LIMEN.2018.120

The question of capital structure is topical at all phases and stages of the enterprise’s
development. The general structure of the capital is characterized by the relative shares of own
funds and borrowings in the amount of the whole capital invested by the enterprise, as well as
by the ratios between the different sources of funds – equity and borrowings.
The ratio between equity and borrowings invested in the enterprise’s business shows the
amount of equity that covers one Bulgarian lev of the enterprise’s borrowings. In general, this
is the financial autonomy ratio. The reciprocal ratio of borrowings to equity is the enterprise’s
debt ratio. The value of this indicator determines the amount of borrowings that covers one
Bulgarian lev of equity.
The ratio between enterprise’s equity and borrowings results in different amounts of profit
available for the owners, as well as in different rate of return of equity. This means that the
values of the enterprise’s financial autonomy and debt ratios have impact on the equity rate of
return. Therefore, the use of borrowings for the enterprise’s business may be a factor that has
positive impact on the rate of return of equity and results in its increase. This impact is related
to the effect of the financial leverage.
This publication studies the effect of the financial leverage that determines the impact of funding
enterprise’s business with borrowings on the change of equity rate of return. The extent and
the direction of this effect are influenced both by the changes in the enterprise’s debt ratio, i.e.
the changes in its capital structure, as well as by the dynamics of difference between the
aggregate assets’ rate of return and the internal interest rate.
The subject matter of this publication is to study the dynamics of equity rate of return under the
influence of the direct factors describing the financial leverage effect.
The aim is to present a methodology for analysis and evaluation of industrial enterprises’ equity
rate of return in relation to the financial leverage effect that is theoretically justified, practically
feasible and useful for the financial management.
The methodology for analysis of equity rate of return is verified by the use of business data of
leading enterprises operating in the Bulgarian food canning industry.
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Analysis, financial leverage, equity rate of return, methodology
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Ivanova_THE EFFECT OF FINANCIAL LEVERAGE AND ITS EFFECT ON THE ENTERPRISE’S EQUITY RATE OF RETURN_pp_120-129