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Requirements
1- Write a report on Debt Securities in 1500 words with reference to APA.
Solution
Introduction:
In the present report, an effort has been made towards deeply analyzing one of the ASX 100 companies for determining its credit rating. In pursuance of developing a credit rating for the company, an effort is being made to calculate and analyze the various ratios that are going to form part of the entire analysis process of the overall business. Again for the purpose of determining the Altman Z scores few more ratios will be calculated, the combination of which will result in the determination of the credit rating for the company.
Background of the company:
Qube Holdings Limited along with its various subsidiaries is engaged in the provision of logistics services in respect of the clients who are engaged in import and export cargo supply chains within Australia. Services of import and export of containerised cargo is provided by the company’s Logistics segment. The same includes the documentary and physical processes involving import export supply chain (Vogel, 2014). The various services provided by it includes transportation of containers to the ports and also from the ports. The transportation was undertaken both from the rail and the train and road. The company is engaged in the operation of both emptyas well as full container parks. The operations of the firm included quarantine and services related to the custom, services related to warehousing and terminal related to intermodal and it also got engaged in freight forwarding in the international market.
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Ratio analysis:
For determining the financial performance and the financial position of the company, it is very important that all the aspects related to the functional areas of the business are checked out. In pursuance of that various ratios are being calculated and analysed. The ratios that are going to be calculated and analysed are as follows:
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a) EBITDA margin (%): The EBITDA margin establishes the relationship between the EBITDA that is earned by the company and the revenue that is transacted by the company over the period of years. The result of the ratio clearly demarcates the profit portion that is included in the sales that is made by the company over the years (Vogel, 2016). For the purpose of increasing the profitability of the company, the management should ensure that the portion of EBITDA earned by the company on its sales is able see swift growth over the years.
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b) Return on Capital (%): It is a ratio that reflects the relation that exists between the EBIT and the capital employed of the company for the relevant financial year. The result of the ratio shows the amount of profit that is being generated by the company on the capital that has been invested in the company (Grant, 2016). The amount that is generated by the company as a proportion to the amount that is invested in it shows the efficiency with which the company has utilised the funds that have been received from the stakeholders of the company. The increase in the return on capital implies that the company is eligible for a higher credit rating as the company is well versed with the use of the amount that has been lend to it by the third parties or the shareholders of the company.
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c) EBIT Interest coverage(X): This ratio clearly demonstrates the proportion between the EBIT and the Interest of the company. The result of the ratio demonstrates the capability held by the company to repay the interest due on its part on the borrowings and the loans taken up by it. The more will be the value of the ratio higher will be the company’s ability to pay off the interest. Due to this reason for gaining a higher credit score the company must ensure that the EBIT earned by it is increased and the interest expense of the company is reduced over the years (Arjaliès& Bansal, 2018).
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d) EBITDA Interest coverage(X): This ratio establishes the relationship between the EBITDA earned by the company and the interest that company has to pay on the loan or borrowings that have been arranged by it from the third parties and the financial institutions. The result of this ratio will establish the ability of the company to pay the interest amount that is payable by it to the third parties and the financial institutions that have provided it with the requisite capital for the purpose of carrying out its business activities. The interest in this case will be compared with the EBITDA of the company instead of the EBIT of the company (Kosinova et al., 2016). The reason for this is that the depreciation and the amortisation expense of the company are non-cash item of the company. Hence the company has cash in respect of the amount that is recognised as depreciation nod amortisation in the financial statements of the company. Hence the same can be utilised by the company for the purpose of paying of its interest liability
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e) FFO/Debt (%): This ratio establishes the relationship between the Free from operations cash flow of the entity and the Debt that has been arranged by the company for the relevant period of time. The result of this ratio will establish the ability of the company to pay off the debt that has been arranged by it with the help of the cash flow that is available with it and has been generated from the continuing operations of the entity for the relevant period of time (Erdogan et al., 2015). The more will be the percentage the better will be for the company in terms of the credit rating that the company is going to get due it.
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f) Free Operations Cash flows/Debt (%): This ratio establishes the relationship between the Free operating cash flow of the entity and the debt that is used by the company in its capital. the result of the ratio establishes the cash that is available with the entity that has been generated from the operating activities of the entity for the purpose of making sure that the payment of the debt is duly done by the company.
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Place Your OrderAscertainment of appropriate Z score model for the purpose of computation of the Z score of the company:
For obtaining the Z score earned by the company and the most appropriate credit score of the company the model that has been selected is the model that has been prescribed for the non-manufacturing companies. As per this model the score will be reflected using the data that is received from four ratios (Bajaj& Banerjee, 2016). The four ratios that are going to be used for the same are as follows:
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a) Working Capital/ Total Assets = X1
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b) Retained Earnings/ Total Assets = X2
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c) Pre-Tax Profits/ Total Assets = X3
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d) Book value of Equity/ Book value of debt = X4
For the purpose of ascertainment of the score of the company the following formula has to be used:
Z= 6.56(X1) + 3.26(X2) + 6.72(X3) + 1.05(X4)
The various categories of the scores in which the credit rating of the company will be adjudged are as follows:
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Z>2.6 = “Safe Zone”
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1.1 < Z < 2.6 = “Grey” Zone
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Z < 1.1 “distress zone”
Conclusion
After conducting the analysis of the various ratios of the company, it was found that the company was engaged in increasing the amount of debt that is being used by it in its capital structure. In addition to that, the profit that has been earned by the company for the year also reduced over the period. This cumulative effect led the company to give less returns on the capital that has been invested in it. After the conclusion of the ratio analysis, an effort has been made to determine the credit score of the company using the Z score model. Under this method, the company was able to register a score of 4.04. As the score is more than 2.2. The company is presently in the “safe zone”. This suggest that the company’s credit position and the ability to pay back the amount that has been lend to it is decent.
Reference
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Arjaliès, D. L., & Bansal, P. (2018). Beyond numbers: How investment managers accommodate societal issues in financial decisions. Organization Studies, 0170840618765028.
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Bajaj, V., & Banerjee, S. (2016). The Spectacle of Excess: A Marketing-Cum-Financial Analysis of WWE Inc. IUP Journal of Brand Management, 13(3), 75.
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Erdogan, E. O., Erdogan, M., &Ömürbek, V. (2015). Evaluating the effects of various financial ratios on company financial performance: Application in Borsa Istanbul. Business and Economics Research Journal, 6(1), 35.
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Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
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Kosinova, N. N., Tolstel, M. S., Sazonov, S. P., &Vaysbeyn, K. D. (2016). Development of Methodological Approach to Enterprise's Financial Strategy Based on Comprehensive Evaluation of Its Strategic Potential. European Research Studies, 19(2), 21.
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Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
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