Accounting Management

Topics: Ratio, Finance, Debt Pages: 3 (666 words) Published: June 21, 2013
Capital Structure Analysis
Formula Debt-to-Equity Ratio = Total Liabilities / Equity.

Formula Interest Coverage Ratio = Non-current Liabilities / Cash Flow from operations

Formula Debt Coverage Ratio = Earnings Before Interest and Tax / Net Finance Expense

The debt-to-equity ratios indicate how risky the firms are. It measures the extent that the assets of a firm are financed by its debts and equity. Lower values of debt-to-equity ratio are favorable indicating the firm is slightly financed by debt. Higher debt-to-equity ratio is unfavorable indicating the firm is at higher risk because its operation heavily relies on debt. Investors usually prefer low debt-to-equity ratio as firms are being financed by their own resources rather than external lenders (Readyratios 2013). The market average of the debt-to-equity ratios in Airline industry in 2012 is 3.88 (CSI Market 2013). The Debt to Equity ratio calculated from the Singapore 2012 financial statement is 0.67, which is far below the industry average. It indicates that the company is quite capable of generating enough cash to satisfy its debt obligations. But the such small ratio may also indicate that Singapore Airline is not taking advantage of the increased profits that financial leverage may bring (Readyratios 2013). The movement of the ratio from 2007 to 2012 showing a downward trend which is favorable. It indicates that the operation of Singapore Airline is highly relying on its own financial resources rather than debt.

Interest Coverage Ratio provides an insight of a company’s ability to pay the interest charges on its debt. The ratio below 1.0 is generally considered as unable to generate enough cash to cover its interest for companies in any industry. The ratio of 1.5 is considered as the minium requirenment for any companies to be able to finance its interest charges (Bergen, JV 2010). In the period 2010-2011, the interest coverage ratio for Singapore Airline is 1.07, which...
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