Question

Based purely on Financial Ratios, recommend whether it is better for the company to borrow the AUD 10 Million or issue AUD 10 Million new shares.

Current Ratio (a/b) = 1,405/194 = 7.24

Interest coverage Ratio (d/c) = 84,932/22,530 = 3.77

PE ratio (f/e) = 74.14/ -08 = - 927 = 0 (not applicable)

ROE (g/h*100) = 19,780/944*100 = -20.95%

Answer 1

It is better for company to borrow debt capital which is borrowing of the Australian Dollar 10 million because it can be seen that the current ratio of the company is exceptional as it is around 8 times and it is reflecting that the company has a higher amount of current asset in its hands and the overall liquidity problem is not a issue for the company.

it is also reflected that the company has a interest coverage ratio of almost 3.77 which is reflecting that the company has enough amount of generation of the cash in short term in order to deal with the interest payment and hence the company will not be having any kind of problem in order to pay the repayment liability in form of interest, so the company will be trying to borrow Australian Dollar of 10 million as the company has enough liquidity and solvency on its hands in order to pay with the the the required debt.

Return on equity and price to earning ratio has not much to do with debt capital and equity capital because the company may have been engaged in various capital expenditure programs.

I will be advising BORROW 10 MILLION AUSTRALIAN DOLLARS.