THE ROLE OF FINANCIAL RISK IN MANAGING THE CAPITAL STRUCTURE AND PERFORMANCE OF RUSSIAN COMPANIES
Issues related to the formation and optimization of the capital structure are an important component of the company`s financial management system. The effectiveness of decisions depends on external and internal factors that affect the financial activities of the company, including financial risk. The article reveals the concept of financial risk and assesses its role in the analysis of the relationship between the capital structure and profitability indicators. It is established that the negative impact of the level of debt in the capital structure on the return on assets weakens as the financial risk increases, measured in terms of current liquidity coefficients and interest coverage. An increase in the debt burden leads to an increase in the return on equity when the company has enough funds to service the debt and the revenue variation is at an average level.
Keywords: capital structure, financial leverage, financial risk, return on assets, return on equity. Highlights:
♦ financial risk can be measured in different ways depending on whether the assessment is carried out by investors, shareholders or company managers;
♦ the nature of the impact of capital structure decisions on the company`s performance depends on the current level of financial risk;
♦ building up the share of debt financing in the capital structure leads to a reduction in the return on assets; with an increase in revenue variation, the negative impact increases; with a decrease in the values of liquidity coefficients and interest coverage, it decreases;
♦ if the financial opportunities of the company are sufficient to service the debt, and the revenue variation is at an average level, then it is profitable for it to increase the share of borrowed capital, as this will lead to an increase in the return on equity.
Galina A. Nekrasova, Senior Lecturer, Pitirim Sorokin Syktyvkar State University.