Question

AP10-14A (Debt to equity and net debt as a percentage of capitalization)

Uchida Genetics Corporation develops and markets biological pharmaceuticals. Uchida is approaching the bond market to raise money to buy equipment to manufacture a new biological therapy. The following is an extract from Uchida Genetics' statement of financial position:

UCHIDA GENETICS CORPORATION Statement of Financial Position (in thousands)
	December 31, 2020	December 31, 2019
Current assets
Cash	$  245,000	$  260,000
Trade receivables	255,000	570,000
Inventories	300,000	400,000
Total current assets	$  800,000	$1,230,000
Non-current assets
Property, plant, and equipment	$1,250,000	$1,050,000
Right-of-use-assets	150,000	200,000
Intangible assets	15,000	10,000
Total non-current assets	$1,415,000	$1,260,000
Total assets	$2,215,000	$2,490,000
Current liabilities
Trade and other payables	$   15,000	$   25,000
Short-term borrowings	200,000	275,000
Current portion of long-term debt	50,000	60,000
Total current liabilities	$  265,000	$  360,000
Non-current liabilities
Long-term loan	$  500,000	$  800,000
Deferred income tax liabilities	50,000	55,000
Total non-current liabilities	$  550,000	$  855,000
Shareholders' Equity
Share capital	$  900,000	$  900,000
Retained earnings	500,000	375,000
Total shareholders' equity	$1,400,000	$1,275,000
Total liabilities and shareholders' equity	$2,215,000	$2,490,000

Required

a.  

Prior to approaching the bond market, Uchida's management would like you to determine the company's debt to equity and net debt as a percentage of capitalization ratios for both years.

b.  

Explain whether Uchida's debt to equity ratio and net debt as a percentage of capitalization ratios have improved in 2020.

Answer 1

a.

Debt to Equity ratio =	Total Liabilities/Total shareholders equity
* Total liabilities =	Total Curent liab + Total Non current liab
Net Debt to capitalisation percent=	Net Debt/(Net Debt + Total shareholders equity)
Net Debt =	Total Liabilities -Cash & Cash Equivalents
	Dec, 20	Dec, 19
Current Liabilities	265000	360000
Non current laibilities	550000	855000
Total Liabilities (A)	815000	1215000
Total Share Holders Equity (B)	1400000	1275000
Cash & Cash Equivalents (C)	245000	260000
Net Debt (D) = (A-C)	570000	955000
Debt to Equity Ration (A/B)	0.5821 times	0.9529 times
Net Debt to capitalisation percent (D/(D+B)	28.93%	42.82%

b. Debt to Equity ration: The ratio is used to evaluate a company's financial leverage. The D/E ratio is an important metric used in corporate finance. It is a measure of the degree to which a company is financing its operations through debt versus wholly-owned funds. Since 2019, D/E ration has decreased meaning debt has decreased as compared to equity. Financing of the firm is fueled more by equity than Debt. Lower the ration means lower risk to shareholder, however high ration give leverage effect as cost of debt is usually lower than cost of equity. Ideal D/E ratio cary from industry to industry.

In our case company is approaching bond market to get more funds, we can say the ratio is improved as lower D/E will make it more attractive for bond investors.

Net Debt to capitalisation percent: Here again net debt has reduced comapred to previous year, and as company is approaching to sale bonds it can be said the ratio has improved as it will make invenstment in company more attractive.