In: Finance
1.NO.Do not agree. |
Interest coverage ratio=EBIT/Interest expense |
Return on Equity=Net income/Total Equity |
If interest coverage ratio is too high, it means that either |
1.EBIT, ie Earnings before interest & taxes is high OR |
2.Interest expense is low. |
In both the above cases, net income will be increasing .(EBIT-Int.-Taxes) |
Hence ROE wil not be too low. |
2. Three factors that affect ROE |
According to the DuPont equation for ROE, |
ROE= Profit margin*Total assets turnover*Financial leverage |
so, 1.the level of profit margin to sales--ie. Operational efficiency |
2. the level of $ sales that is generated by deploying per $ of the assets-- the assets usage efficiency & |
3. the level of debt in funding the assets, the optimium the better-- |
are the three main factors that drive the return to equity |
Higher ROE lead to higher share price |
as incresaing ROE is an indication of good returns on the equity capital |
as well as better usage of the equity funds |
thus instilling confidence in the potential investors to invest funds in the company. |
Thus the demand for the company's shares goes up in the market |
pushing up the stock prices |