Theoretical characteristics of using leverage instruments in the context of rural entrepreneurship

Abstract

Today, the matters pertaining to regional and urban development in the EU are increasingly integrated into EU development plans and strategies. The EU actively facilitates regional development by supporting the development of small and medium-sized enterprises in the regions to contribute to employment, education and social integration. The strategic goal of the National Development Plan of Latvia 2021-2027 is to promote also regional development in Latvia in order to ensure long-term balanced growth in the country. Promoting entrepreneurship in the regions is of great importance, as Latvia is still one of the countries in the European Union experiencing unbalanced regional development and having socio-economic disparities. Consequently, financial performance and financial stability play an important role in sustainable business development. Rural entrepreneurs whose business is seasonal often lack an awareness of the role of financial leverage degrees, which could lead to making wrong decisions. Performing an assessment of the degrees of financial leverage could be useful not only in a situation when experiencing a business expansion but also when a business decline occurs, which is specific to rural entrepreneurship. A hypothesis of the present research is based on the authors’ opinion that by meaningfully applying the degrees of financial leverage, it is possible to enhance the financial performance of enterprises, which is particularly important for rural entrepreneurship. The aim of the research is to define the degrees of financial leverage – the degree of operating leverage (DOL), the degree of financial leverage (DFL) and the degree of combined leverage (DCL) – as measures of financial performance of enterprises and classify the principles of measure assessment in relation to whether the indicator percentage changes used in financial leverage calculations are positive or negative. The research employed the following methods: induction – to make scientific assumptions and identify similarities based on individual elements – and deduction – to logically systematize and explain empirical data. Applying the empirical and logical construction methods, the authors analysed six different theoretically possible situations, gave six different examples, defined and classified the principles of leverage degree assessment as different (positive and negative) in relation to the indicator percentage changes used in financial leverage calculations.