In: Finance
The Covid-19 crisis led to a sharp drop in revenue and, as a result, the depletion of cash, debt servicing problems and, in some cases, bankruptcy. If you could invest $100,000 in one company, based only on the five ratios below, which stock would be the most suitable to buy?
a. | Stock D: P/E = 25.0; cash ratio = 0.2x; EBIT/Interest = 2.1x; Debt/equity = 70%; ROIC = 8% | |
b. | Stock B: P/E = 17.5; cash ratio = 0.4x; EBIT/Interest = 7x; Debt/equity = 45%; ROIC = 12% | |
c. | Stock A: P/E = 15.0; cash ratio = 0.6x; EBIT/Interest = 10x; Debt/equity = 30%; ROIC = 14% | |
d. | Stock C: P/E = 20.0; cash ratio = 0.9x; EBIT/Interest = 15x; Debt/equity = 25%; ROIC = 16% |
As debt servicing problems is the leading cause of banruptcy, the stock with the best debt service coverage ratio need to be chosen. Stock C has the best debt interest coverage ratio of 15x , best cash ratio of 0.9x (liquidity) and comfortable Debt to equity ratio of 25% (lowest among all). In addition to all these, Stock C also provides the best ROIC figures. So answer is
d.
Stock C: P/E = 20.0; cash ratio = 0.9x; EBIT/Interest = 15x; Debt/equity = 25%; ROIC = 16%