Question

6. The following financial data are for two companies in the same industry.

	CASS	HAKN	Industry Average
EBITDA/Interest exp	4.94	3.23	43.65
Total Debt to Capital	55.19%	50.2%	28.32%
FFO/Debt	0.14	0.23	3.01
Current Ratio	0.54	0.71	1.01
Credit Rating			A-

The industry is rated A- on the average. What rating would you give these two companies? Describe by using the given ratios.

Answer 1

a) EBITDA / Interest expense : It tells us the ability of the company to pay interest on its debt. The higher the better. The industry average is 43.65 but for both these companies CASS and HAKN the ratio is way lower than the industry standard.

b) Total Debt to Capital ratio : This ratio should be optimal i.e. neither too high nor too low. It should be enough to use the leverage and not too high to fall into a debt trap. for both these companie the ratio is almost double the industry standards and is a risky proposition for an investor.

c) FFO/Debt tells us the ability of a company to pay off its debt from its operating income. The higher the better. Both these companies have a much lower ratio as compared to industry standards.

d) Current Ratio: It tells us the ability of a company to meet its short term obligations. A preferred number is 2 but it should not be less than 1. For both these companies it is less than 1 which is not a good sign.

On analysing all the 4 ratios, both these companies have a worse standing as compared to industry standards. Hence, the rating for these 2 companies should be lower than A-.

Also, these companies too worse than industry so i would rate them around BBB- or BB.