Careful use of financial leverage

Release time:

2022-11-03

Careful use of financial leverage

Mouth depression promotes health

The word "lever" originates from a physical noun. Archimedes said that if you give me a fulcrum, you can pry up the whole earth. It can be seen how powerful the leverage is. Financial leverage refers to a financing method that uses debt financing to obtain more income. Reasonable use of the principle of financial leverage will help enterprises and individuals accelerate development and improve the efficiency of capital use. However, there is also a risk that matured debts cannot be repaid. The leverage ratio is also the debt ratio. Financial leverage is a double-edged sword. If it is used well, it will play a role of pulling a thousand pounds out of four, Poor use may lead to bankruptcy of the enterprise.

In the period of rapid economic development, high leverage can expand the scale of enterprises, and mergers and acquisitions are inseparable from the extreme speed effect of leverage; In the period of economic downturn and contraction, the consequences of increasing leverage can only face the expansion of debt risk, ranging from freezing of litigation to bankruptcy and reorganization. It is the most scientific and reasonable financing to formulate a reasonable financing scale according to the enterprise's own operating characteristics and control the leverage ratio at the golden section of risk income. All leverage has risks, so the gains obtained are called risk gains; Internationally, short-term treasury bond yield is generally used as risk-free yield.

The financial leverage must be used to measure the profit before interest and tax, that is, the profit obtained after excluding the factors of interest cost and income tax. The profit before interest and tax=net profit+income tax+interest expense. Due to the stability of the income tax policy, the interest expense generated by liabilities directly affects the net profit. The analysis and comparison of EBIT and interest expenditure is an important reference data for total financing, that is, the break even point analysis.

Through the risk analysis of interest income and expenditure, the following two paths should not be taken——

1、 The negative pre interest and tax profit after deducting interest expense indicates that excessive borrowing leads to zero profit. This business model with high debt ratio has no risk resistance ability. Financing regardless of cost is like drinking dove to quench thirst. Once the debt matures, facing a cash flow circuit breaker will directly lead to bankruptcy risk and failure to repay the matured debt, so we will embark on a road of no return to borrowing new debt to repay old debt;

2、 The interest income from borrowing funds of enterprises or internal units is higher than the main business profit, which indicates that the enterprise has the attribute of a financial institution. However, due to the defects in the relevant mortgage guarantee procedures, bad debts are likely to occur in the later recovery of principal, leading to the risk that the principal cannot be recovered. This seemingly high-yield business model is actually risky, especially the construction enterprises should stick to the low line of unswerving main business and not giving up professionalism, Never use high leverage to make loans;

The downward trend of the construction industry cannot be changed. The thunderstorm in the real estate industry has seriously affected the liquidity of construction enterprises. Every penny of cash is our food source for spending the cold winter. The era of pursuing high dividends has passed. We should fully deal with the existing funds in the turnover of bank loans to ensure that there are deposits in times of crisis, which is also the fundamental reason to be prepared for danger in times of peace.

Power is a kind of service ability

Gather forward strength to achieve a century of peace

Recommended news

2025-12-01

The group company sent representatives to observe the finals of the first China Postgraduate Smart Construction Innovation Competition.

On November 28-29, the finals of the first China Postgraduate Smart Construction Innovation Competition were held at the Nantong International Convention Center. Wu Donghui, chief engineer of the Group Corporation, and other representatives attended the event on-site to observe the competition.

2025-11-26

Yin Weidong, Chairman of the Group Company, traveled to Shanghai for a visit and exchange.

On November 20, Yin Weidong, Party Secretary and Chairman of the Group Corporation, visited and exchanged views at the Hongqiao International Central Business District in Shanghai. At Midea’s Global Innovation Park, the chairman and his delegation toured Midea’s R&D center and gained an in-depth understanding of its core R&D areas and production layout.

2025-11-18

Sixteen employees from the group company have been promoted to senior engineers and successfully completed the independent evaluation for their mid-level professional titles.

In early November, it was learned from Document No. 3 [2025] issued by the Nantong Human Resources and Social Security Bureau that 16 employees from the Group Company—Ni Dongchen, Qin Bingyan, Gu Zhuhai, Xu Min, Liu Yunfeng, Xu Shaowei, Xu Jianhua, Mo Yanbo, Wu Lin, Zhao Ruihu, Yao Bin, Wei Wei, Gong Zhengrong, Lu Yongbo, Hong Jinxin, and Tang Yin—have successfully passed the Jiangsu Province Nantong City Senior Professional Technical Qualification (Associate Senior) evaluation for construction engineering, marking the highest-ever number of promotions in the company's history.

2025-11-13

The group sent representatives to attend the safety commitment rally for the major overhaul of Covestro's Caojing Integrated Base.

On November 12, the group company sent representatives to attend the 2025 Major Overhaul Contractor Safety Commitment Signing Ceremony held at Covestro's Caojing Integrated Base.

2025-11-13

The group was awarded the team prize in the "Quality Month" knowledge competition organized by the Provincial Construction Industry Association.

On November 11, the website of the Provincial Construction Industry Association announced the winners of the 2025 Jiangsu Province "Quality Month" Construction Engineering Quality Knowledge Competition. The Group won the second-place team award, and two individuals received the special third-place prize for project managers.

2025-11-05

The group company sent representatives to participate in training aimed at enhancing capabilities in preventing workplace injuries during construction projects.

To further enhance the group's capacity for injury prevention in the construction sector and strengthen safety management practices, on November 4, the Group dispatched personnel to attend a training workshop in Jiangsu Province aimed at improving the injury prevention capabilities of construction companies and projects.