COURSES NO.

5 & 6 RISK ANALYSIS AT THE COMPANY LEVEL

1. Risk Analysis at the Company Level. The Exploitation Risk 2. Risk Analysis at the Company Level. The Profit Risk.

1. RISK ANALYSIS AT THE COMPANY LEVEL. THE CALCULATION OF THE EXPLOITATION RISK
In any type of business, the essential issue is the determination of the minimum degree of use of the production capacities that ensure the income covering the expenses. We start from the equation: CA (CV+CF) = 0 where: CA= the turnover or production (Q) CV = the variable costs CF = the fixed costs The equation could be more suggestive in order to describe an economic activity, thus: CA = CV+CF + P where: P = the expected profit To analyse the exploitation or operational risk (the possibility of not totally recovering the total expenses from the realized income) we can use two models: A) The analysis using the safety interval (or the position indicator) where: IS =

CAMX CAmn CAMX

where:

Example: CAMX= 10,000 CAmn = 9,000 It results that IS =

IS = the safety interval CAMX = the maximum turnover CAmn = the minimum turnover

10 ,000 9,000 100 10 % 10 ,000

A safety interval of 10% that must be interpreted with discernment according to the uniformity of the evolution of the companys turnover and expenses. We consider that the position of the turnover according to the critical point has the following significance: < 10%, the company is in a stable condition; between 10% - 20%, the company has a relatively stable condition; > 20%, the company is in a comfortable condition.

b) The analysis using the exploitation leverage coefficient (coefficient of exploitation lever), where: KL =
CA CV GROSSMARGI N CF CF

When < 1, we deal with the exploitation risk; in this regard, the company cannot cover its expenses from its income, so it cannot recover the production factors, entering the area of bankruptcy risk. For the calculation of the profit risk or of the risk concerning the fact that the company does not realize the activity volume generating the necessary profit so as to cover the dividends required by the capital owners, we use the indicator minimum turnover for dividend payment (CAminim).

where: KL = the exploitation lever coefficient CA = the turnover CV = the variable costs CF = the fixed costs.

2. Risk Analysis at the Company Level. THE CALCULATION OF THE PROFIT RISK
The Profit Risk is determined on CAmin In order to determine CAmin , the following steps are to be followed: A) determining the dividends requested by shareholders: D=

Ks Rd 100

where:

D = the volume of dividends; Ks = the social capital; Rd = the requested dividend rate

B) determining the net profit Pn = D + (

CPF 100 CPF ) 100 where: CPF = the profit quota belonging to the company

It is necessary to calculate Pn because the dividend is ensured from the net profit. C) Determining the gross profit according to the relation: PB = Pn + (

This indicator is necessary because the net profit has as source the gross profit. D) Determining costs, thus:

CI 100 CI

) Pn

where: PB = the gross profit; CI = the rate of profit tax

PB C = RRC 100

where: C = the cost related to turnover, RRC = the profitableness rate to costs, calculated below: ??????????????????????????

This index is necessary to calculate the minimum turnover ensuring the profit necessary to realize the dividends required by shareholders.

E) Determining the minimum turnover (CAminim) thus:

CAminim = C + PB
F) Determining the necessary period of time to realize the minimum turnover, thus: Ca monthly scheduled

CAp = 12

where:

Cap = the turnover scheduled for the respective year

and the necessary period of time to realize the minimum turnover (T) is calculated as follows: T=

CAmin CAL

where: CAL = the monthly scheduled turnover

CASE STUDY
In 2005, The company ELECTRON S.A. ran a business described as follows: The social capital (Ks) = 2,500 million lei; The required dividends are equal to the bank interest rate (rd = 30%); The profit quota belonging to the company (CPF) = 75%; The profit tax quota (CI) = 25%; The profitableness rate to costs RRC(PB/C) = 20%; The yearly scheduled turnover = 30,000 million
Solution: The required dividend (D):
D = Ks rd =

2,500 30 750 100

million lei

The net profit (Pn): Pn = D + (

75 CPF )D = 750 + ( )750 = 3,000 million lei 100 75 100 CPF

The gross profit (PB):

PB = Pn + ( costs (C): C=

CI 100 CI

)Pn = 3,000 + (

25 100 25

)3,000 = 3,990 million lei

CAminimum = C + PB = 19,950 + 3,990 = 23,940 million lei The period of time in which the CAminim for ensuring dividends:

PB = 3,990 20 RRC 100 100

= 19,950 million lei

CAp 30,000 2,500 million lei 12 12 CAm in 23,940 9.5 months, so CAminim is realized at the half of October. T= CAL 2,500
CAL =