Question

Question

You have to analyze the ratios that which company is riskier and better in the terms of investment.? Which company rely more on dept ratio?

for definition of DBRS bond rating refer to Appendix A

BCE, Inc. provides wire line and wireless communications services, Internet access, data services, and video services in Canada. BCE has DBRS bond rating of BBB (high) in 2014.

Agrium, Inc. (AGU Inc.) produces and markets agricultural nutrients, industrial products, and specialty products worldwide. The company has DBRS bond rating of BBB in 2014. In addition, the following financial ratios are provided for each company:

BCE: Times interest earned= EBIT / interest payment = 4.54

BCE: Debt/Equity = 149% AGU: Times interest earned= EBIT / interest payment = 17.58

AGU: Debt/Equity= 53%

Required: Data

https://www.investingforme.com/classroom/investment-type/bonds-and-debentures/faq?q=142

For Canadian issuers, corporate and Government, investors usually rely upon the credit ratings assigned by Dominion Bond Rating Services (DBRS) or the Standard & Poors. Below, from the DBRS website, are the corporate credit rating scales: Long Term Obligations* The DBRS® long-term rating scale is meant to give an indication of the risk that a borrower will not fulfill its full obligations in a timely manner, with respect to both interest and principal commitments. Every DBRS rating is based on quantitative and qualitative considerations relevant to the borrowing entity. Each rating category is denoted by the subcategories "high" and "low". The absence of either a "high" or "low" designation indicates the rating is in the "middle" of the category. The AAA and D categories do not utilize "high", "middle", and "low" as differential grades. This scale is also used for preferred and hybrid instruments. References to interest throughout reflect dividend commitments, where applicable, for a preferred instrument. Within Canada, certain securities use the DBRS® Preferred Share Rating Scale. * Formerly referred to as "Bond and Long Term Debt" AAA Long-term debt rated AAA is of the highest credit quality, with exceptionally strong protection for the timely repayment of principal and interest. Earnings are considered stable, the structure of the industry in which the entity operates is strong, and the outlook for future profitability is favourable. There are few qualifying factors present that would detract from the performance of the entity. The strength of liquidity and coverage ratios is unquestioned and the entity has established a credible track record of superior performance. Given the extremely high standard that DBRS has set for this category, few entities are able to achieve a AAA rating. AA Long-term debt rated AA is of superior credit quality, and protection of interest and principal is considered high. In many cases they differ from long-term debt rated AAA only to a small degree. Given the extremely restrictive definition DBRS has for the AAA category, entities rated AA are also considered to be strong credits, typically exemplifying aboveaverage strength in key areas of consideration and unlikely to be significantly affected by reasonably foreseeable events. A Long-term debt rated "A" is of satisfactory credit quality. Protection of interest and principal is still substantial, but the degree of strength is less than that of AA rated entities. While "A" is a respectable rating, entities in this category are considered to be more susceptible to adverse economic conditions and have greater cyclical tendencies than higherrated securities. BBB Long-term debt rated BBB is of adequate credit quality. Protection of interest and principal is considered acceptable, but the entity is fairly susceptible to adverse changes in financial and economic conditions, or there may be other adverse conditions present which reduce the strength of the entity and its rated securities. BB Long-term debt rated BB is defined to be speculative and non-investment grade, where the degree of protection afforded interest and principal is uncertain, particularly during periods of economic recession. Entities in the BB range typically have limited access to capital markets and additional liquidity support. In many cases, deficiencies in critical mass, diversification, and competitive strength are additional negative considerations. B Long-term debt rated B is considered highly speculative and there is a reasonably high level of uncertainty as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity.

Answer 1

You have to analyze the ratios that which company is riskier and better in the terms of investment.? Which company rely more on dept ratio?

Before answering this question, let's summarize the information we have:

Company	Time Interest Earned = EBIT / I	Debt to Equity ratio = D / E	Bond Rating
BCE, Inc	4.54	149%	BBB (high)
AGU Inc.	17.58	53%	BBB

• Times Interest Earned (TIE) tells us how prepared a company is to service its interest burden. A higher TIE ratio is better for the firm and improves the risk profile. It makes the company less riskier.
• Proportion of debt in capital structure or debt to equity ratio tells us about the leverage of the firm. Leverage increases the riskiness and deteriorates the risk profile of a firm. Higher the debt equity ratio, higher will be the riskiness of the firm.

Thus, it should not take us long to figure out that AGU Inc. performs better than BCE Inc on the count of both the ratios. It has better TIE and lower D/E. Hence, AGU Inc. is a better investment choice.

BCE has 149% as Debt to equity ratio. So proportion of debt in capital structure = D / (D + E) = 149% / (149% + 1) = 60%. For BCE, proportion of debt in capital structure = D / (D + E) = 53% / (1 + 53%) = 35%.

Thus BCE Inc has higher reliance on debt and hence higher debt ratio.