Each large enterprise seeks to optimize its capital structure. It is formed from own and borrowed sources. Moreover, their ratio should be maintained at a specified level. Analytics allows you to determine the need of a company for a particular source of financing its activities.
One of the components of the organization’s financial stability methodology is the concentration ratio of borrowed capital . It is calculated according to the established formula and has a clearly defined meaning. How to calculate the presented indicator, as well as interpret the result? There is a certain technique.
The essence of the coefficient
The concentration ratio of borrowed capital shows the amount of paid financial sources in the balance sheet structure. Each company should organize its activities using equity. However, borrowing opens up new perspectives for the organization.
A company that correctly uses paid sources of funds can acquire new high-tech equipment, introduce a new production line, expand sales markets, etc. For this, the level of borrowed funds should remain within certain limits. It is installed for each enterprise separately.
Attraction of long-term and short-term loans increases the risks of the company. However, the higher they are, the larger the net profit potential organization can receive. The state of the share of paid liabilities must be monitored by the analytical service of the enterprise.
The essence of borrowed funds
The value of the concentration ratio of borrowed capital in calculating financial stability is extremely high. Such sources of financing have a number of characteristic features. Their attraction carries both benefits and additional costs.
A company that attracts funds from outside investors, opens up new prospects and opportunities. Its financial potential is growing rapidly. At the same time, the cost of the presented sources remains quite acceptable. With the competent use of additional funds, you can increase the profitability of the company. In this case, profit is growing.
However, attracting investment sources from the outside has a number of negative characteristics. Such capital increases risks, reduces indicators of financial stability. Making such a procedure is quite difficult. Costs largely depend on the level of development of a particular market. The income of the organization will be reduced by the cost of using investor funds (interest on the loan).
Method for determining the indicator
The balance sheet data will help to calculate the concentration ratio of borrowed capital. The formula for the calculations is simple. It reflects the ratio between the indicator of external loans and the balance sheet currency. This is the actual debt burden that is placed on the organization. The calculation formula is as follows:
KK = / , where: - the amount of loans (short-term and long-term), B - balance sheet currency.
Settlements are made based on the results of the operating period. Most often it is 1 year. However, for some companies it is more profitable to make settlements on a quarterly or semi-annual basis.
Paid sources of financing are presented in lines 1400 and 1500 of form 1 of the financial statements. The total balance sheet is indicated on line 1700. This is a simple calculation, the result of which will help draw conclusions about the harmonious organization of capital structure.
Normative
Using the above system, you can calculate the concentration coefficient of borrowed capital. The standard value will allow you to analyze the result. For the presented indicator, there is a certain range of values at which the balance structure can be called effective.
The concentration ratio of external sources of financing can be in the range from 0.4 to 0.6. The optimal value depends on the type of activity of the company, features within the industry. For example, enterprises with a pronounced seasonality of activity may have low concentration of credit funds.
To conclude that the structure of financial sources is correct, it is necessary to study the presented indicator of competing firms. So it will be possible to calculate the intrasectoral indicator. The coefficient value obtained during the study is compared with it.
Financial gain
In some cases, the amount of credit funds of the organization may be too large or, conversely, low. This indicates the wrong organizational structure of the balance sheet. The above norm of the concentration ratio of borrowed capital is applicable for most domestic companies. Foreign organizations may have more loans in the structure of liabilities.
If the company during the study determined that the concentration coefficient is below normal, it means that it has accumulated a large number of borrowed financial sources. This is a negative factor for further development. In this case, the risks of default on debt increase. The cost of the loan will increase. It is necessary to reduce the amount of borrowed funds in liabilities.
If the indicator, on the contrary, is above the norm, the company does not attract additional resources for its development. It turns into a lost profit. Therefore, a certain amount of funds of third-party investors must be used by the company.
Calculation Example
To understand the essence of the presented methodology, it is necessary to consider an example of calculating the concentration coefficient of borrowed capital. The balance sheet formula given above is used during the study.
For example, the company completed the operating period with a total balance sheet figure of 343 million rubles. 56 million rubles were determined in its structure. long-term liabilities and 103 million rubles. short-term debt. In the previous period, the balance sheet currency amounted to 321 million rubles. Short-term liabilities were 98 million rubles, and long-term sources of financing - 58 million rubles.
In the current period, the concentration coefficient was as follows:
Cct = (56 + 103) / 343 = 0.464.
In the previous period, the same indicator was at the level of:
KKp = (98 + 58) / 321 = 0.486.
The result obtained is within the established norm. In the previous period, the company’s activities were largely financed from third-party sources. The company has prospects for attracting credit funds. The presented indicator must be calculated in conjunction with other settlement systems.
Financial leverage
The leverage (leverage) indicator allows analysts to correctly assess the dependence of the concentration coefficient of borrowed capital on the business environment. The combination of these two methods of calculation allows you to establish the level of efficiency of using available capital, the possibility of further increase due to credit sources.
Leverage shows the benefits that the organization receives when using borrowed funds. For this, the indicator of the return on equity of the organization is calculated. In the course of such a study, the need of the company to attract external sources of financing, as well as the current profitability of total capital, is established.
With proper use of loans, you can increase your net profit. The funds received are invested in the development and expansion of the business. This allows you to increase the total net profit. This is precisely the point of using paid investors' funds.
Profitability
The concentration ratio of borrowed capital must be considered in the general system of analytical calculation. Therefore, along with the presented methodology, other indicators are also determined. Their combined analysis allows us to draw the right conclusions about the structure of capital.
One such indicator is the return on borrowed capital. For the calculation, net profit for the current period is taken (line 2400 of form 2). It is divided by the amount of long-term and short-term loans. If the net profit is higher than the amount of paid sources, the company harmoniously uses funds received from outside investors in its activities.
The return on borrowed capital is investigated in dynamics. This allows us to draw conclusions about further actions.
Structure management
The concentration ratio of borrowed capital becomes the first indicator in the development of the financial strategy of the organization. Based on the calculations, the company management may decide on the further attraction of loans and credits.
During the planning process, the need for additional sources is determined. Risks, future profits, as well as ways to develop production are evaluated. The cost of investor capital is determined. Based on the research, the company decides on the possibility of additional borrowing.
Having considered what constitutes the concentration coefficient of borrowed capital, the methodology for calculating it and the approach to the interpretation of the result, you can correctly evaluate the balance sheet structure and decide on the further development of the organization.