Cosmos will spin for Perekrestok:: Assessing its financial health
Assessing financial stability, risk, and leverage is imperative for investors to gauge a company’s ability to cover debt expenses and stay profitable.
The company I opted for the examination where I live is called Perekrestok, a major player in the Russian retail industry.
Debt-to-Assets Ratio
Perekrestok operates throughout Russia and has an expansive network of 852 stores with revenues reaching RUB 273 billion. The ratio declares how the company is financed: through debt (creditors) or equity (shareholders).
The low ratio suggests that debt is relatively small and that the company does not rely heavily on loans and other financial instruments.
Additionally, with the low ratio, assets are owned outright (equity-financed).
Conversely, the higher ratio suggests that the company builds up its finances through debt primarily, leaving the possibility of insolvency (a default on payments) and non-liquidity (no cash on hand to pay off short-term obligations) crises.
In the case of economic downturns, a company will experience firsthand its strikes and may not recover. Such a giant as Perekrestok may also not be immune to economic shocks, so maintaining healthy debt ratios will ensure future “cosmos-spinning” financial stability. Yet, knowing all the negatives of a higher ratio, it is worth mentioning the greater leverage and potential for exponential growth. But let us not forget the vulnerability before fluctuations in demand that can shift profits and lead to difficulties covering debt with reduced revenues.
For example, Perekrestok’s assets constitute RUB 500 billion and total liabilities of RUB 200 billion. Debt-to-asset ratio = Total Liabilities / Total Assets = 200 billion / 500 billion = 0.4 or 40%. It signifies that 40% of Perekrestok’s assets are financed through debt and 60% through equity. A ratio below 40% is considered sounder: a ratio well over 60% would imply greater risks of default, which should alarm investors. Decisions such as taking out a loan to open new stores and expand must be made after assessing a debt-to-assets ratio to monitor its healthiness.
Times-Earned-Interest Ratio
The TIE ratio measures a company’s ability to pay off interests on outstanding debts. The TIE ratio = EBIT (Earnings Before Interest and Taxes) / Interest Expense. EBIT suggests an operating income before subtracting taxes and interest.
Interest Expense shows the cost of borrowing. In this case, the higher the ratio is, the better the soundness of the business is. A higher TIE ratio suggests that Perekrestok has incurred an outstanding operating income to cover interest expenses multiple times over.
A red flag is if the ratio is low: it indicates a weak ability to cover interest expenses. Supposedly, Perekrestok declares RUB 30 billion of EBIT and RUB 6 billion as an interest expense. 30 billion / 6 billion = 5. This outcome shows that Perekrestok earns 5 times its annual interest expense, signaling a good standing and financial stability, serving as a buffer against seasonal inflation fluctuations.
A TIE above 3 is deemed healthy and gives reassurance to the debtors and investors that a company can cover its interest expenses without straining its operational cash flows. A strong TIE supports better credit terms: lower interest rates and higher investor/debtor confidence, contributing to cheaper capital access for other ventures.
Debt-to-Equity Ratio
This particular ratio declares to what extent a company incurs debt over shareholders’ equity or the proportion of debt versus equity. In practical terms, Perekrestok’s debt-to-equity ratio is not a surreal term: it is configured in the DNA of the company, showing how much the company borrowed compared to what shareholders have invested.
It is a refreshing way of looking at financial performance in the retail sector. A moderate D/E strikes a balance of growth with potential financial risks. For example, with a 0.6 ratio, for every 1 dollar of equity, Perekrestok has 0.6 dollars of debt. Given specifics in Russian markets, it is vital to maintain a healthy ratio with inflation and chain disruptions holding over the head.
Perekrestok’s total equity is RUB 250 billion and the total debt of RUB 150 billion. Then, 150 billion / 250 billion equals 0.6, showing that the company has 60% debt to equity. With the rising ratio, the company might not maintain a status quo and face challenges to credit market volatility and escalated credit costs.
Perekrestok has demonstrated healthy debt management, having ratios with industry norms and offsets borrowing with advanced supply chain technologies it invested the borrowed money in the first place, having steady revenue streams, contributing to modernization.
As a retail company, Perekrestok possesses vast asset wealth like stores and warehouses: the D/E ratio provides an insight into whether the company can finance those assets via debt or equity, which is enough or not to buffer the market turmoils.
The bottom line is that debt-to-assets and debt-to-equity ratios are proven invaluable in assessing a company’s ability to keep the operations running smoothly or not.
To be continued on my juicy ♦️ASAP| Business English Hunger Telegram channel…
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