Financial Knowledge: Financial Leverage

2011/1/6 11:11:00 70

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Financial Knowledge Financial Leverage

(1) financial leverage

concept

Financial leverage refers to the existence of debt.

cause

The change of earnings per share is greater than the leverage effect before interest tax changes.

(two) measurement of financial leverage

The main index of financial leverage measurement is the financial leverage coefficient.

The coefficient of financial leverage refers to the rate of change of the profit per share of a common stock, which is equal to the multiple of the pre tax profit change rate.

The formula is:

Financial leverage =

ordinary

Profit per share change rate / pre tax profit rate of change

= base interest pre tax profit / (base interest pre tax profit base interest)

For enterprises with bank loans, financing leases and issuing preferred shares, the financial leverage coefficient can be calculated according to the following formula:

Financial leverage ratio = pre tax profit / [pre tax profit - interest - finance lease reserve fund - preferred stock dividend / (1- income tax rate)]

(three) relationship between financial leverage and financial risk

Financial risk refers to the risk that an enterprise increases the chance of a large change in the opportunity of bankruptcy or common stock per share in order to obtain financial leverage.

Financial leverage will increase financial risk, the greater the proportion of corporate debt, the stronger the financial leverage effect, the greater the financial risk.

The relationship between financial leverage and financial risk can be tested by calculating and analyzing the earnings per share, standard deviation and standard deviation of common stock under different capital structure.