Business Analysis of the applicability of the basic theory of leverage

[Abstract] operating leverage effect only explains the basic theory of corporate income tax profits greater than zero, that is when the corporate income tax profits greater than zero, the theory can explain the EBIT and sales in the same direction of change and EBIT rate of change is greater than the sales rate of change, and thus explain changes in sales to business arising from operational risks, but corporate income tax profits equal to zero, the situation there is less than zero, and even some business will be extreme cases. So when companies in several cases when the theory behind how to use? The theory is not an explanation, so the theory and practical application in the study had some limitations in the article on this issue, do a rough exploration in order to illustrate this theory in different situations in the enterprise use.

[Keywords] operating leverage, the empirical analysis, leverage existing state; apply analysis

First, review the basic theory of operating leverage effect

According to the cost of the state, within a certain range of production and sales, production and sales generally do not affect the increase in total fixed costs, but will reduce fixed costs per unit of product, thereby increasing the profit per unit of product, and to production and sales growth rate greater than the profit growth rate On the contrary, reduced production and sales, fixed costs per unit of product will increase, thereby reducing the profit per unit of product, and make the profit rate of decline is greater than the rate of decline in production and sales, so there is no fixed cost of product only under the conditions in order to make contributions benefit is equal to gross operating profit, the profit rate of change and synchronize production and sales increase or decrease the rate of change, but in reality this situation does not exist. leaving because of fixed costs of production and sales profit rate of change is greater than the rate of change of the law, which a phenomenon known as operating leverage. operating leverage refers to the expansion of sales (turnover conditions, due to operating costs in the fixed costs are relatively lower, the impact of faster growth in operating profit in a certain production scale, due to fixed cost does not increase sales (sales volume increases, and vice versa, with sales (sales volume increases, unit fixed costs will be borne by the relatively reduced, and thus bring additional revenue to the enterprise. also known as business risk operating risk, refers to the risks associated with business, especially the use of operating leverage is a result of exposure to changes in EBIT.

Affect business risk factors are: changes in product demand, product price changes, changes in variable costs per unit of product, changes in operating leverage, etc. operating leverage effect of the most comprehensive business risk, companies want to obtain the benefits of operating leverage, we need to bear the resulting business risk, operating leverage needed to make trade-offs between benefits and risks.

In order to quantify the effect of operating leverage, financial management and management accounting change in the profit rate is equivalent to production and sales (or sales multiple of the rate of change as "operating leverage", "operating leverage" and use the formula to be said .

Operating leverage, EBIT is the rate of change is equivalent to the rate of change in business volume and sales multiples.

Operating Leverage = EBIT change / change the volume of business sales
DOL = (△ EBIT / EBIT ÷ (△ S / S Formula 1
Reporting period, operating leverage = contribution margin base / base EBIT
DOL = (EBIT + F / EBIT or DOL = Tcm / (Tcm-F) formula 2
DOL for the degree of operating leverage, EBIT to EBIT, △ EBIT EBIT for the variation, S is sales, △ S is the change in sales, F is fixed costs, Tcm for the contribution margin.

As the presence of fixed costs, according to the formula DOL 2 degree of operating leverage is greater than 1.

The size of the business risk is often used to measure the operating leverage, operating leverage the size of the general use of operating leverage that it is the corporate interest and earnings before income tax rate of change in the ratio between the rate of change in sales.

First, it reflects the changes in profits and changes in the relationship between changes in sales.

Second, the greater the degree of operating leverage, operating leverage and the greater business risks.

Third, the fixed costs remain constant, the greater the sales, the smaller the degree of operating leverage, the smaller the business risk, whereas the opposite.

Fourth, when sales reach break-even threshold, the degree of operating leverage tends to infinity.

Fifth, in the other conditions unchanged, the higher product prices, the smaller the degree of operating leverage, the smaller the business risk, whereas the opposite.

Sixth, in the other conditions unchanged, the lower the unit variable cost product, the smaller the degree of operating leverage, the smaller the business risk, whereas the opposite.

The basic theory above shows corporate income tax only profits greater than zero, but corporate income tax profits greater than zero, zero, the situation there is less than zero, or even the business there will be some extreme cases. So when companies in several cases when the theory behind how to use? The theory does not give or can not be explained, so that the theoretical understanding and practical application in the study had some limitations in this paper will explore this issue to do some rough, to illustrate this theory in the case of business use in different .


Second, the empirical analysis of operating leverage

(A change in sales and EBIT and operating leverage changes in calculation and analysis
If a company produces only sell a product, fixed costs of $ 600,000, and the unit price of $ 10, unit variable cost of $ 4.


Take in Table 1 Sales S and leverage (Equation 2 and other related information drawn between the two curves shown in Figure 1.


According to the results in Table 1 and Figure 1 shows the curve:
1 in other conditions unchanged, changes in sales and EBIT of change in the same direction.

2 In other conditions unchanged, with sales increasing leverage DOL from negative to positive infinity and then to eventually converge to a steady decline which indicates leverage DOL is not always greater than 1. Specifically, sales of <100 million, EBIT is less than zero, DOL <0, sales = 100 million, EBIT equal to zero, DOL is infinite, with sales> 100 million, income tax before the profit is greater than zero, DOL> 1.

3 In other conditions unchanged, the EBIT is less than zero (a loss: When the 500,000 yuan <sales <1 million yuan when, | DOL |> 1, when sales = 50 million when, | DOL | = 1, when sales = 50 million when, | DOL | <1.

4. Leverage DOL is not always greater than 1, then shows EBIT is greater than the sales rate of change may not change and only under certain conditions, profit before interest and tax rate of change was greater than the sales rate of change.

(Two fixed costs and leverage the relationship computational analysis DOL
Take the example data, and the contribution margin = 1.2 million yuan when the analysis of changes in fixed costs F of the impact of leverage DOL, DOL = 120 / (120-F.

According to Table 2 painted DOL fixed costs and leverage the curve shown in Figure 2. Links to free download http://www.hi138.com According to the results in Table 2 and shown in Figure 2 curves found:
1 in other conditions unchanged, the leverage value of fixed costs on DOL.

2 In other conditions unchanged, with increasing fixed costs, leverage DOL by the continued increase greater than 1 is less than zero to infinity then the change process. Specifically, when the fixed cost of <120 million, leverage DOL> 1, with fixed costs decreasing, leverage DOL converges to 1, when the fixed cost = 120 million, leverage DOL is infinite, when the fixed cost of> 120 million, leverage DOL <0, with the increasing leverage of fixed costs DOL converges to 0.

3 When the 1.2 million yuan <fixed costs <240 million, leverage | DOL |> 1, when the fixed cost = 240 million, leverage | DOL | = 1, when the fixed costs> 240 million, leveraged coefficient | DOL | <1.

4 When the fixed costs ≠ 0, leverage DOL is not always greater than 1, then shows EBIT is greater than the sales rate of change may not change and only within a certain range of fixed costs in the profit before interest and tax rate of change was greater than the sales rate of change.


Third, the effect of operating leverage existing state and strength analysis

Through the above empirical analysis of operating leverage, operating leverage existing state and strength should note the following points.

(One when the company's EBIT is greater than zero (profit status
When business breakeven based sales of S0. When the sales of S> S0, the firm's EBIT is greater than zero, and leverage DOL> 1, there is operating leverage effect by Table 1, Table 2, Fig. 1, S 2 that sales at near break-even sales S0, leverage the value of a great and DOL is also a large variation, indicating the effect of operating leverage in this region significantly, changes in EBIT on sales is very sensitive, since With sales increasing leverage DOL values ​​greater than 1 but still small and its value changes gradually reduced, indicating an increase in sales from this region, the strong operating leverage effect will be weaker, the interest rate sensitive to changes in pre-tax profit on sales but not strong, when sales to large, leverage DOL values ​​converge to 1, in the process of operating leverage effect will be weak into does not exist, EBIT greatly reduced sensitivity to the change in sales.

(B when the company's EBIT equal to zero (break-even status
When sales of S = S0, the EBIT is equal to zero. At this time, sales grew at close to the left S0 S0, leverage DOL approaches negative infinity, sales from the right side tends to be greater than S0 S0, leverage DOL approaches positive infinity. Indicate that the operation infinite leverage, changes in EBIT on sales of the sensitivity of the infinite.

(Three when the company's EBIT is less than zero (a loss
When sales of S <S0, the EBIT is less than zero, according to Table 1 and Figure 1, when leverage DOL <0. To illustrate the problem, take the S in Table 1 is less than the break-even sales point S0 = 100 Data from Table 3 and drawn 3, as shown below.


According to Table 3 and Figure 3 can be proved in the other conditions unchanged, there is a sales S1 (in this case S1 = 50 million when the sales of S <S1, the leverage factor | DOL | <1, operating leverage effect is not exist, EBIT is not sensitive to the change in sales, sales growth that is faster than the speed reduction in losses, while sales of S = S1, the leverage factor | DOL | = 1, there is no effect of operating leverage, change in sales and EBIT margin the absolute value of the same rate, that rate of sales growth rate is equal to reduced losses, while sales of S> S1, the leverage factor | DOL |> 1, there is operating leverage, EBIT is very sensitive to changes in the sales, ie sales growth of small in reduced losses and speed.

(D) on fixed costs and operating leverage and strength analysis of the same state of existence (three, not repeat them here, as shown in Figure 2, Figure 4
(Five when the business in extreme situations
1 business in the state of closure, that is, when sales of S = 0, according to the formula 2 leverage DOL = 0.


2 business cease operation at the point that the product price is equal to unit variable costs at this time is not an operating loss of business or company the same according to the formula 2 leverage DOL = 0, note sales and profits has nothing to do.

3 in an extreme loss of business, that is the product price less than the unit variable cost. At this point the greater the sales volume of more losses. According to the formula 2 Leverage 0 <DOL <1, DOL can not explain leverage between sales and profits relationship.


CONCLUSIONS

In summary, I believe that the theory for the effect of operating leverage should be differentiated to understand and use.

First, when the company's EBIT is greater than zero (profitable, leverage DOL greater than 1, operating leverage effect exists. DOL can leverage the value of the actual calculation, analysis shows that the rate of change is greater than the profit before interest and tax sales rate of change and measure the size of business risk. The basic theory of factors affecting the leverage DOL analysis is correct and realistic.

Second, when the company's EBIT equal to zero (break-even status, leverage DOL infinity, EBIT changes in response to changes in sales for the most intense. If the business is profitable, the company is facing the greatest risk of loss, if an enterprise is losses, the profitability of the enterprises are facing the most likely.

Again, when the company's EBIT is less than zero (losses, leverage is less than zero DOL, DOL can not leverage the value of telling the actual calculation of this point should leverage DOL's actual calculated value of the absolute | DOL | sub | DOL | <1, | DOL | = 1, | DOL |> 1 shows three cases to analyze the sales growth and reduced losses of the business relationship, and | DOL | the size of the business risks facing the enterprise is the reverse relationship.

Finally, when the business is more than a few extreme cases, effects of operating leverage when the theory does not apply.


[References]
[1] Luo Fukai.'s Improved operating leverage theory [J]. Accounting Communications (integrated version, 2004 (03.

[2] Jia Wei, Ruan Wenbiao. Analysis of operating leverage improvement [J]. Accounting magazine, 2006 (35.

[3] Tang Guliang. Senior financial management [M]. Beijing, CITIC Publishing House, 2006.

[4] Wang Chemical Financial management [M]. Beijing, China Renmin University Press, 2003.

[5] Cui Yi. Operating leverage and financial leverage a prerequisite for analysis and application [J]. South China University of Technology (Natural Science Edition, 2001 (12.

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