Information that Long Term Solvency Ratios - myassignmenthelp.com

Question: Write about theInformation that Long Term Solvency Ratios. Answer: Information that long term solvency ratios provides about the firm Long term solvency ratios help in evaluating the capital structure of the company as it shows proportion of each capital that is used by the management to finance the required assets. The ratios calculated in the long term solvency analysis help to provide the information on company ability to pay the interest on the borrowed capital and how much part of capital is covered with the cash. The main ratios that are calculated in the long term solvency analysis are total debt ratio, debt equity ratio, equity multiplier, long term debt ratio, time interest earned and cash coverage ratio (Moles and Kidwekk, 2011). In this report long term solvency analysis will be performed on the Company Walt Disney and its financial performance is been compared with industry average in order to make recommendation to the management if the Walt Disney. In addition to this trend analysis will also be performed in order to know the impact of each ratio over the years. The below tables shows each of the ratios computed for long term analysis and trend analysis of each ratio: Long term Solvency Ratios Walt Disney Industry Average Formula % Increase or Decrease Years 2015 2016 2017 2015-2016 2016-2017 Total Debt ratio Total Debt /Total Assets 0.495 0.53 0.58 7.07% 9.43% 0.69 Debt Equity ratio Debt /Equity 0.98 1.13 1.32 15.31% 16.81% 2.64 Equity Multiplier Total Assets /Total Equity 1.98 2.13 2.32 7.58% 8.92% 3.64 Long Term Debt ratio Long term debts /Total Assets 0.22 0.28 0.31 27.27% 10.71% 0.56 Time Interest earned EBIT/Interest 49.7 40.12 27.4 -19.28% -31.70% 11.23 Cash Coverage ratio (Earnings Before Interest and Taxes + Non-Cash Expenses)Interest Expense 58.58 47.26 35.8 -19.32% -24.25% 13.94 Total Debt Ratio: The ratio helps in assessing the leverage position of a company by providing an estimate of the total debt in comparison to the total assets. As this ratio shows total amount of debt that company owns in relation to total assets so if it increase year by year that it means company has taken more bank loans that has increased the amount of total debt. As it can be clearly seen form the above table that total debt ratio has been increasing from year 2015 to 2016 by 7.07% and from year 2016 to 2017 by 9.43%. The greater proportion of debt as compared to total assets shows poor capital structure of the company. The industry average is no doubt more that the company total debt ratio but management must look after to reduce the debt proportion in future years (Brealey, Myers and Marcus, 2007). Debt-Equity Ratio: It is a financial ratio used for proving an estimate of the equity and debt used by a company for financing its assets. The main purpose of this ratio is to find out debt and equity capital proportion at the end of particular year. As debt reflects the leverage capital and bears the charge on company profits that it must be reduced as much as possible. It has been found that there has been more that 15% increase in debt equity ratio in year 2016 and 2017 as compared with their respective previous years. So both debt equity ratio and total debt clearly indicates that capital structure of Walt Disney is not sound and there need to take necessary steps by the management (Arnold, 2013). Equity Multiplier Ratio: This ratio indicates the amount of fixed assets that has been financed by the equity capital. If this ratio got increases on year to year basis that it reflects that there has been increase in equity capital for financing the assets of the company. Looking at the above table it can be find that equity multiplier has been increased in both 2016 and 2017 that shows minor increase in equity capital for financing the assets of the company. The equity multiplier of industry is 3.64 times which is almost one times more than the company equity multiplier in year 2017 that indicates poor utilization if equity for financing the assets of the company (Ross, Jaffe and Kakani, 2008). Long-term debt ratio: It provides a measure of the percentage of the assets of a company financed with loans or other long-term financial obligations. The above table clearly shows that Walt Disney has taken the bank loan or any long term debt in year 2016 that has raised the long term debt by 27.27% in year 2016. The industry average is just double the financial leverage ratio of Walt Disney that shows company has adequate capital structure but regular rise in debt without paying them is not for the company in future years. Time-Interest earned: It provides a measure of the ability of a company to meet its debt obligations. This ratio is constantly decreasing as seen from the above table that means the income or profits available to paid the interested fees on debt capital has been regularly decreasing due to increase in interest payment amount (Brigham and Michael, 2013). Cash-Coverage ratio: It is used for determining the amount of cash available within company to meet the interest expenses on its debt. It seems that cash availability to finance or to pay the interest fees has been constantly decreasing. It reflects that there can be shortage of cash in future years if company will raise its debt capital in rapid speed without paying them. The company ratio is greater than industry average that shows positive financial structure of the company (Bromwich and Bhimani, 2005). References Arnold, G.Corporate financial management. Pearson Higher Ed. 2013. Print. Brealey, R., Myers, S.C. and Marcus, A.J. FundamentalsofCorporate Finance. Mc Graw Hill, New York. 2007. Print. Brigham, F., and Michael C. Financial management: Theory practice. Cengage Learning. 2013. Print. Bromwich, M. and Bhimani, A. Management accounting: Pathways to progress. Cima publishing. 2005. Print. Moles, P. and Kidwekk, D. Corporate finance. John Wiley sons. 2011. Print. Ross, A., Jaffe, J. and Kakani, R.K. Corporate Finance. Pearson. 2008. Print.