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ŠUMARSKI LIST 7-8/2019 str. 75     <-- 75 -->        PDF

Business success for business owners depends on the achieved earning power but also on choosing methods of financing their companies. Summing up, the opportunity of choosing methods of financing can be observed through the financial leverage rule. The rule states that the income for business owners can be increased through an opportune use of debt, in comparison to the income they would yield if the debt was not used.
This paper first examines possible approaches to the analysis of the opportune use of a financial leverage and isolates the best approach as the one which excludes the burden of spontaneous financing. After that, an analysis of concrete data of the company Croatian forests, Ltd is conducted, for the period between 2005 and 2015. The company manages most forests and forest land (2 million ha) owned by the Republic of Croatia. The company’s headquarters is in Zagreb. The share capital is HRK 1.171.670.000.00.
The opportunity of using financial leverage is usually shown in the ratio of return on equity (ROE) and return on assets (ROA) (Table 1). The paper measures the ratio through the difference between ROE and ROA. If the difference is positive, the use of a leverage was opportune and vice versa (Figure 5). This type of assessment of opportune leverage use hides a burden of spontaneous financing which is a result of business decisions, and not the decision of methods of financing. Therefore, the first idea of the paper was to test the effectiveness of an analysis of an opportune use of a leverage through the modified indicator called the financial leverage effect (Expression 4, Figure 6). Through a deductive approach, which was also confirmed by the empirical research, we have concluded that this indicator also shows the same burden of the rating of the financial leverage use connected with spontaneous financing. For that reason, we modified the standard ROE/ROA analysis by using three cases. The first case started with complete assets and total liabilities and equity (Expression 5-7). The second case had only interest-bearing liabilities so that the total asset was decreased for the amount of non-interest-bearing liabilities, which means that only the asset financed by equity and interest-bearing liabilities was taken into consideration (Expression 8-10). The third case was constructed for emphasizing the influence of suppliers as one of the most significant forms of spontaneous financing (Expression 11-13). The definite rating of an opportune use of financial leverage is possible only through using the second case where the yield on equity and asset is observed only through the ration of ROE and ROA calculated for assets financed by equity and interest-bearing liabilities.
In the analyzed time period, Croatian forests Ltd., achieved a positive result and a positive net profit (Figure 1, 2, 4). One possible conclusion might be that the company’s business was successful. Naturally, the conclusion of a company’s business success should be based on whether the net profit is satisfactory from the owner’s point of view. An additional question, which was also the subject of this research, relates to the whether the use of a financial leverage in the analyzed company was opportune or not. The answer to that question is provided by the management’s assessment of the choice of financing mode. In other words, whether the company’s choice of financing has increased or reduced earnings for owners.
The standard analysis of the ROE and ROA ratio showed that the use of a leverage was opportune only between 2006 and 2007 and in 2015 (Figure 5). A somewhat different rating is given by the use of indicators of the financial leverage effect (Figure 6). The key difference between these two ratings is connected to the intensity of aggregated indicators. After the conducted analysis of the opportune use of financial leverage by modifying the calculation of ROE and ROA for spontaneous financing, a final conclusion can be made about the opportune use of financial leverage in Croatian forests Ltd. (Figure 7,  8).
Based on the definitive analysis of the opportunity to use the financial leverage (Case 2) in Croatian forests Ltd. in the period from 2005 to 2015, we concluded that, the general speaking, the management used the financial leverage poorly. In other words, the management used debt whose price was too high in relation to the company’s earning power. For this reason, the owners of the company made a smaller return than the company would have done, had it not been indebted. The only opportune financial leverage was used in 2015 where debt had a lower interest rate than the return on assets (Figure 8).
The reasons for the unsuccessful use of the financial leverage should not be sought only in excessive loans (Figure 3). A very low earning power had a huge impact on the unsuccessful use of the financial leverage (Figure 1, 2). The breakthrough point for poor earnings was 2012, from which steady growth is recorded. It is precisely as the result of this turnaround that the achieved level of the profitability of assets was high enough that the use of financial leverage can be assessed as opportune in the last year of the analyzed sample (Figure 8).
Key words: forestry, effect of financial leverage, return on equity, return on asset, cost of debt