Debt to equity ratio – shows the extent to which the assets are financed by either debt or equity. This could be calculated by the following equation. The decision on the ratio of long term debt to equity is considered as a strategic one for managers i. E. Future oriented and has a long term effect (Watson and Head, 2007). Capital structure decision directly affects entity’s profits; this makes it the important decision in corporate finance, so it must not be taken lightly.
Debt to equity ratio = Long term debt Total Equity Using the aforementioned formula the debt to equity ratio was calculated for 5 ears and as per the graph shown below the debt to equity ratio has been below 100% for the past 5 years. This is quite good for shareholders as the organization is able to pay off its debts using the equity that they have. In contrary, if the debt to equity ratio is high (i. E. Above 100%) that means the company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.
As you can see, in 2011 the ratio has been come down to 56% but has been increased to 64% in 2012 and remained the same in 2013 as well. However, in 2014 the ratio has been reduced to 63%. Therefore in conclusion we can say that Sunburst’s debt to equity ratio is on the low side and they are able to settle off their debts quite conveniently through the equity. Capital Gearing Ratio: Stable Capital gearing ratio = Long term debt X 100 Capital employed Watson and Head (2013) mentioned, the capital gearing ratio is used to indicate the amount of debt finance used by a company.
When the gearing ratio is high the company is considered to be a risky business. As per the ratio analysis of Sunburst’s shown below, the capital gearing ratio has been around 35%-38% room 2’010 – 2014. In fact the capital gearing ratio has been around 38. 4% in 2010 and it has been reduced to 35. 86% in 2011 , later it has again increased to 38. 57% in 2014. All in all, the capital gearing ratio has been remained quite stable, even though it went up to 39. 06% in 2013.
Therefore we can say that no corrective measurements have to be taken on capital gearing ratio at the moment. Besides, the increase in capital gearing ratio can be associated with financing of new revenue generating assets such as new stores and other relevant purchases on reporter, plant and equipment (Ginsburg, 2014). Interest Cover Ratio Interest cover ratio helps to identify as how many times a company can cover its current interest payments out of the operating profits during a period.
Also, lower level of operating profit coverage, the higher the risk to lender and shareholder. The interest cover ratio can be calculated using the below formula (Watson and Head 2013). Interest cover ratio = Profit before interest and tax Interest charges As per Sunburst’s interest coverage ratio graph shown below in 2010 the interest cover ratio was 6. 7 times and the ratio has been increased to 10. 13 times during 2011 financial year. However, in 2012 the ratio has reduced to 8. 49 times and reduced further to 6. 8 times in 2013. This finding suggests that Sunburst’s current business model gradually reduces the company s effective interest cover with corrective action thus being required every few years. This may be of concern during the years in which corrective action is required due to potential investments being forsaken to carry out such corrective action. However, in 2014 the interest coverage ratio has been increased to 7. 6 times, indicating that interest cover ratio of Ginsburg has gotten stronger compared to 2013 financial year.
Conclusion The gearing ratio has decreased which is most important for an investor which means that the company does not have many debts to pay. The interest cover ratio is increasing which is also good as company is capable to pay interest to its debtors. Therefore, based on all these figures it can be analyzed that Ginsburg is making good amount of profit and is capable of playing good amount of dividend so it is beneficial for an investor to invest in this company.