Q5 (b) Ratios and Interpretation of Accounts
Debenture Holders
[2010, 2006, 2001]
Debentures are loans that are usually secured and are said to have
either fixed or floating charges with them.
A secured debenture is one that is specifically tied to the financing
of a particular asset such as a building or a machine. Then, just like
a mortgage for a private house, the debenture holder has a legal
interest in that asset and the company cannot dispose of it unless
the debenture holder agrees. If the debenture is for land and/or
buildings it can be called a mortgage debenture.
Debenture holders have the right to receive
their interest payments before any dividend is
payable to shareholders and, most importantly,
even if a company makes a loss, it still has to
pay its interest charges.
If the business fails, the debenture holders will
be preferential creditors and will be entitled to
the repayment of some or all of their money
before the shareholders receive anything.
Key Questions and concerns
Key Ratios
Dividend Policy
Dividend Cover
What is the Dividend Cover? Are the ordinary shareholders getting
proportionally more of the profits?
Shouldn’t more of the profitsbe retained for the debenture holders?
Dividend per Share
What % of the profits is given out in dividends?
Also check out the changes in share price.
Security – Real Value of the Assets
Debentures are secured on the fixed assets---re they big enough to
act as security for the loan?What is the REAL VALUE of these
assets?What about Intangibles and Investments?
Profitability
ROCE
Return on Capital Employed – compare over 2 years
Compare with return on risk-free investments in 2014 approx
3.75% ( Govt Bonds)
Liquidity
Current ratio
Calculate the Acid Test (Quick) Ratio and compare over 2 years.
Also Current ratio.
Quick (Acid Test ) Ratio
Will the company have difficulty paying its debtsfrom Liquid assets
( CA-Stock)?
Debenture holders worried because cash not available to pay
interest in short time, and repay loan in long-term
Gearing
Gearing ratio
Is the company low or highly geared?
What is the Fixed Interest capital as a % of capital Employed. The
higher the gearing, the worse for the Debenture holders, as there is
more fixed interest/Pref Divs to be paid out of profits.
Interest Cover – compare over 2 years – if it is lower its worse for
the Deb Holders.
Interest Cover
Sector
N/A
Put the sector the company is working in in the context of the wider
industry and the economy of the country, and any other prospects
for the company. Short term v long term
Debenture Redemption Reserve
Has any money been ser aside for the future repayment of the
Debenture?How long till redemption? Have the holders any need to
be worried?
See Reserves in “Financed By”
Q5 (b) Ratios and Interpretation of Accounts
Shareholders
[2012, 2009, 2008, 2007, 2005]
Key Questions and concerns
Key Ratios
Dividend Policy
Dividend Cover
What is the Dividend Cover? Are the ordinary shareholders getting
proportionally more of the profits?
Shouldn’t more of the profitsbe retained for the debenture holders?
What % of the profits is given out in dividends?
Also check out the changes in share price.
Dividend per Share
Security – Real Value of the Assets
Debentures are secured on the fixed assets---re they big enough to
act as security for the loan?What is the REAL VALUE of these
assets?What about Intangibles and Investments?
Profitability
ROCE
Return on Capital Employed – compare over 2 years
Compare with return on risk-free investments in 2014 approx
3.75% ( Govt Bonds)
Liquidity
Current ratio
Calculate the Acid Test (Quick) Ratio and compare over 2 years.
Also Current ratio.
Will the company have difficulty paying its debtsfrom Liquid assets
( CA-Stock)?
Quick (Acid Test ) Ratio
Debenture holders worried because cash not available to pay
interest in short time, and repay loan in long-term
Gearing
Gearing ratio
Is the company low or highly geared?
What is the Fixed Interest capital as a % of capital Employed. The
higher the gearing, the worse for the Debenture holders, as there is
more fixed interest/Pref Divs to be paid out of profits.
Interest Cover
Interest Cover – compare over 2 years – if it is lower its worse for
the Deb Holders.
Sector
N/A
Put the sector the company is working in in the context of the wider
industry and the economy of the country, and any other prospects
for the company. Short term v long term
Debenture Redemption Reserve
Has any money been ser aside for the future repayment of the
Debenture?How long till redemption? Have the holders any need to
be worried?
See Reserves in “Financed By”
Q5 (b) Ratios and Interpretation of Accounts
Bank Loan Application [2011, 2007]
A bank will essentially be looking for the following :
What is the loan for? Can the interest be repaid annually?
Can the loan itself be repaid over the term agreed?
Key Questions and concerns
Key Ratios
Dividend Policy
Dividend Cover
What is the Dividend Cover? Are the ordinary shareholders getting
proportionally more of the profits?
Wouldn’t more of the profits have to be retained for the payment of
loans and interest?
What % of the profits is given out in dividends? Would the
repayment of the loan be jeopardized by the dividend policy?
Also check out the changes in share price.
Dividend per Share
Security – Real Value of the Assets
Debentures are secured on the fixed assets---re they adequate / big
enough to act as security for the loan? Are any of the Fixed Assets
already secured on the Debentures?What is the REAL VALUE of
these assets?What about Intangibles and Investments?The bank
manager would have to question these valuations
Profitability/ ROCE
ROCE
Is the company profitable? Compare the current ROCE with the
rate of interest on the loan – if ROCE<Rate of Interest then
questionable.
Liquidity
Current ratio
Calculate the Acid Test (Quick) Ratio and compare over 2 years.
Also Current ratio.
Will the company have difficulty paying its debts including extra
interest from Liquid assets ( CA-Stock)?
Bank Manager may be concerned because cash may not available
to pay interest in short time, and repay loan in long-term.
Remember Debentures have to be repaid in 4 years, so cash will
also have to be found for this.There is no Debenture Redemption
Reserve
Quick (Acid Test ) Ratio
Gearing
Gearing ratio
Is the company low or highly geared?
What is the Fixed Interest capital as a % of capital Employed. The
higher the gearing, the worse for the bank, as there is more fixed
interest/Pref Divs to be paid out of profits.Will the new loan make
the company highly geared? - YES
Interest Cover – compare over 2 years – if it is lower its worse for
the bank – loan will make it worse again.
Interest Cover
Sector
N/A
Put the sector the company is working in in the context of the wider
industry and the economy of the country, and any other prospects
for the company. Short term v long term – its all about whetehr the
loan can be serviced and repaid, probably in 5 years time.
Purpose of loan
Why is loan required ? future expansion – exactly what??Can this
expansion generate enough income to service loan? Where is the
Business Plan??
Relate to “Sector”
Q5 (b) Ratios and Interpretation of Accounts
Prospective Shareholders
[2013, 2004, 2003]
Key Questions and concerns
Key Ratios
Dividend Policy
Dividend Cover
What is the Dividend Cover? Are the ordinary shareholders getting
proportionally more of the profits?
Shouldn’t more of the profitsbe retained for the debenture holders?
What % of the profits is given out in dividends?
Also check out the changes in share price.
Dividend per Share
Security – Real Value of the Assets
Debentures are secured on the fixed assets---re they big enough to
act as security for the loan?What is the REAL VALUE of these
assets?What about Intangibles and Investments?
Profitability
ROCE
Return on Capital Employed – compare over 2 years
Compare with return on risk-free investments in 2014 approx
3.75% ( Govt Bonds)
Liquidity
Current ratio
Calculate the Acid Test (Quick) Ratio and compare over 2 years.
Also Current ratio.
Will the company have difficulty paying its debtsfrom Liquid assets
( CA-Stock)?
Quick (Acid Test ) Ratio
Debenture holders worried because cash not available to pay
interest in short time, and repay loan in long-term
Gearing
Gearing ratio
Is the company low or highly geared?
What is the Fixed Interest capital as a % of capital Employed. The
higher the gearing, the worse for the Debenture holders, as there is
more fixed interest/Pref Divs to be paid out of profits.
Interest Cover
Interest Cover – compare over 2 years – if it is lower its worse for
the Deb Holders.
Sector
N/A
Put the sector the company is working in in the context of the wider
industry and the economy of the country, and any other prospects
for the company. Short term v long term
Debenture Redemption Reserve
Has any money been ser aside for the future repayment of the
Debenture?How long till redemption? Have the holders any need to
be worried?
See Reserves in “Financed By”