Essay About Book Leverage And Interest Cover

Long Term Assets
Assets. Long term assets are productive capacity of the business and intended for use in the business on a continuing basis. In contrast short term assets are intended for sale and revolve as part of the trading cycle. A lot of tangible assets means capital intensive. Significant intangible assets might result from acquisition of another companies.Standard Chartered is very capitalized for the bank, with an equity ratio 7.4%. In IS of a bank bad debt provisions might be significant amount, especially in economic downturns.Capital employed=Net debt + shareholders funds (CE). Book leverage= Net Debt/CEROCE=EBIT/Average capital employed – pretax measure of WACCROE=Earnings/Average equity shareholders funds Shareholders funds=minorities, pref. shares, paid share capital, reserves and minus treasury stock.  Preference shares are debt likely, unless they are: non-cumulative, participating (ability to get upside), irredeemable (so that they are not repaid early). Interest cover=EBIT/Net interest payable (be careful whether EBIT includes interest receivable or not). Sometimes analyst may include scheduled repayments of principal to denominator. Cash interest cover=EBITDA/Cash net interest paid (watch out: company’s ability to meet interest bill depends on factors such as how much cash and liquid assets it has, the willingness of the banks to lend more and so forth), so coverage ratio describes relationships between what company earns and its interest commitments. Link between coverage ratio and financial distress is covenants in the bonds. Vulnerability of bs accounting in calculation of book leverage is one reason for the popularity of interest cover measures. But instead we now need to be careful about income-statement accounting: Capitalisation of interest, the use of discounted or zero coupon debt would potentially understate the interest payable figure, if preference shares included in leverage calculation, include it in interest coverage calculation. Market leverage=Value of net debt/Enterprise Value  Operating leverage=Fixed cost/Totat cost. In high or low operating leverage case, the tax shield softens the decrease in absolute terms. Companies with high operating leverage tend to have more volatile profits after tax. On the upside, companies with high oper. Leverage experience disproportionate improvement in profits when sales increase. Financial leverage adds to volatility of profits, i.e. financial leverage amplifies the volatility in sales, it makes earnings and return on equity more variable. ROE=Aftex-tax ROCE + D/E (After tax ROCE – Rd (1-T). In case D=0 ROE=After tax ROCE. The higher D/E ratio, the greater the uplift. Reverse also applies, if the after tax ROCE is below after tax cost of debt, leverage depresses the ROE further. Equity prefers 100% leverage. The equityholder has a call option over the company. While financial leverage increases the ROE, it increases the volatility of earnings. GAAP tries to police of mechanisms of borrowing without appearing to borrow or off balance sheet financing. However off balance sheet financing will not reduce volatility of earnings because it simply shifts high financing leverage to high operating leverage. Low debt is possibility of hostile acquisition and missing out of tax shield.