Interest Coverage Ratio Research Articles

English

The aim of the research is to evaluate the differences between economic and financial results in a sample of micro enterprises (MEs) and small / medium sized enterprises (SMEs) in fruit and vegetables processing industry in Italy. The firms included in the sample operate in an industry characterized by high capital intensity; this character is caused by the length of working capital cycle and high level of fixed asset investment. These characteristics of the firms can amplify the differences in economic and financial management results. In order to offer a comparison in applying economic and financial approaches, especially useful for agro-food firms operating in a capital intensive sector, in the article are calculated 12 ratios, of which 7 are sustainability ratios (calculated 3 with economic approach and 4 with financial approach) and 5 are interest coverage ratios (calculated 2 with economic approach and 3 with financial approach). The article highlights that economic and financial approach has statistically different result in the firm’s sample. Considering the significant differences in economic approach and financial approach, the firms could incur in error, and it will be necessary to identify which of the 2 approaches provides the correct indication of sustainability. The way of analysis proposed in the article can then be used to analyze firms operating in other agro-food sectors, especially if characterized by high capital intensity, high capital investment in fixed assets, long production cycle and long time debt collection.   Key words: Firm cycle sustainability, economic and financial approach, interest coverage ratio, fruit and vegetables processing industry.

The Effect of Financial Leverage on Financial Performance: Evidence of Quoted Pharmaceutical Companies in Nigeria

A common phenomenon in the financial reports of Nigerian pharmaceutical companies is the volume of short-term and long-term liabilities that forms a considerable size of their capital structure. Explaining the role of financial leverage in companies' financial performance is one of the primary objectives of contemporary researches and this role remains a questionable subject which has continued to attract the attention of many researchers. The main objective of this study is to determine the effect of financial leverage on financial performance of the Nigeria pharmaceutical companies over a period of twelve (12) years (2001 - 2012) for the three (3) selected companies. This work employed three (3) financial leverage for the independent variables such as: debt ratio (DR); debt-equity ratio (DER) and interest coverage ratio (ICR) in determining their effect on financial performance for Return on Assets (ROA) as dependent variable. The ex-post facto research design was used for this study. The secondary data were obtained from the financial statement (Comprehensive income statement and Statement of financial position) of the selected pharmaceutical companies' quoted on the Nigerian Stock Exchange (NSE). Descriptive statistics, Pearson correlation and regressions were employed and used for this study. The results of the analysis showed that debt ratio (DR) and debt-equity ratio (DER) have negative relationship with Return on Assets (ROA) while interest coverage ratio (ICR) has a positive relationship with Return on Assets (ROA) in Nigeria pharmaceutical industry. The analysis also revealed that all the independent variables have no significant effect on financial performance of the sampled companies. The results further suggested that only 16.4% of the variations on the dependent variable are caused by the independent variables in our model suggesting that 83.6% of the variations in financial performance are caused by other factors outside our model. Based on the above findings, the researchers now recommend that companies' management should ensure that financial decisions made by them are in consonance with the shareholders' wealth maximization objectives which encompasses the profit maximization objective of the firm. The amount of debt finance in the financial mix of the firm should be at the optimal level so as to ensure adequate utilisation of the firms' assets. The management should also monitor the interest charged on debt financing to avoid liquidation of the company.

Determinants of Capital Structure in Indian Automobile Companies: A Case of Tata Motors

Firms use different sources of finance having independent characteristics to finance its operations and to succeed in attaining the ultimate goal of shareholders' value creation. Every decision in business has inevitable connection with finance and cost of finance. Indian financial market has been changing swiftly from bankingdominated to capital market-oriented system. Finance manager has a variety of alternatives at his disposal to raise funds but associated with different cost. The raising of funds may not be a great challenge in a liberalized era but the ultimate objective is efficient use of funds and earning a rate of return over the cost of capital. This will depend upon the capital structure and achieving a judicious mix of debt and equity funds into the capital structure. Improper mix of debt and equity will lead to wealth destruction of the shareholders and optimum capital structure results in wealth creation. This paper has examined the determinants of capital structure in auto industry, particularly in Tata Motors. The period of the study is 12 years: from 2000 to 2011. Seven determinants of capital structure, namely; non-debt tax shields, size of the business, profitability, growth of assets, tangibility, interest coverage ratio and liquidity. It has been observed that non-debt tax shield, size of the business, growth of assets as significant factors in deciding capital structure.

Evidence from German Companies of Effects of Corporate Risk Management on Capital Structure Decisions

The author investigates the interaction between risk management and capital structure among publicly listed German companies. By surveying executives at these companies, she computes a risk management score for each company indicating the extent of risk management practices. The scores reflect not only the companies' use of derivatives and “at‐risk” ratios, but also the respondents' assessments of how well risk management has been integrated into existing corporate processes.Some results, though not all, are consistent with finance theory. Most important, companies with more extensive risk management activities have higher debt ratios and lower interest coverage ratios. At the same time, such companies also exhibit lower volatility of cash flow, sales, EBIT, and net income, which helps explain their ability to service more debt. And, finally, companies with more extensive—and, according to their responding executives, more effective—risk management also tend to be larger, have longer debt maturities, lower average costs of debt, and have more tangible assets.

Debt and Taxes at Multinational Corporations

Empirical research has struggled to document the variation in recent corporate capital structures as arising from variation in estimated corporate income tax rates. We argue that in previous studies, both the tax rates being applied to multinational corporations and the taxable income earned has been miss-measured, a result of firms operating in many foreign countries. Using a sample of multinational firms collected in the Bureau of Economic Analysis’ annual survey combined with each firm’s respective income and country specific tax rate, we revisit this tax-leverage puzzle. Empirically we find that firms do have higher leverage ratios and lower interest coverage ratios when they operate in countries with higher tax rates, as theory would suggest. Our results demonstrate that the primary benefit of leverage under the trade-off theory of capital structure continues to have empirical support.

English

  In this paper, we declare that such objective, autonomous and exogenous certifying mechanism provides a better opportunity to test the well-established credit rating hypothesis, especially in the context of emerging markets with institutional voids. Employing a sample of 142 Indian IPOs (January 2007 to December 2012), we also experiment Ex-ante uncertainty with the efficacy of IPO (Initial Public Offerings) grading mechanism. We procure; grading decreases IPO underpricing and positively influences demand of retail investors, issue size, earnings before interest and dividend, long-term debt-equity equity ratio and profit to the book value ratio. Grading diminishes the number of share offered, a debt-equity ratio, and earnings before interest, dividend and tax, fixed to assess ratio and is having much impact on Ex- Ante uncertainty. Notwithstanding, grading does not affect subscription rate, offer timing (difference in days between offer days and listing days), firm’s age, debtors turnover ratio, creditor payment method, cash to price earnings ratio, PIPH (post issue promoter's holding), interest coverage ratio, inventory turnover ratio, market capitalization, price earnings ratio, return on capital employed and return on net worth of the IPOs. IPO grading is prominent to capture firm size, business group affiliation and firm’s quality of corporate governance. Our findings put forward that, in emerging markets, regulator’s role to signal the quality of an IPO contributes with respect to the market welfare.   Key words: Initial Public Offerings, underpricing, credit rating, ownership structure, Ex-ante uncertainty.

Divestitures and value creation: does leverage matter?

This article evaluates the extent and sources of value associated with the divestitures of French firms over the period 1990 to 2010. The results show that excess returns are consistently higher when the divesting firm is highly levered. The market reaction is also stronger when the seller's return on assets and interest coverage ratio are low and when the seller is less focused. Using changes in the firm's fundamentals following the divestiture as proxy for market expectations at the announcement date, we find that excess returns are positively related to expected increases in focus, expected increases in the interest coverage ratio and expected decreases in leverage. These results indicate that investors recognize the benefits of divestitures and reevaluate the seller accordingly. However, they only hold for highly levered firms. In contrast, the market reaction to the divestitures announced by low-leverage firms does not appear to be related to the seller's fundamentals. This finding suggests that the determinants of value creation are not uniform across all firms.

Financial statement comparability and credit risk

Prior research shows that firms’ financial statement comparability improves the accuracy of market participants’ valuation judgments and thus may reduce firms’ costs of capital. Distinct from prior research focusing on the equity market, we develop measures of comparability relevant to debt market participants based on the within-industry variability of Moody’s adjustments to reported accounting numbers for the purposes of credit rating. We examine two sets of adjustments: (1) to the interest coverage ratio and (2) to non-recurring income items. We validate these comparability measures by providing evidence that greater comparability is associated with lower frequency and magnitude of split ratings by credit rating agencies. We predict and find that greater comparability is associated with (1) lower estimated bid-ask spreads for traded bonds, (2) lower credit spreads for both bonds and five-year credit default swaps, and (3) a steeper one- to five-year credit default swap term structure. Our results are consistent with financial statement comparability reducing debt market participants’ uncertainty about and pricing of firms’ credit risk.

Reverse Takeover and Firm Survivability

Manuscript Type: Empirical Research Question/Issue: This paper investigates how firm financial characteristics and governance characteristics affect reverse takeovers’ survival. Research Findings/Insights: Using a sample of reverse takeovers that took place during the 2000–2009 period in the U.S., we find that firms with reverse takeover are more likely to survive when they have higher interest coverage ratio of the shell, while its profitability (return on equity) is lower just before the reverse takeover and the new firm is relatively smaller than the public shell. In addition, firms with new CEOs are more likely to survive than firms without CEO replacement, and this effect is pronounced when the shell has lower liquidity. Theoretical/Academic Implications: Our findings suggest that the survivability of reverse takeovers relies both on the financial conditions of the merging firms and on their presumed value-enhancing governance characteristics. Practitioner/Policy Implications: Conventionally, firms try to improve the financial conditions of the merging firms to survive in the reverse takeover. Our empirical results however stress that firms should also practice good corporate governance in order to be successful in reverse takeover.

Financial Statement Comparability and Credit Risk

Prior research shows that firms' financial statement comparability improves the accuracy of market participants' valuation judgments and thus may reduce firms' costs of capital. Distinct from prior research focusing on the equity market, we develop measures of comparability relevant to debt market participants based on the within-industry variability of Moody's adjustments to reported accounting numbers for the purposes of credit rating. We examine two sets of adjustments: (1) to the interest coverage ratio and (2) for non-recurring income items. We validate these comparability measures by providing evidence that greater comparability is associated with lower frequency and magnitude of split ratings by credit rating agencies. We predict and find that greater comparability is associated with: (1) lower estimated bid-ask spreads for traded bonds, (2) lower credit spreads for both bonds and five-year credit default swaps, and (3) a steeper one- to five-year credit default swap term structure. Our results are consistent with financial statement comparability reducing debt market participants' uncertainty about and pricing of firms' credit risk.

EBITDA/EBIT and cash flow based ICRs: A comparative approach in the agro-food system in Italy

The interest coverage ratios (ICRs) are used to quantify the ability of firms to pay financial debts; ICRs are then considered by banks such as covenants in the financing term sheet, and are used by researchers and the rating agencies to estimate the probability of default of firms. Typically, ICRs calculation is based on profit margins, such as EBITDA and EBIT; EBITDA and EBIT approximate, but do not directly express, cash flows available to pay financial debts. The article aims to evaluate whether there are significant differences in results using ICRs based on EBITDA or EBIT and ICRs based on different definitions of cash flow (CF). The application is made to a sample of firms characterized by high absorption of capital operating in the Italian agro-food sector. The article highlights that there are statistically significant differences using ICRs EBITDA and EBIT based and ICRs based on different CF definitions.

Evaluating Constructive Lease Capitalization and Off‐Balance‐Sheet Financing: An Instructional Case with FedEx and UPS

AbstractThis case illustrates the effects of the proposed new lease standard by the Financial Accounting Standards Board and the International Accounting Standards Board on existing outstanding operating leases. Specifically, the case examines the effects of the proposal that all firms report existing operating leases as capital leases upon the initial adoption of the proposed standard. By applying a constructive capitalization model to two firms who rely on operating leases for financing, FedEx and UPS, we found that both companies would have to record billions of dollars of liabilities that had only appeared in the footnotes of their financial statements under the current lease standards. In addition, the firms would experience a decline in retained earnings and key financial ratios, such as the debt‐to‐equity, return‐on‐assets, and interest coverage ratios, by reporting operating leases as capital leases under the new proposed standard. Furthermore, the magnitude of the lease capitalization impact is much smaller for UPS than for FedEx.

Interest Tax Shields: A Barrier Options Approach

There is a link between barrier options and tax shields of interest expense. We combine this link with a traditional valuation approach, to present practical valuation formulas for interest tax shields in three debt scenarios with risk of default: (1) constant debt, (2) delayed debt, and (3) debt refinancing. In all cases, default and refinancing are contingent on the random evolution of the income of the firm. For each scenario, we work out sensitivity analysis of the value of tax shields with respect to income, growth, systematic and business risk, risk-free interest rate, interest coverage ratio covenant, and the firm’s refinancing strategy.

Financial Analysis and Valuation of Astrazeneca

The project requires me to analyse a UK company - it is AstraZeneca. I first start by introducing UK economic condition at the moment and then analysing the pharmaceutical industry in UK by employing 5 forces Porter. When understanding the macro-economics, I am able to explain the situation of AstraZeneca better. In the second part of this project, I address the financial position of AstraZeneca by scrutinising Income Statement and Balance Sheet. I also use ratio to comment on the improvement or the stagnation of the company in either time order or a comparison with its peers. The ratios are profitability ratio, liquidity ratio and operation efficiency ratio. Other ratios such as dividend yield, leverage ratio and interest coverage ratio will be discussed in the next two chapters which are dividend policy and capital structure. In these chapters, I will approach relevant literatures and then put them into the context of AstraZeneca to understand the prevailing dividend policy and capital structure. The next part is valuation which is supposed to be very diverse with different valuation approaches. They are asset-based, discounted cash flow, relative and contingent claim valuation. After review relevant valuation literature, I will apply them to value AZN equity. This result will be combined with other fundamental analysis to propose investment or divestment in the conclusion part.

The Determinants of Debt Ratio at Manufacturing Firms That Listed in Indonesia Stock Exchange

This study purposed to acknowledge the determinants of debt ratio. Data research‘s drawn from 74 ftnns in manufacturing industry that listed in Indonesia Stock Exchange during period 2007 until 2009. Analysis method used is panel data regression with fixed effect model approach. Independent variables used are size. quick ratio, interest coverage ratio. growth. and investment opportunity. While dependent variable used in this study is debt ratio. Based on the result Fixed Effect Model. size. growth. and investment opportunity have no significantly effect to debtratio. While interest coverage ratio and quick ratio have significant effect on debt ratio. This study expected can give input to corporate managers to consider firms characteristic to determine optimal capital structure. Investors have to consider firms characteristic before investing. Investor better to invest in big company and has less debt because the risk is lower.Keywords : debt ratio. growth. interest coverage ratio. investment opportunity, quick ratio, size

Do managers use securitisation gains for real manipulation purposes?

Recent corporate financial scandals show that managers, capital market intermediaries and financial statement users are unable to assess correctly the information disclosed by firms related to unconsolidated special purpose entities and securitisation transactions. In this paper, we present empirical evidence on the use of securitisation gains by firms for real manipulation of reported earnings. First, the estimation of the Heckman (1979) two-step selection model shows that securitisation gain is related to financial reporting determinants (leverage), economic determinants (free cash-flow and interest coverage ratio) corporate governance determinants (percent of shares owned by the CEO) and other control variables (firm sector and return on equity). Second, the estimation of the simultaneous equation approach using the seemingly unrelated regression (SURE) method (Zellner, 1962) shows that managers use discretionary accruals and securitisation gains as substitutes to manage their reported earnings. Additional analysis shows that securitisation gains are used for real smoothing purposes.

A restaurant case study of lease accounting impacts of proposed changes in lease accounting rules

PurposeNew lease accounting rules are proposed that will fundamentally change the way leases are accounted for and reported in financial statements. This paper seeks to provide information on the proposed new rules and to illustrate their impact on financial statements and financial ratios using a single restaurant company.Design/methodology/approachThe case of a single restaurant company, CEC International, is used to illustrate the potential impact of the new rules. Additional examples are used to illustrate the impact on financial policies. Financial statements were adjusted and various financial ratios such as interest coverage, leverage and profitability ratios were computed before and after capitalization.FindingsThe results show that financial statements presented will change dramatically when lease assets and liabilities are added to the balance‐sheet. The expense recognition pattern will change significantly and negatively impact performance measures such as interest coverage and capital ratios but improve cash flow measures such as EBIT and EBITDA.Research limitations/implicationsLimitations of this study include the assumptions used to capitalize leases such as interest rate, life of leases, no new leases, and exclusion of contingent rentals.Practical implicationsAll restaurant companies and managers must assess the costs and benefits of complying with the proposed new rules and start analyzing and evaluating their impact on existing debt agreements, executive compensation plans, and the lease versus buy decision.Originality/valueThis paper serves to inform restaurant managers about the potential implications of the new rules, so managers can prepare, plan and formulate strategies to mitigate their impact.

Determinants of corporate hedging policies: A case of foreign exchange and interest rate derivative usage

Derivatives are mostly used by corporations to hedge their foreign exchange or interest rate risk, especially in Asian countries due to their highly volatile political and economic situation. Current study aimed to determine the factors affecting firms hedging policies of both foreign currency and interest rate derivative instruments of 105 non-financial firms listed on Karachi Stock Exchange for the period of 2004-2008. Logit model was used to test whether the firm’s decision to use hedging instruments can increase firm value? For a detailed analysis, firm’s endogenous policies were regressed separately to identify the effect of firm’s investment and financing policies on firm’s hedging policies. The estimated results supported the financial distress hypothesis, tax convexity, underinvestment hypothesis and managerial risk aversion hypothesis. Though, inconsistent with the theory, interest coverage ratio demonstrated positive effect on firms hedging policies that may be attributed to the lag period effect.

PENGARUH SIKLUS BISNIS, KAPASITAS HUTANG, PROFITABILITAS DAN NILAI PASAR TERHADAP REAKSI PASAR PADA PERUSAHAAN MANUFAKTUR DI BURSA EFEK INDONESIA

Invesments for stocks has a high risk compared with the other investments. Ability of company to make earnings is very demanded by investors in their investments to get dividend and maximized capital gain.The ability of company can be view by some aspects, there are, business cycle by Degree of Operating Leverage (DOL), debt capacity by Debt to Equity Ratio (DER) and Interest Coverage Ratio (ICR), profitability by Return on Equity (ROE) and Earnings Per Share (EPS), and market value by Price Earnings Ratio (PER).The objectives ofresearch are to analyze effect ofDegree of Operating Leverage (DOL), Debt to Equity Ratio (DER), Interest Coverage Ratio (ICR), Return on Equity (ROE), Earnings Per Share (EPS), dan Price Earnings Ratio (PER) to market stock price. The research use data of audited financial statements of manufacturing company from Indonesia Stock Exchange (Bursa Efek Indonesia) in period 2007 till 2009.The results show that as partial, DOL, ROED, PER, EPS, and DER significantly effect to market stock price, than ICR. Simultaneously, DOL, ROED, ICR, PER, EPS and DER significantly effect to market stock price.

On the relationship between systematic risk and financial and operating risk: the case of the Greek listed firms

The study analyses the effect of operating and financial risk and other factors such as profitability, liquidity, dividend payout, size and growth on systematic risk for Greek listed firms, after Greece’s entrance in the Monetary Union. The study also examines whether the explanatory power of the fundamental drivers of systematic risk is time sensitive. A panel data multivariate regression methodology is used. The findings suggest that the degrees of financial and operating leverage, the interest coverage ratio, the growth in total assets and the dividend payout ratio help explain variations in beta. It is shown that there is a negative relationship between DOL * DFL and systematic risk and that the examined relationships are time-sensitive. The study also denotes that the Athens Stock Exchange General Index is not appropriate for the estimation of beta for the Greek listed firms.