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.

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