Final Long Term

8/13/2019 Final Long Term

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LONG TERM DEBT

Times interest earned ratio

It shows how many times the interest expenses are covered by the net operating income

(income before interest and tax) of the company. It is a long-term solvency ratio that

measures the ability of a company to pay its interest charges as they become due. It is

computed by dividing the income before interest and tax by interest expenses.

Analysis

Loans and borrowings are cheap source of finance primarily because the interest cost is

usually tax deductible, unlike dividend payments. However, interest costs are necessary

payments unlike dividends which are optional to management's intent. Therefore, the level

of debt financing must be at an acceptable level and should not exceed the point which

exposes an organization to unacceptably high financial risk.

Interest cover of lower than 1.5 times may suggest that fluctuations in the profitability could

potentially make an organization vulnerable to delays in interest payments. That is why

times interest earned ratio is of special importance to creditors. They can compare the debt

repayment ability of similar companies using this ratio.

Although profitability is not absolutely essential to maintain liquidity in the short term,

profitability of operations is crucial to enable an organization to meet its debt servicing

obligations in the long run. Management may also use interest cover ratio to determinewhether further debt financing can be undertaken without taking unacceptably high

financial risk.

Interpretation

Times interest earned in Sept-2007 - 1.58



Times interest earned in Dec-2010 - 1.25

The ratio is showing a declining pattern from 1.58 to 1.22 to 1.12.

Net earnings continuously going down. Interest payments have continuously increased. Debentures & bonds are redeemed and hence the rising interest. Reserves are being utilized in redeeming the debentures.


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The year 2012 show a loss of 851 mn with interest obligations shooting high to 970 mn.

Since the mandatory interest obligation has to be fulfilled even if the company is incurring

loss, the times interest earned ratio is less than 1, i.e. 0.12 (2012).

Fixed charge coverage ratio

Fixed charge coverage is a ratio that indicates a firm's ability to satisfy fixed financing

expenses, such as interest and leases.Higher value of fixed charge coverage means a greater

ability of a business to repay its interest and leases.

There is a declining trend in the fixed charge coverage which is interrupted by a substantial

fall from September 2007 and then the declining trend continues till 2012. When we

observe the components of the formula i.e. EBIT, interest paid and leases, we see that the

EBIT and lease payment figures demonstrate an decreasing trend till sep 2009 and then

increase in dec 2010 and again fall till 2012 whereas interest paid shows a increasing trend

till dec 2010; after which there is a gradual fall from 2011 but 2012 increase to 970.4. Thus

we can conclude that it is the EBIT that concludes the most to the fluctuation in fixed

charge coverage. Apart from that, the growth trend in intreast paid is proportionately

greater than lease payments which explains the gradual decrease in the fixed charge

coverage over the years.

Debt ratio

Is a ratio of total liabilities of a business to its total assets. It is a solvency ratio and it

measures the portion of the assets of a business which are financed through debt.

The debt ratio in all the six years is less than 1 which means that the company hasmore assets than debts.

The lower the company depends on debt for assets formation, the less risky thecompany is. The ratio indicates that the company is in a position of paying its debts.

Excessive debts results in very heavy interest and principle repayment burden. There is instability in the debt ratio % from 2008 to 2012, the % is increasing. This is

not a good sign as the more the debt ratio the higher the companys risk increases.

The borrowings from bank and foreign investors has reduced in 2012, whereas theother borrowings have increased this has impacted the debt ratio. The liabilities have

reduced.

Reserves and funds have reduced from 4214.40 in 2011 to 3568.00 in 2012. I.e. 15 %reduction. This shows that the reserves are paid, means that that the liabilities are

paid.

The other borrowings have roused from 2250.00 in 2011 to 5016.00 in 2012 i.e.123% rise that has increased the liabilities of the company. They must have


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borrowed these funds for operations but there is no rise in sales revenues in 2012.

Borrowing has increased the debt ratio.

When analyzing the balance sheet, it is seen that there is a rise in the intangibleassets in March 2012 it has gone up to 15.7 which was 0 in 2011. This explains that

this rise has contributed in assets, but at the same time ( see the above table)

investments have gone down in 2012 , inventories have gone up in 2012 and

deferred tax assets have increased drastically from 7.4 to 240.9 in 2012 this has

impacted the debt ratio to increase.

Debt Equity Ratio:

Trends of Debt : Equity Ratio

Period

Total

Liabilities Long Term Debts Shareholders

Debt :

Eqity

Fin

Year (Rs.Crs)

Value

(Rs.Crs)

% to Total

Liabilities

Equity

(Rs.Crs) Ratio

Sept'07 1546 281 18% 35.5 8

Sept'08 1383 385 28% 41.1 9

Sept'09 1518 490 32% 40.4 12

Dec'10 1637 479 29% 39.8 12

Dec'11 1878 537 29% 39.2 14

Dec'12 1756 612 35% 39.2 16

Definition: A measure of a company's financial leverage calculated by dividing its total

liabilities by stockholders' equity. It indicates what proportion of equity and debt the

company is using to finance its assets.

1) The debt equity ratio of 8 to 16 is a very high ratio, which indicates that the companyis using a very high level to finance its operations.

2) Very high level of debts is not acceptable because of the high interest burden itcreates for the company and its earnings. High interest burden reduces the earnings

of the company. However in the case of Videocon, the component of long term debt

as a percentage of total liabilities has been as low as 18% in sep 2007 & as high as


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35% in the year ending December 2012. Such a low percentage of long term debts

dos not affect the earnings of the company.

All in all the debt equity ratio depicts being high is not going to impact th

earnings of the company.

Final Long Term

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