3 Development program improvement of financial risk management in the jsc “Forte Bank”

3.1 The total financial risk of the jsc "Forte Bank" on the basis of operational and financial leverage

The definition of the cumulative effect on the company's structure of the cost structure and capital structure and management of these parameters is one of the main tasks of financial management. The combined effect of operational and financial leverage is determined by multiplying the strength of the operating leverage with the strength of the financial leverage. It shows how much the free profit of the enterprise will change if the sales proceeds decrease by one percent.

Calculation of the combined effect of operational and financial leverage allows to estimate the total risk associated with the enterprise. As can be seen, the combination of high operating leverage (low financial strength, high share of fixed costs) with high financial leverage (high share of borrowed funds, significant interest payments) leads to a strong increase in the overall risk associated with the enterprise. Such a situation must be avoided by all available means, first of all, by a reasonable policy of borrowing funds and by a balanced management of the cost structure.

Operating leverage - an indicator of risk assessment associated with a decrease in revenue from sales. It shows how much the profit will decrease at a decrease in sales revenue by one percent. The higher the operating leverage, the greater the risk of losing profit. Operating leverage is calculated in different ways depending on the factor that influences the decrease in sales revenue.

According to the formula 7, operating leverage (L1) is determined, if sales proceeds decrease due to lower prices for products.

Where RS - revenues from sales,

PS - profit from sales.

According to the formula 8, operating leverage (L2) is calculated in cases where the decrease in sales proceeds is caused by a decrease in the real volume of sales.

Where VC – variable costs.

According to the formula 9, it is possible to calculate operating leverage (L3), if both factors reduce the sales revenue and lower prices and reduce the natural volume of sales.

Where Ip - price reduction index,

Ir - index of decline in the real volume of sales,

Irs - index decrease in revenues from the sale.

Table 16 shows the calculation in accordance with the above formulas of operational leverage in 2016.

Table 16

Calculation of operating leverage

Index	2015	2016
Revenue from sales	12547	13456
Profit from sales	212	326
L1	59,18	41,28
Variable costs	11987	12457
L2	2,64	3,06
Average product price	15,3	16,1
Ip	1,08	1,052
Volume of production in physical terms	820,07	835,78
Ir	1,01	1,019
Irs	1,062	1,072

The indicator of operational leverage for 2015

The indicator of operational leverage for 2016

Thus, the decrease in sales proceeds by 1 percent will reduce profit from sales by 43.41% in 2016 and by 62.7% in 2015. Having tracked the change in dynamics, we can say that the company has undertaken a more competent policy. The value of operational risk decreased by 19.29%. However, its value is still far from optimal.

, (10)

where FLE – effect of financial leverage;

T - tax rate of profit;

EP - economic profitability;

AEIR - average estimated interest rate, this value is equal to the ratio of the actual financial costs for all loans for the period analyzed to the total amount of borrowed funds used for the period;

BF - borrowed funds;

OF - own funds.

Calculate the financial leverage. Unlike operational, financial leverage is intended to measure not the level of risk that arises in the process of the enterprise's sales of its products (works, services), but the level of risk associated with the insufficiency of profits remaining at the disposal of the enterprise. It measures the level of risk associated with the insufficiency of profits remaining at the disposal of the enterprise. Shows how much the percentage of free profit will decrease with a decrease in net profit by one percent. The higher the financial leverage, the greater the risk of not paying off the mandatory payments that are made at the expense of the company's net profit.

There are various ways of calculating financial leverage.

We will use the calculation technique that takes into account the influence of such a factor as the ratio of borrowed funds and own funds.

One of the components of this formula is the differential - the difference between the economic return on assets and the average calculated interest rate on borrowed funds.

Because of taxation, the amount of the differential is reduced by the share of taxation of profits (1-T).

The second component - the leverage of the financial lever - characterizes the strength of the financial leverage. This is the ratio between borrowed (BF) and own funds (OF).

Allocation of these components allows to purposefully manage the change in the effect of the financial lever in the formation of the capital structure.

So, if the differential has a positive value, then any increase in the leverage of the leverage, i.e. Increase in the share of borrowed funds in the capital structure, will lead to an increase in its effect. Accordingly, the higher the positive value of the differential of the financial lever, the higher, with other things being equal, will be its effect.

However, the growth of the financial leverage effect has certain limits and it is necessary to realize the deep contradiction and inextricable link between the differential and the leverage of the financial lever. In the process of increasing the share of borrowed capital, the level of financial stability of the enterprise decreases, which leads to an increase in the risk of its bankruptcy. This forces lenders to increase the level of the credit rate, taking into account the inclusion of an incremental premium for additional financial risk. This increases the average estimated interest rate, which (at a given level of economic return on assets) leads to a reduction in the differential.

With a high value of the leverage of the financial lever, its differential can be reduced to zero, in which the use of borrowed capital does not increase the return on equity. If the differential is negative, the return on equity will decrease, as part of the profit generated by equity will go to servicing the borrowed capital at high interest rates for the loan. Thus, the attraction of additional borrowed capital is advisable only if the level of economic profitability of the enterprise exceeds the cost of borrowed funds.

We calculate the financial leverage for the last two years to track the dynamics of the change in this indicator.

Table 16

Calculation of financial leverage

	Index	Formula	2015	2016
1	Assets (net of deferred payments)	А	1 760	1 723
2	The passive, millions tenge		1 760	1 723
	own funds	OF	1510	1473
	borrowed funds	BF	250	250
3	Net result of investment exploitation, millions tenge	NRIE	212	326
4	Economic profitability,%	EP=NRIE/A	11,1	18,7
5	Fee for credit, millions tenge	FFC	13	13
6	Average estimated interest rate,%	AEIR=FFC/BF	5	5
7	Current result after paying % on loan, millions tenge		200	314
8	Taxes
	Tax rate,%	TP	24	24
	millions tenge		42	66
9	Profit after taxation, millions tenge		158	248
10	Return on equity,%	ROE=NRIE/OF	14,04	22,13
11	The differential effect of the financial leverage, including taxation,%	EP-AEIR	6,05	13,72
12	Lever arm,%	BF/OF	0,17	0,17
13	Effect of financial leverage,%	EFL=(1-TP)(EP-AEIR) BF/OF	0,79	1,84
14	The optimal value of EFL	1/2EP	5,53	9,36
		1/3EP	3,65	6,18

An analytical way of assessing financial leverage is:

• Adopt reasonable, calculated risks within the differential (EP-AEIR);

• The differential should not be negative;

• is considered optimal EFL = (1/3 ¸ 1/2) · EP. In this case, EFL is able to compensate for tax exemptions and ensure an acceptable level of return on equity.

As we see the indicator of financial leverage does not fall into the interval of optimal values, it is much lower. This indicates the extremely inefficient use of own and borrowed capital. The current financial strategy can be considered quite risky.

Based on the calculated operating and financial leverage, we calculate the total financial risk of the enterprise.

R_T= L_O*L_F, (11)

where R_T – total enterprise risk.

Thus, the total enterprise risk:

In 2014 R_T= 62,7 * 0,79 = 49,62 %

In 2015 R_T= 43,41 * 1,84 = 79,85 %

Thus, the financial policy of the enterprise is high-risk. So despite the decline in the level of operating leverage in 2016, the significance of the financial leverage effect in 2016 increased and the overall financial risk increased significantly. And the main task of the company's management is to improve the management of the company's financial resources.