Debt bearing ratio Debt int int Equity rs Shareholde Debt bearing ratio Equity

Debt bearing ratio debt int int equity rs shareholde

This preview shows page 6 - 10 out of 14 pages.

Debt bearing ratio Debt ' _ int_ _ int_ _ Equity rs Shareholde Debt bearing ratio Equity Debt ' _ int_ _ / assets total s liabilitie total ratio Assets s Liabilitie _ _ _ /
Image of page 6
10/9/2019 7 ASSESSING FINANCING MANAGEMENT INTEREST COVERAGE RATIO Expense Interest Expense IncomeTax Expense Interest NI Coverage Interest _ _ _ _ Measures how many times a firm’s net income before interest expense and income taxes (EBIT) exceeds its interest expense. Interest coverage ratios less than 2.0 suggest a risky situation E.g. Minh Phu Seafood Corp. (HOSE: MPC) is a Vietnamese shrimp producer. The capital structure and its interest coverage are as follow: Ticker: MPC 2010 2011 2012 2013 * Debt / Equity 2.55 4.64 4.88 5.02 * LT Debt / Equity 0.85 1.29 0.94 0 * Total Liabilities / Total Assets 0.64 0.74 0.78 0.73 * Interest Coverage 3.6 1.83 1.08 2.46 OVERALL PROFITABILITY ROE ROA OVERALL PROFITABILITY ROE VS. ROA Equity rs Shareholde Common Avg div pref NI ROE ' _ _ . Assets Total Avg t NI ROA _ _ ) 1 int( Rate earned on shareholders’ equity (ROE): measure a firm’s ability to generate return on shareholders’ investment: Rate earned on total assets (ROA): measure a firm’s ability to generate return on total assets
Image of page 7
10/9/2019 8 OVERALL PROFITABILITY DUPONT ANALYSIS ROE = ROA x LEVERAGE NI NI SALES ASSETS EQUITY ASSETS ASSETS EQUITY = x x NI NI ASSETS EQUITY ASSETS EQUITY = x PROFITABILITY DIFFERENTIATION LEVERAGE ROE > ROA when ROA exceeds the cost of debt ASSETS TURNOVER LOW-COST E.g. Saigon General Service Corp. (HOSE: SVC) is a retail trading company in automobile and real estate. What strategy do you expect SVC to follow? 2009 2010 2011 2012 2013 * ROE 14% 12% 11% 6% 8% * Net margin 3.2% 2.1% 1.3% 0.8% 0.9% * Asset T/O 1.72 1.77 2.26 1.99 2.35 * Leverage 2.54 3.22 3.68 3.7 3.78 high-value strategy unprofitable product line excess capacity @ high FC excess SG&A Leverage shows the extent to which firm relies on debt financing in its capital structure Since cost of debt is typically less than cost of equity, it is optimal for firm to use some debt in their capital structure to take advantage of leverage Given that increases in financial leverage increase ROE, why are all companies not 100% debt financed? Analysis of LEVERAGE The answer is that: debt is risky Increased risk increases the expected return investors require to provide capital to the firm Higher financial leverage also results in a higher interest rate on the company’s debt S&P’s and Moody’s ratings partly determine the debt’s interest rate: lower quality ratings yield higher interest rates. If all else equal, higher financial leverage lowers a company’s debt rating and increases the interest rate it must pay Analysis of LEVERAGE
Image of page 8
10/9/2019 9 ASSESSING LIQUIDITY & CASH FLOW STATEMENT ANALYSIS Short-term liquidity management Cash flow statement analysis Sheds light on a firm’s ability to pay for obligations that come due during its operating cycle (e.g. wages, purchases of inventory, ..) Common measures used include: Current ratio Quick ratio CCC CFO to liabilities ASSESSING LIQUIDITY MANAGEMENT
Image of page 9
Image of page 10

You've reached the end of your free preview.

Want to read all 14 pages?

  • Spring '16
  • Ms.Phan Ngoc Anh

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes