The EFR indicator can be divided into three elements:
Posted: Tue Jan 07, 2025 10:03 am
The tax adjuster shows how the effect of financial leverage will change given a change in the income tax rate.
Leverage differential (the difference between return on assets and return on debt).
The debt to equity ratio determines the strength of the influence of debt on the financial leverage effect.
When the leverage differential is less than zero , the company will go into the red. In this case, the company will not be able to operate effectively to compensate for debt obligations.
If the differential is zero , then the leverage effect netherlands telegram will also be zero. As a result, all additional profit will go to servicing the debt.
The desired differential indicator should be greater than zero . In this case, the company receives additional profit over and above that which covers the fee for borrowed funds. The higher the indicator, the more profitable the use of credit funds.
The optimal leverage is 50-70%. If the borrowed capital is more than 70%, there is a risk of losing financial independence or even bankruptcy. If the borrowed capital is less than 50%, the company most likely has the opportunity to make more profit.
The coefficient value depends on the industry, sphere and market. To put it simply: the more assets, for example, equipment, the higher the indicator will be. For example, in the IT sector the coefficient will be minimal, and for agricultural or automobile industry enterprises – maximal.
When it is not worth scaling using credit funds
If the return on assets is lower than the interest on the loan, then you can forget about scaling the business. There will be no positive dynamics from such actions. On the contrary, all profits will go to paying off debts. Accordingly, the share of equity capital will decrease, and the financial stability of the company will go down. Only risks will increase, not profits.
Yes, credit money can increase revenue. But revenue will help to influence the return on investment in a positive direction only when the return on assets is higher than the interest on the loan.
Leverage differential (the difference between return on assets and return on debt).
The debt to equity ratio determines the strength of the influence of debt on the financial leverage effect.
When the leverage differential is less than zero , the company will go into the red. In this case, the company will not be able to operate effectively to compensate for debt obligations.
If the differential is zero , then the leverage effect netherlands telegram will also be zero. As a result, all additional profit will go to servicing the debt.
The desired differential indicator should be greater than zero . In this case, the company receives additional profit over and above that which covers the fee for borrowed funds. The higher the indicator, the more profitable the use of credit funds.
The optimal leverage is 50-70%. If the borrowed capital is more than 70%, there is a risk of losing financial independence or even bankruptcy. If the borrowed capital is less than 50%, the company most likely has the opportunity to make more profit.
The coefficient value depends on the industry, sphere and market. To put it simply: the more assets, for example, equipment, the higher the indicator will be. For example, in the IT sector the coefficient will be minimal, and for agricultural or automobile industry enterprises – maximal.
When it is not worth scaling using credit funds
If the return on assets is lower than the interest on the loan, then you can forget about scaling the business. There will be no positive dynamics from such actions. On the contrary, all profits will go to paying off debts. Accordingly, the share of equity capital will decrease, and the financial stability of the company will go down. Only risks will increase, not profits.
Yes, credit money can increase revenue. But revenue will help to influence the return on investment in a positive direction only when the return on assets is higher than the interest on the loan.