SOLVENCY RATIOS

SOLVENCY RATIOS - SOLVENCY RATIOS : Equity Ratio of Ht....

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SOLVENCY RATIOS :: Equity Ratio of Ht. Leela : (Shareholders Funds / Total Assets) Equity Ratio (Ht. Leela) 0 0.1 0.2 0.3 0.4 0.5 0.6 Mar '05 Mar '06 Mar '07 Mar '08 FY 2005-08 equity ratio Ht. Leela As we can from the chart above the equity ratio has been decreasing it was strong at 52.7% in FY05 and drove down to 31.4% in FY08 .Lets a take close look on the factors effecting the equity ratio. In FY05, the shareholders of the firm were contributing 52.7% in the total assets of the firm reflecting a strong solvent position with respect to equity ratio. In FY06, the shareholders stake increased by 7.33% from FY05 but the total assets increased by 29.15% which was much greater than the rate at which shareholders fund increased, therefore the difference had to be compensated by introducing more debt. In FY07, the shareholders fund increased by 9.36% from FY06 and the total assets decreased by 1.4%. This decrease in total assets and the increase in shareholders equity gives a positive trigger to the equity ratio and increases the equity share in total assets by 10.96%. In FY08, the shareholders stake increased by 3.2% from FY07 and there was a quantum increase in the total assets i.e. 59.97% compared with the previous year. The increase in shareholders stake was nothing in comparison with quantum increase in total assets, therefore the firm covered up the substantial difference through inducing more debt into its capital structure . Mar '05 Mar '06 Mar '07 Mar '08 Ht. Leela 0.52732 0.438231 0.486084 0.313628
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This means on an overview, the stake of the shareholders in the total assets has been decreasing and the percentage of debt contributing in the total assets has been increasing. This reflects a weak sign for the solvency of the firm as it has introduced more debt into its capital structure, which in turn entails greater risk for the creditors in the long tern as the debt-burden has been increased by 195.8% from FY05 to FY06 . COMPARISON OF EQUITY RATIO WITH INDUSTRY AND E.I.H : Equity Ratio Chart (Industry vs Ht. Leela vs E.I.H) 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Mar '05 Mar '06 Mar '07 Mar '08 FY 2005-08 equity ratio industry ht leela eih As we can observe from the chart above that Ht. Leela has always been below the industrial standards as well as below E.I.H in its equity ratio. It had a strong equity position 52.7% in FY05 but after then started to deteriorate and in FY08 reached the level of 31.4% of the total assets. This shows that the firm’s total assets have increased quantumly and it outperforms the percentage increase in its networth. It has introduced a large amount of debt in its capital structure so as to finance its increasing total assets needs. The firm has to put more emphasis on its sales turnover so as to cover-up the increased debt-burden. Further we have to analyze ratios relating to the composition of total assets more carefully . In case of E.I.H which is maintaining a strong equity ratio position from FY05 to FY08 as
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This note was uploaded on 11/15/2011 for the course ACCOUNTS 231 taught by Professor Majidkhan during the Winter '11 term at IIPM.

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SOLVENCY RATIOS - SOLVENCY RATIOS : Equity Ratio of Ht....

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