution, they are entitled to the same (in percentages) profit after taxes and other mandatory contributions.
To their own capital is attributed and various contributions,donations, undistributed profits. And if the authorized capital of owners is obliged to contribute to the general fund, then other infusions are optional. Having received a net profit in the reporting period, the owners can decide on its full distribution among themselves. But sometimes it is more expedient to direct all this amount or only a part to the development of production. This article is called retained earnings.
Debt-to-equity ratiomeans, the formula of which will be considered below, takes into account paid sources of financing. They can be long-term (they are at the disposal of the company for more than a year) or short-term (are refundable during the operational period). These are the means that the organization lends to investors and creditors for a fee.
At the end of the period of use the enterprise is obligedrepay the amount of debt and pay for the use of this capital in the form of a fixed interest. The involvement of such funds is associated with a certain risk. But with the right approach, the use of paid sources of financing in its activities can give a significant increase in net profit.
To properly understand the essence of the analysisstructure of the company's balance, it is necessary to consider the formula for the ratio of financial sources. It is also called an indicator of financial independence. Its value is of interest to both the analysts of the enterprise, and the controlling bodies or investors. The more the enterprise own funds, the less is the risk of non-return of capital to creditors. The formula for calculating the debt / equity ratio is as follows:
Кфз = ЗС: СС * 100%, where ЗС - borrowed funds, СК - own means.
The higher this indicator, the more dependent the enterprise is from paid sources. The growth of the indicator in the dynamics indicates a decrease in financial stability, an increase in the risk for investors.
Calculation of the coefficient of financial dependence inworld literature is called an indicator of financial leverage or leverage. This is one of the most important indicators of the financial state of the organization. Together with it, the coefficient of capital maneuverability, autonomy and financial dependence are necessarily calculated.
Calculating leverage allows you to assess the opportunities andprospects of business development at the expense of borrowed capital. With its help the enterprise forms a financial lever. This allows you to significantly increase the return on your own resources.
Financial leverage is calculated from the aboveabove formula. Data for research are taken from the balance sheet. Long-term and short-term liabilities, reflected in liabilities, are considered to be borrowed capital.
The financial independence of the organization is determined if the source ratio is 1. This means that in the balance sheet balance, both capital items amount to 50% each.
For some companies it is considered normal ifthis figure is increased to 2. This is especially true for large organizations. However, too much importance of financial leverage is considered a deviation from the norm. This means that the company organizes its activities on the basis of borrowed capital. To repay the debt, it will take quite a lot of time and money. Therefore, investors do not want to invest their money in similar enterprises. The risk of a non-return of their capital is high.
Too high independence ratiotestifies to the loss of the organization's ability to improve the profitability of property. Therefore, this analysis does not accept either too large or too small a value of the coefficient.
Secured by own capital
Counting on the independence of the enterprise, analystsmust calculate the number of their own sources of financing in the structure of the balance sheet, which would bring the maximum profit. If an organization attracts borrowed capital, it is simply necessary. Therefore, along with the coefficient of financial leverage, we calculate the security by own means (autonomy):
Ka = SK: WB, where WB is the balance currency.
Its normative value should be at least0.5. Optimum for most enterprises is considered to be 0.7. Western enterprises operate with a minimum value of the autonomy ratio of 0.3-0.4. This depends on the industry, as well as the ratio of current and non-current assets.
The more capital-intensive the production (the larger the share of non-fixed assets), the more long-term sources of financing the enterprise needs.
The price of capital
By calculating the independence coefficient, analysts,in addition to the amount of equity, determine the cost of borrowed funds. To do this, it is required to find out the amount of interest that the company is obliged to pay to creditors at the end of the life of their property.
To do this, use the weighted average price of borrowed capital. It looks like this:
Цкк = Σ (Цк * Дк), where к - quantity of paid sources of financing, Цк - cost of each source, Дк - a share in a total sum of the capital.
Based on the data obtained, the financial risk of the enterprise is determined.
The effect of financial leverage
The calculation of the risk factor is performed through the leverage indicator. This provides an opportunity to assess the effectiveness of the organization of the structure of the balance. It shows the quantitative expression of a company's risk.
It includes expenses for payment not on timeinterest and the amount of debt, as well as loss of profit due to excessive borrowing. To determine the effect of financial leverage, the following formula is applied:
ЭФЛ = (1-Н) * (Р-П) * ЗК: СК, where Н - the rate of the profit tax, Р - profitability of industrial activity, П - the average rate of percent of the paid capital.
The result is a sum of growthreturn on equity when using paid sources. If P <P, then the company's profitability increases. If, however, P> P, then it is not advisable to take credit funds.
Having considered the ratio of borrowed andown funds, the formula of which is obligatory used by analysts, certainly make an assessment of the structure of the balance. This allows you to determine the correct ratio of funding sources.