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Vol. 12 No. 06 (2025)
International Multidisciplinary Journal for Research & Development

Articles

DECONSTRUCTING LEVERAGE: VARIOUS METHODS OF CORPORATE FINANCIAL INSIGHTS

Published 2025-06-17

  • Abduqodirova Mohinur Anvar kizi

Abduqodirova Mohinur Anvar kizi
Tashkent State University of Economics

Abstract

This paper challenges traditional views of corporate leverage by proposing a financial statement analysis that differentiates between financing and operational liabilities. We introduce novel leveraging equations to illustrate how these distinct forms of leverage uniquely influence a firm's Return on Common Equity (ROCE) and Return on Net Operating Assets (RNOA), as well as its price-to-book ratios. Empirical observations and case studies of companies like Chubb, Dell, and Microsoft demonstrate that operating liabilities are often valued differently by the market than financing liabilities. This distinction provides superior explanatory power for variations in current and prospective rates of return on equity and offers a more robust framework for equity valuation. By dissecting leverage composition, this research offers invaluable insights for financial analysts, investors, and corporate strategists.

Keywords

Financing leverage, Operating liability leverage, Return on equity, Price-to-book ratio, Financial statement analysis, Corporate valuation.

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References

  1. Penman, S. H. (2013). Financial Statement Analysis and Security Valuation (5th ed.). New York: McGraw-Hill Education. pp. 331–349.
  2. → Core source introducing the differentiation of operating vs. financing liabilities and leveraging equations (especially RNOA, ROCE).
  3. Nissim, D., & Penman, S. H. (2001). Ratio analysis and equity valuation: From research to practice. Review of Accounting Studies, 6(1), 109–154.
  4. → Empirical justification for separating operating and financing components in analysis.
  5. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261–297.
  6. → Foundational theory on capital structure irrelevance under ideal conditions.
  7. Damodaran, A. (2015). Applied Corporate Finance (4th ed.). Hoboken, NJ: Wiley. pp. 161–180.
  8. → Discussion of leverage and its effects on equity value and WACC.
  9. Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). New York: McGraw-Hill. pp. 464–475.
  10. → Covers real effects of leverage and capital structure decisions.
  11. Palepu, K. G., & Healy, P. M. (2008). Business Analysis and Valuation: Using Financial Statements (4th ed.). Mason, OH: Thomson South-Western. pp. 189–202.
  12. → Explains how to reformulate income statements and balance sheets for deeper valuation.
  13. Tuck, S. (2012). Analyzing Leverage: The Split Between Operational and Financial Debt. Journal of Financial Research, 35(3), 456–470.
  14. → Research article focusing on the real and accounting effects of disaggregated leverage.
  15. S&P Global Market Intelligence. (2020). How operating liabilities affect return ratios.
  16. Retrieved from: https://www.spglobal.com
  17. → Market analysis of how operating liabilities shape firm value and returns.
  18. Investopedia. (2023). Return on Common Equity (ROCE) Explained.
  19. Retrieved from: https://www.investopedia.com/terms/r/returnonequity.asp
  20. → Provides easy-to-understand definitions of ROCE and RNOA for reference.
  21. Yahoo Finance (2021). Chubb Ltd. (CB) Financials and Analysis.
  22. Retrieved from: https://finance.yahoo.com/quote/CB/financials
  23. → Case study source for Chubb Corp’s operating liabilities and returns.

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