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Economic Analysis: Theory and Practice
 

Main criteria of financial risk in determining financial leverage as part of express-analysis: the Russian practice

Vol. 13, Iss. 44, NOVEMBER 2014

Available online: 30 November 2014

Subject Heading: Financial analysis

JEL Classification: 

Pages: 58-66

Savchenko N.L. Ural Institute for the Humanities, Yekaterinburg, Russian Federation
nsavchenko12@mail.ru

Importance In the modern economy, the majority of businesses, regardless of the size and forms of ownership, use borrowed source of funds. It is generally admitted that under certain conditions and financial indicators, the attraction of credit resources is beneficial. It increases return on equity of an enterprise. At the same time, there is a financial risk associated with the possibility of non-repayment of the loan and interest thereon. I point out that defining the criteria of financial risk while attracting financial leverage debt is quite relevant for financial managers of enterprises, and also for determining the credit ratings of commercial banks. As the main purpose of this work, I consider the development of the basic criteria of financial risk in determining the level of financial leverage and the financial leverage effect in the Russian practice within the framework of an express-analysis.
     Objectives The research considers the following objectives: an analysis of approaches to research and consideration of the financial leverage effect and the related effect by various national scientists; comparison of definitions and classifications of financial risk in a variety of sources, comparing it to credit risk; identification of the current conditions of accounting and taxation enabling to determine the level of financial leverage in the Russian practice; stating the main criteria of financial risk in terms of the leverage level, the differential, the financial lever impact and the critical value of operating profit during the express-analysis; determination of the level of financial risk by different criteria for an enterprise with a multiple-option capital structure.
     Methods While comparing the definitions of financial leverage and financial risk, I have used the methods of comparison and analysis. I also applied the financial analysis methods, namely, ratio analysis when considering the main indicators of financial leverage, and also proposed a method for determining the basic criteria of financial risk in terms of the leverage, the differential and financial impact of the leverage during an express-analysis. The main elements of the proposed method to determine the financial risk criteria while calculating financial leverage are presented in my program on financial management for professionals, bachelors and students training in "finance and credit". Also, this material was a subject of discussions with heads of a number of financial services of several enterprises and bank credit divisions in Yekaterinburg.
     Results The possibility of applying the basic criteria of financial risk while determining the financial leverage is supported by the specific case. I also provide corresponding calculations and conclusions.
     Conclusions and Relevance The developed technique allows using the proposed criteria for different industrial enterprises, since these criteria are of universal nature. In addition, credit institutions can use these criteria for compiling credit rating of enterprises and organizations.

Keywords: financial leverage, leverage effect, financial leverage impact strength, quoted differential, financial risk, credit risk, financial risk criteria

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