The creation of value through the use of a mix of financing and financial assets.

Have you ever thought about how some companies manage to maximize their profitability while optimizing their financial resources? The answer often lies in their ability to use a mix of financing and financial assets. In this article, I will show you how, by wisely combining your financing structure with your financial assets, you can create significant added value for your business.

The financing mix refers to the balance between debt and equity that the company uses to finance itself. Finding the right balance is crucial to minimizing the Weighted Average Cost of Capital (WACC).

– Debt: Often cheaper due to the tax-deductibility of interest payments. However, excessive debt can increase the risk of bankruptcy.
– Equity: More expensive because shareholders demand a higher return. However, they offer better resilience in times of difficulty.

Value is created when the cost of credit is low, allowing for investments that must have a significantly higher rate. A viable project must present a return on investment greater than this cost. Why? A loan commits you, and you must repay it. Therefore, you must ensure that you can repay it. The goal is also to make a profitable operation.

Financial assets, whether stocks, bonds, mutual fund shares, private equity shares, gold funds, stablecoins, or cash, are key levers for increasing a company’s value. The idea is to use financial assets by raising debt on these assets.

– Direct Assets: Their return must be higher than the financing rate.
– Liquidity Management: Having cash available to seize investment opportunities or manage unforeseen events. This can also be a form of investment aimed at strengthening or securing value creation. It is also recommended to hold liquidity.
– Collateral for Financing: Using these assets as collateral to obtain one or more financings.

The financial leverage effect is powerful. By using debt to finance assets whose return exceeds the cost of debt, the company aims to create value.

SIMPLIFIED EXAMPLE:
Consider a company with €100 in equity and a project worth €200 that returns 10% per year.

1. Without leverage: Investment of €100, return of €10. Return on equity: 10%.
2. With leverage: Borrowing of €100 at 5%, total investment of €200, gain of €20, interest payment of €5, net profit of €15. Return on equity: 15%.

This leverage effect enhances profitability as long as asset returns exceed the cost of debt. We wish to provide reasoning through this example. We remind you that every financial operation involves risks.

Value creation involves:

– Minimizing financing cost through an efficient capital/debt mix;
– Maximizing asset returns by aiming for a return higher than the cost of financing.

To maximize your company’s potential, mastering the balance between financing mix and financial assets is crucial. The aim of this article is to inform you and broaden your knowledge. It is by no means to encourage or suggest this possibility is « magical. » No, there are risks that you need to understand. There is also the fact of using financing. A loan commits you, and you must repay it. Therefore, you must ensure that you can repay it.

Risks exist because the value of your assets can decrease at any time. The economic situation can deteriorate, and you must also consider this possibility.

We wanted to talk to you about this possibility and provide you with information so that you can be aware and assess all the risks.