What is the leverage factor and what is the total leverage factor

The financial leverage coefficient (DFL) refers to the multiple of the change rate of after-tax profit per common share to the rate of change of EBIT, also known as the degree of financial leverage, which is usually used to reflect the size and degree of financial leverage, as well as the evaluation of the financial risk of the enterprise. The formula for calculating the financial leverage factor is: dfl=( eps eps) ( ebit ebit) where:

DFL is the financial leverage factor; EPS is the change in earnings per share of common stock; EPS is earnings per common share before the change; EBIT is the change in earnings before interest and taxes; EBIT is EBIT before the change. For the sake of calculation, the above equation can be transformed as follows: from eps=(ebit-i)(1-t) n eps= ebit(1-t) n to get dfl=ebit (ebit-i) where:

i is interest; t is the income tax rate; n is the number of common shares outstanding. In the case of preferred shares, since the dividends on preferred shares are usually fixed but should be paid as after-tax profits, the formula should be rewritten as follows: dfl=ebit [ebit-i-pd (1-t)] where:

PD is a preferred stock dividend.

What leverage are you referring to? There is an operating leverage coefficient and a financial leverage factor.

Financial leverage: An indicator of the risk of raising funds.

Total leverage factor DTL = DFL * DOL = (EBIT+F) [ EBIT- I - D (1-R)]. The total leverage factor refers to the product of the company's financial leverage coefficient and the operating leverage factor. Where:

EBIT refers to earnings before interest and taxes, F refers to total fixed costs, I refers to interest, D refers to preferred dividends, and R refers to income tax rate.

Extended Materials: a. What is the total leverage factor.

The total leverage coefficient is the product of the company's financial leverage coefficient and the operating leverage coefficient, which directly examines the impact of changes in operating income on earnings per share, and is an indicator to measure the company's profitability per share.

Two. The significance of the total leverage factor.

The importance of total leverage for the company's management:

1.Under a certain cost structure and financing structure, when there is a change in operating income, the management can make a judgment on the impact of earnings per share, that is, estimate the impact of changes in operating income on earnings per share. For example, if a company's total leverage factor is 3, this means that for every doubling of revenue, earnings per share will increase (decrease) by 3 times.

2.The interrelationship between operating leverage and financial leverage is conducive to management's management of operational and financial risks. In other words, in order to control a certain total leverage factor, there can be many different combinations of operating and financial leverage.

For example, companies with high operating leverage can use a lower degree of financial leverage; Companies with low operating leverage can make use of financial leverage to a higher extent, etc. After considering all the relevant specific factors, it is up to the company to make the choice.

Three. The relationship between the leverage factor and the corresponding risk.

Operating leverage refers to the impact of changes in sales (amount) on EBIT at a certain percentage of fixed costs. It is generally expressed by the operating leverage factor. Operational risk refers to the risk of a change in EBIT due to operational reasons.

That is, due to the operating leverage, when sales decline, the EBIT of the enterprise declines faster, which brings risks to the enterprise. Business leverage has the most comprehensive impact on business risk. In order to obtain business leverage, enterprises need to bear the resulting business risks, and need to strike a balance between business leverage benefits and risks.

Generally speaking, the higher the operating leverage factor, the stronger the impact on the operating leverage efficiency and the greater the operational risk. Vice versa.

Total leverage coefficient: refers to the product of the company's financial leverage coefficient and operating leverage coefficient, which is a measure of the company's profitability per share.

Financial leverage coefficient DFL = EBIT [ EBIT - I - D (1-R)] = EBIT [EBIT - Interest - Preferred Stock Dividend (1-Income Tax Rate)].

Operating leverage coefficient dol = (ebit+f) ebit = (EBIT + total fixed costs) EBIT.

Then the total leverage factor DTL = DFL * DOL = (EBIT+F) [ EBIT-I- D (1-R)].

EBIT + Total Fixed Costs) [EBIT - Interest - Preferred Stock Dividend (1 - Income Tax Rate)].

where EBIT = Sales S - Total Variable Costs VC - Total Fixed Costs F

The meaning of leverage is as follows:

Leverage ratio generally refers to the ratio of total assets to equity capital in the balance sheet, which is an indicator to measure the company's liability risk and reflects the company's repayment ability from the side. To put it simply, because of need, a loan is made of an amount of money, and then the amount of two sums of money (the one you own and the one you loan) are combined, thus forming a fund with leverage.

In general, high leverage represents high returns and high risks, and the higher the leverage (i.e., the higher the leverage), the more susceptible it is to yield and loan rates.

1. To bring leverage back to 20 times, they would have to either sell $9.7 trillion in assets or raise another $485 billion.

2. If China wants to stabilize the economy or reduce the leverage ratio in the economy, then even after inflation subsides, it must strictly control the increase in credit.

3. In addition, it was also found that financial variables such as turnover rate, company size, leverage ratio, etc., also had an impact on informed trading.

4. And these two groups are showing no signs of wanting to increase spending: households are busy reducing leverage, and businesses are happy to hoard money.

Advantages of leverage:

The advantage of leverage is that it can monitor the company's ability to ensure that your company can withstand certain risks.

To achieve the balance of the entire ticket market, to avoid the company's bankruptcy caused by the rise and fall of the market.

Disadvantages of leverage:

Although the leverage ratio can be strictly monitored, for financial institutions, the leverage of financial institutions is a series of creditor's rights and debts, that is, contracts of ownership relationships.

If deleveraging leads to a breach of contract, it will bring a series of problems, therefore, in order to avoid default, enterprises will sell liquidity, bonds and other assets, and then cause ****.

If you have 10,000 yuan in your hand and you borrow another 30,000 yuan, the leverage is 3 times, and your own 10,000 yuan can bring 10,000 yuan in profit.

If you borrow 30,000 yuan and need to pay 10,000 yuan in interest, but can bring an additional 30,000 yuan in profits, then you can increase your profit by 20,000 yuan by borrowing (30,000 yuan profit - 10,000 interest), then the profit leverage of borrowing is 2 times.

Further information: Leverage generally refers to the ratio of equity capital to total assets on the balance sheet. Leverage ratio is an indicator that measures the company's debt risk, which reflects the company's ability to repay from the side.

Generally speaking, the leverage ratio of investment banks is relatively high, the leverage ratio of Merrill Lynch was 28 times in 2007, and the leverage ratio of Morgan Stanley was 33 times in 2007.

The concept of financial leverage: Regardless of the company's operating profit, the interest on debt and the dividends on preferred shares are fixed.

The effect of this debt on an investor's earnings is known as financial leverage.

Financial leverage affects a company's after-tax profit rather than pre-interest, tax, and profit.

The financial leverage ratio is equal to the ratio of EBIT to operating profit, which reflects the degree to which financial expenses (interest) affect the profit of insurance companies due to the existence of fixed debt.

To a certain extent, it reflects the degree of corporate debt and corporate solvency, and the higher the financial leverage ratio, the higher the interest expense, resulting in lower ROE indicators.

To put it simply, it is to magnify your capital, so that your cost of capital is small, and at the same time, your risk and return are magnified, because the percentage of profit and loss is not measured according to the original capital, but according to the enlarged capital.

The Basel Banking Management Committee, drawing lessons from the 2008 financial crisis and refining the new capital agreement, proposed leverage as a regulatory indicator with a floor limit of 3%.

Leverage ratio = core capital Risk exposure to total assets on and off the balance sheet.

One of the major causes of the 2008 financial crisis was the excessive accumulation of leverage on and off the balance sheet in the banking system. Leverage accumulation has also been a feature of previous financial crises, such as the 1998 financial crisis. At the height of the crisis, banks were forced to reduce leverage, amplifying the pressure of declining asset values, further exacerbating the positive feedback loop between losses, a decline in banks' capital base, and a contraction in credit.

As a result, the Basel Committee will introduce leverage requirements aimed at achieving the following objectives:

1) Establishing a floor for the accumulation of leverage in the banking system can help mitigate the risks of unstable deleveraging and the negative impact on the financial system and the real economy.

2) The use of simple, transparent, total-at-risk metrics as a complementary indicator to the risk capital ratio provides additional protection against model risk and measurement errors.

The formula for calculating the three leverage factors = EBIT change rate and production and sales volume change rate = ( ebit ebit) (q q). Leverage adds the borrowed currency to the existing funds used for investment, leverage, the ratio of assets to bank capital.

The rational use of the principle of leverage is helpful for enterprises and individuals to accelerate their development and improve efficiency, but there is also a risk that they cannot be repaid when due. Leverage reflects the ratio of the cost of investing in the underlying stock relative to investing in warrants. Assuming a leverage ratio of 10x, this only means that the cost of investing in a warrant is one-tenth of that of investing in the underlying stock, and does not mean that when the underlying stock rises by 1%, the warrant will increase by 10%.

It is used to estimate the impact of changes in sales on earnings per share and to reveal the correlation between operating and financial leverage. The detailed explanation is as follows:

First of all, the company's management can make a judgment on the impact of earnings per share when the operating income changes under a certain cost structure and financing structure, that is, it can estimate the impact of the change in operating income on earnings per share. For example, if a company's total leverage factor is 3, it means that every 1x increase (decrease) in operating income will result in a 3x increase (decrease) in earnings per share.

Secondly, through the interrelationship between operating leverage and financial leverage, it is conducive to the management to manage operational risk and financial risk, that is, in order to control a certain total leverage factor, operating leverage and financial leverage can have many different combinations. For example, companies with higher operating leverage can use financial leverage to a lower extent; Companies with low operating leverage can use financial leverage to a higher extent, among other things. This is a choice that the company makes after considering the specific factors involved.

We hope you find the following information helpful:

The total leverage coefficient refers to the product of the company's financial leverage coefficient and the operating leverage coefficient, which directly examines the impact of changes in operating income on earnings per share, and is a measure of the company's profitability per share.

Calculation of the total leverage factor:

Since the financial leverage factor dfl=ebit [ebit- i - d (1-r)], where: ebit- earnings before interest and taxes i - interest d--preferred dividends r--income tax rate, operating leverage coefficient dol=(ebit+f) ebit, where: ebit--earnings before interest and taxes f--total fixed costs, so the total leverage coefficient dtl = dfl* dol = ebit+f) ebit- i - d (1-r)], where:

EBIT - EBIT F - Total Fixed Costs I - Interest D - Preferred Stock Dividends R - Income Tax Rate, Note: EBIT = Sales S - Total Variable Costs VC - Total Fixed Costs F

Easy to memorize formulas.

Sales Revenue - Variable Costs = Marginal Contribution (1) Marginal Contribution - Fixed Costs = EBIT.

2) Earnings before interest and taxes - Interest = Profit before taxes (total profit).

3) operating leverage dol = (1) 2);

Financial leverage DFL = 2) 3);

Total leverage DTL = 1) 3).

The total leverage factor plays the role of ( ) a) the impact of changes in estimated sales on EBIT b. the impact of changes in estimated sales on earnings per share.

c. Reveal the correlation between operating leverage and financial leverage d. Estimate the impact of changes in EBIT on earnings per share e. Estimate the impact of sales volume on EBIT.