EGF by types, borrowed resources for the reporting year

EGF by types, borrowed resources for the reporting year

EGF =(40,0 – 30 ∕ 1.2) × (1 – 0.34) × 5040/25975 + 5040 × 20 ∕ 25975 = 5.80%.

Ro eh this indicator. factors for its change. Method for calculating their influence. Optimization of the capital structure according to the criterion of maximizing the level of its profitability.

Return on equity closes the entire pyramid of performance indicators - acceptance. All activities of the enterprise should be aimed at increasing the amount of equity capital and increasing the level of its profitability. It is calculated by the ratio of the amount of net profit to the average annual amount of equity capital:

General structural - the logical scheme of the analysis of return on equity is presented in fig. 22.3.

Rice. 22. 3. Structural-logical factorial model of return on equity

It is easy to see that the return on equity ( ROE)and return on total capital ( ROA) are related as follows:

ROE \u003d D hn × ROA × MK, or

where D n - the share of net profit in the total balance sheet profit;

MK is the capital multiplier, i.e. the volume of assets based on the equity foundation. It acts as a lever that increases the power of equity capital.

This relationship shows the relationship between the degree of financial risk and the return on equity.

Extend Factor Model ROE possible by decomposing the indicator into its component parts ROA:

ROE \u003d D hn × MK × K about × R about, or ROE= (1 - K n)× MK × K vol × R vol.

Profitability of turnover ( R about) characterizes the effectiveness of cost management and pricing policy of the enterprise. The capital turnover ratio reflects the intensity of its use and the business activity of the enterprise, and the capital multiplier reflects the policy in the field of financing. The higher its level, the higher the degree of financial risk of the enterprise, but at the same time, the higher the return on equity (equity) capital with a positive effect of financial leverage.

Let us calculate the influence of these factors on the change in the level ROE on based on the data given in table. 22.8.

Table 22 . 8

Initial data for the analysis of return on equity

General change ROE:

50,8 - 44,6 = +6,2%;

including by changing

a) the share of net profit in the total balance sheet profit:

∆ROE= ∆Dpp × MK nl × Kob nl × Rb nl=

= (0,66 - 0,65) × 1.828×1.875 × 20,0 = +0,70%;

b) capital multiplier:

∆ROE \u003d Dchp f× ∆ MK× Kob pl× Rob pl =

0.66×(1.92 - 1.828) × 1.875 × 20.0 = +2.3%.

c) capital turnover:

∆ROE= DCHP f × MK f × ∆Cob× Rb nl =

= 0,66 × 1,92 × (2,04 - 1,875) × 20,0 = +4,2%;

d) profitability of sales:

∆ROE \u003d Dchp f × MK f × Kob f ×∆Rb =

= 0,66 × 1,92 × 2,04 × (19,6 - 20,0) = - 1,0%.

Consequently, the return on equity increased mainly due to - for accelerating capital turnover and increasing the share of borrowed capital . Due to the decrease in the profitability of turnover, the profit per ruble of equity decreased by 1 kopeck.

It is possible to deepen the analysis of ROE due to a more detailed study of the reasons for the change in each factor indicator of the model under study. The methodology for analyzing the profitability of turnover is set out in paragraph 17.7, and capital turnover - in paragraph 22.3.

Optimization of the capital structure according to the level maximization criterionprofitability equity produced as follows (Table 22.9).

Table a 22.9

Calculation of the level of return on equity for various values ​​of the coefficient of financial leverage

It is known that the return on equity depends on the return on assets and the ratio of equity and borrowed capital. An increase in the share of borrowed funds contributes to an increase in the return on equity, provided that the return on assets is higher than the real interest rate on credit resources.

As shown by the given data, the highest level of profitability under the given conditions is achieved with a financial leverage ratio of 0.9. With the growth of the latter, the interest rate for the loan rises, as a result of which the return on equity decreases.

Chapter 23 ANALYSIS OF THE VOLUME AND EFFICIENCY OF INVESTMENT ACTIVITIES

Role and factors for its change. methodology for calculating their influence.

The return on equity closes the entire pyramid of performance indicators of the enterprise, all activities of which should be aimed at increasing the amount of equity capital and increasing its level of profitability.

It is easy to see that the return on equity (ROE) and return on total capital (ROA) closely related:

Total Capital

Equity

Profit after

paying taxes

Equity

Tax payments X

Total Capital

where MK- capital multiplier (financial leverage).

This relationship shows the relationship between the degree of financial risk and the profitability of own

capital. Obviously, as the return on total capital decreases, the company must increase the degree of financial risk in order to ensure the desired level of return on equity.

An enterprise whose predicted level ROA is 20%, it will take 1.5 rubles. total capital for each ruble of own,

to level ROE has reached

thirty%. If it is expected that ROA drops to 10%, then in order to achieve ROE in 30% it is necessary to have 3 rubles for every ruble of equity capital. total assets.

Extend Factor Model ROE possible by decomposing the indicator into its component parts ROA:

ROE = R pn XTO about XMK.

Return on sales (R pn ) characterizes the effectiveness of cost management and pricing policy of the enterprise.

Capital turnover ratio reflects inintensity its use and business activity of the enterprise,

capital multiplier- financing policy. The higher its level, the higher the risk of bankruptcy of the enterprise, but at the same time, the higher the return on equity (equity) capital with a positive effect of financial leverage.

Let's calculate the impact of data on the level change ROE:

Return on equity after

tax payments, % 44.56 50.82

General changeROE : 50,82-44,56 = +6,26 %; including by changing

but)return on sales:

(12.94-13.0) x 1.875 x 1.828 = -0.21%;

b)capital turnover:

(2.04-1.875) x 12.94 x 1.878 = +4.01%;

in)capital multiplier:

(1.92-1.828) x 2.04 x 12.94 = +2.46%.

Consequently, the return on equity increasedmainly due to faster capital turnover andincreasing the level of financial leverage.

Deepen AnalysisROE possible through a more detailed studyreasons for changing each factor indicatorfollowing model according to scheme 2.

Conclusion.

As a result of the work performed, it was found that:

A delay in the movement of funds at any stage leads to a slowdown in capital turnover, requires additional investment of funds and can cause a significant deterioration in the financial condition of the enterprise.

The effect achieved as a result of the acceleration of turnover is expressed primarily in an increase in output without additional attraction of financial resources. In addition, due to the acceleration of capital turnover, there is an increase in the amount of profit, since it usually returns to its original monetary form with an increment. If. production and sales of products are unprofitable, then the acceleration of the turnover of funds leads to a deterioration in financial results and the "eating away" of capital.

Profit on the total amount of assets, the best indicator that reflects the efficiency of the enterprise. It characterizes the profitability of all assets entrusted to management, regardless of the source of their formation.

Ways to improve the efficiency of capital use - this is what needs to be influenced so that the enterprise receives maximum profit at minimum cost and additional injections from the outside.

All criteria for evaluating the effective use of capital are important to obtain a positive end result. Practically influencing through the adoption of managerial decisions on the adoption of strategies for the use of capital, it is possible to achieve a significant improvement in its use.

Analysis of return on equity.

Lecture 39-40

1. Analysis of profitability indicators of available resources.

1. Analysis of profitability indicators of available resources

The effectiveness of the use of available resources is assessed, first of all, with the help of profitability indicators, which characterize the profitability of invested financial resources in the property of the organization, in equity.
The most general indicator that answers the question of how much profit an organization receives per ruble of its property, return on total assets or economic profitability:

R(a)= P(b)/A∗100

It is calculated as the ratio of the total gross profit from ordinary activities before interest and taxes to the average annual value of all assets.
A more in-depth analysis of the return on assets is carried out using modeling and one of the methods of deterministic factor analysis.

Ra \u003d Pb / A \u003d (P (b) / RP) ∗ (RP / A) \u003d R (ob) ∗ Kob (a)

This is the DuPont model, which makes it possible to determine what caused the change in profitability, and which of the indicators changes more and faster.
Capital Ratio R = Pb / Av(190) ∗ 100 .

This is the next indicator that characterizes the efficiency of using fixed assets and other non-current assets, or how much profit is accounted for per 1 ruble of non-current assets.

Return on borrowed capital R = Pb /ZK∗100

Return on equity is a kind of closing indicator of the efficiency of the enterprise, all activities of which should be aimed at increasing the amount of equity capital and increasing its level of profitability.
Return on equity is an indicator of return on invested capital, calculated by the formula:

R= Pb/SC ∗100.

Shows the effectiveness of the use of equity or shows how much profit the company receives from each ruble of its own funds. This indicator allows you to evaluate the effectiveness of advanced capital management. Its dynamics influences the level of share quotation.

Each profitability indicator is a two-factor multiple model of the type F = x / y, therefore, on the profitability of its own

capital, expressed as F/SK, is influenced by two factors:

Profit, which is directly proportional;
- the average annual cost of equity capital, which has a reverse pro-

proportional dependency.
Using the chain substitution method, it is possible to calculate the influence of each factor on the value of profitability.

Return on equity can also be represented as a multifactorial multiplicative model using the expansion method. In this case, it is possible to calculate the influence of qualitative factors on the return on equity:

Rck= Pb/ SK∗100=Rnp∗Kob(a)∗Kf.

In the course of the analysis, other factorial models can also be used:

Rc k \u003d Pb / SK ∗ 100 \u003d Rnp ∗ PT ÷ K / in,

where Rpr is the profitability of sales,

Kob (a) - asset turnover ratio,

Kf - coefficient of financial maneuverability,

Kob (ZK) - debt capital turnover ratio,

Kl - financial leverage ratio,

PT - labor productivity,

K / in - capital-labor ratio.

Return on equity and return on total capital are closely related:

R(sk)= P(after payment)/ SC = [P(after payment)/ SC] * Total Capital|SC where Total Capital/SC is the capital multiplier (financial leverage).

This relationship shows the relationship between the degree of financial risk and the return on equity. As the return on total capital decreases, the enterprise must increase the degree of financial

risk in order to provide the desired level of return on equity.
It is possible to expand the factorial model of return on equity by decomposing the indicator Rsk into component parts:

Rsk \u003d Rsales * K about * MK.
Profitability of sales characterizes the effectiveness of cost management and

pricing policy of the enterprise.

The capital turnover ratio reflects the intensity of capital use and business activity of the enterprise.

The enterprise multiplier characterizes the financing policy. The higher its level, the higher the risk of bankruptcy of the enterprise, but at the same time, the higher the return on equity (equity) capital with a positive effect of financial leverage.

Analysis of the impact on the change in the return on equity of the above factors, in particular, the level of financial leverage (increase in the share of borrowed capital) can be done using factor analysis by the method of chain substitutions.

Evaluation of the effectiveness of the use of borrowed capital.

Part of the funds that the company uses in the course of its

activities are borrowed. These include bank loans and

financial companies, loans, accounts payable, etc.

The question arises: how effectively the enterprise uses

borrowed resources and does it make sense to attract them?

One of the indicators used to evaluate the effectiveness

the use of borrowed capital is the effect of financial leverage

EGF \u003d (VER - C n ZKo) x (1 - K n) x ---,

where BEP is the total return on total assets (ratio

total profit for the reporting period before interest and taxes

(EBIT) to the average annual amount of the company's assets), %;

C n ZK - the nominal price of borrowed resources (the ratio of accrued

interest and other financial costs associated with attracting

borrowed funds, to the average amount of borrowed resources in the reporting

period), %;

K N - the level of tax withdrawal from profit (the ratio of taxes

from profit to the amount of profit after paying interest on loans);

ZK - the average amount of borrowed capital;

SC - the average amount of equity capital.

The effect of financial leverage shows how much

increases the amount of equity capital by attracting

borrowed funds in the turnover of the enterprise. Positive EGF occurs in

in cases where the return on total capital is higher

the weighted average price of borrowed resources, that is, if BEP > ZK.

For example, return on total assets after tax

is 15%, while the price of borrowed resources is 10%.

The difference between the cost of borrowings and the return on total

capital will increase the return on equity.

Under such conditions, it is beneficial to increase the leverage of financial leverage

(the ratio of borrowed funds to equity capital). If BEP< Ц ЗК,

a negative EGF is created (the “baton” effect), as a result of which

there is a “eating away” of equity, and this can become

reason for the bankruptcy of the company. Therefore, borrowed funds

can contribute to both capital accumulation and ruin

enterprises.

The ability to generate income is the main characteristic of the use of capital. Wherever capital is directed as an economic resource - to the sphere of the real economy or to the financial sphere - it is always potentially capable of generating income, provided that it is used effectively. Thus, the main goal of the financial activity of the enterprise is to ensure the maximization of the welfare of the owners of the enterprise. Return on equity is analyzed using a methodology developed by DUPONT.

The essence of this technique is to decompose the formula for calculating the return on equity capital into factors that affect this return. The analysis is carried out on the basis of the calculated coefficients obtained. Which of the indicators affects the return on equity the most will determine the assessment and recommendations for improving the efficiency of the enterprise to maximize the return on equity.

At the first stage, the analyst answers the question of how the key financial indicator - the return on equity - has changed and in what direction the factors that determined its dynamics and included in the model changed. There are 3 models of DUPONT analysis. The indicators used in these models are given in the table.

The use of a particular model depends on the required degree of detail in the analysis of return on equity.

Return on equity in various models:

1. ROE = Return on Assets x Leverage

2. ROE = Return on Sales x Asset Turnover x Leverage

3. ROE = Operating profit x Interest burden x Tax burden x Asset turnover x Leverage

In the second step, the analyst must understand the ultimate causes behind the change in financial ratios. The main reasons include the change in the primary reporting indicators underlying the calculation of the coefficient, namely: revenue, profit, fixed and current assets, debt, ratio of own and borrowed funds, etc. In the course of the analysis, it is advisable to highlight the indicators that have had the greatest impact on the resulting coefficients.

To make recommendations for maximizing financial performance, the analyst must have additional knowledge about the specifics of the enterprise, have an idea of ​​the objective limitations and internal needs of production. So, for example, an increase in revenue at an industrial enterprise with a limited maximum level of capacity utilization, etc.

The analyst may not limit himself to developing recommendations for improving indicators, but support them with numerical data, that is, assess the impact of changes in one or more factors on the dynamics of the return on equity ratio and assess the sensitivity of the result to such a change.

The assessment is made by changing the value of the indicator in the primary reporting (balance sheet and profit and loss account) with other conditions unchanged - analysis "ceteris paribus". For example, anticipating a decrease in prices for raw materials and renegotiating contracts with suppliers on more favorable terms, the analyst has the opportunity to artificially reduce the cost, while it is necessary to calculate the change in all coefficients in the model achieved in this way.

Coefficient equal to the ratio of net profit from sales to the average annual cost of equity. Data for calculation - balance sheet.

It is calculated in the FinEcAnalysis program in the Profitability Analysis section as Return on Equity.

Return on equity - what shows

Shows the amount of profit that the company will receive per unit cost of equity capital.

Return on equity - formula

The general formula for calculating the coefficient:

Calculation formula according to the old balance sheet:

Return on equity - value

(K dsk) - in fact, the main indicator for strategic investors (in the Russian sense - depositors of funds for a period of more than a year). The indicator determines the effectiveness of the use of capital invested by the owners of the enterprise. Owners receive profitability from investments in the form of contributions to the authorized capital. They donate the funds that form the equity capital of the organization and receive in return the rights to a corresponding share of the profits.

From the position of the owners, profitability is most reliably reflected in the form of return on equity. The indicator is important for the shareholders of the company, as it characterizes the profit that the owner will receive from the ruble of investments in the enterprise.

This ratio has limitations. Income does not come from assets, but from sales. Based on K dsk, it is impossible to evaluate the effectiveness of the company's business. In addition, most companies use a significant share of debt capital. As an accounting measure, Return on Equity provides an indication of the returns a company earns for shareholders.

The return on equity is compared with a possible alternative investment in shares of other enterprises, bonds, bank deposits, etc.

The minimum (normative) level of profitability of entrepreneurial business is the level of bank deposit interest. The minimum standard value of the indicator Return on equity (K dsk) is determined by the following formula:

K RNA = Sd * (1-Snp)

• К rnc – normative value of return on equity, rel.units;
• Сд – average rate on bank deposits for the reporting period;
• Snp - income tax rate.

If the indicator Kdsk for the period of analysis turned out to be lower than the minimum Krnk or even negative, then it is not profitable for the owners to invest in the company. An investor should consider investing in other companies.

For the final decision to withdraw from the capital of the company, it is better to analyze K dsk in recent years and compare it with the minimum level of profitability for this period.

Return on equity - scheme

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