Qinghaihuading Industrial Morgan Bond

600243 Stock   4.45  0.06  1.37%   
At present, Qinghaihuading Industrial's Short Term Debt is projected to increase significantly based on the last few years of reporting. The current year's Net Debt is expected to grow to about 174.1 M, whereas Long Term Debt is forecasted to decline to about 3.7 M. With a high degree of financial leverage come high-interest payments, which usually reduce Qinghaihuading Industrial's Earnings Per Share (EPS).
At present, Qinghaihuading Industrial's Non Current Liabilities Other is projected to decrease significantly based on the last few years of reporting. The current year's Change To Liabilities is expected to grow to about 93.9 M, whereas Total Current Liabilities is forecasted to decline to about 324.6 M.
  
Check out the analysis of Qinghaihuading Industrial Fundamentals Over Time.
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Given the importance of Qinghaihuading Industrial's capital structure, the first step in the capital decision process is for the management of Qinghaihuading Industrial to decide how much external capital it will need to raise to operate in a sustainable way. Once the amount of financing is determined, management needs to examine the financial markets to determine the terms in which the company can boost capital. This move is crucial to the process because the market environment may reduce the ability of Qinghaihuading Industrial Co to issue bonds at a reasonable cost.
Popular NameQinghaihuading Industrial Morgan Stanley 3591
SpecializationSpecialty Industrial Machinery
Equity ISIN CodeCNE0000015J1
Bond Issue ISIN CodeUS61744YAK47
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Qinghaihuading Industrial Outstanding Bond Obligations

Understaning Qinghaihuading Industrial Use of Financial Leverage

Qinghaihuading Industrial's financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures Qinghaihuading Industrial's total debt position, including all outstanding debt obligations, and compares it with Qinghaihuading Industrial's equity. Financial leverage can amplify the potential profits to Qinghaihuading Industrial's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if Qinghaihuading Industrial is unable to cover its debt costs.
Last ReportedProjected for Next Year
Long Term Debt3.9 M3.7 M
Short and Long Term Debt103.7 M98.5 M
Short Term Debt338.4 M385 M
Net Debt130.1 M174.1 M
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Other Information on Investing in Qinghaihuading Stock

Qinghaihuading Industrial financial ratios help investors to determine whether Qinghaihuading Stock is cheap or expensive when compared to a particular measure, such as profits or enterprise value. In other words, they help investors to determine the cost of investment in Qinghaihuading with respect to the benefits of owning Qinghaihuading Industrial security.

What is Financial Leverage?

Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing. In most cases, the debt provider will limit how much risk it is ready to take and indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending, the financial provider uses the assets as collateral until the borrower repays the loan. In the case of a cash flow loan, the general creditworthiness of the company is used to back the loan. The concept of leverage is common in the business world. It is mostly used to boost the returns on equity capital of a company, especially when the business is unable to increase its operating efficiency and returns on total investment. Because earnings on borrowing are higher than the interest payable on debt, the company's total earnings will increase, ultimately boosting stockholders' profits.

Leverage and Capital Costs

The debt to equity ratio plays a role in the working average cost of capital (WACC). The overall interest on debt represents the break-even point that must be obtained to profitability in a given venture. Thus, WACC is essentially the average interest an organization owes on the capital it has borrowed for leverage. Let's say equity represents 60% of borrowed capital, and debt is 40%. This results in a financial leverage calculation of 40/60, or 0.6667. The organization owes 10% on all equity and 5% on all debt. That means that the weighted average cost of capital is (.4)(5) + (.6)(10) - or 8%. For every $10,000 borrowed, this organization will owe $800 in interest. Profit must be higher than 8% on the project to offset the cost of interest and justify this leverage.

Benefits of Financial Leverage

Leverage provides the following benefits for companies:
  • Leverage is an essential tool a company's management can use to make the best financing and investment decisions.
  • It provides a variety of financing sources by which the firm can achieve its target earnings.
  • Leverage is also an essential technique in investing as it helps companies set a threshold for the expansion of business operations. For example, it can be used to recommend restrictions on business expansion once the projected return on additional investment is lower than the cost of debt.
By borrowing funds, the firm incurs a debt that must be paid. But, this debt is paid in small installments over a relatively long period of time. This frees funds for more immediate use in the stock market. For example, suppose a company can afford a new factory but will be left with negligible free cash. In that case, it may be better to finance the factory and spend the cash on hand on inputs, labor, or even hold a significant portion as a reserve against unforeseen circumstances.

The Risk of Financial Leverage

The most obvious and apparent risk of leverage is that if price changes unexpectedly, the leveraged position can lead to severe losses. For example, imagine a hedge fund seeded by $50 worth of investor money. The hedge fund borrows another $50 and buys an asset worth $100, leading to a leverage ratio of 2:1. For the investor, this is neither good nor bad -- until the asset price changes. If the asset price goes up 10 percent, the investor earns $10 on $50 of capital, a net gain of 20 percent, and is very pleased with the increased gains from the leverage. However, if the asset price crashes unexpectedly, say by 30 percent, the investor loses $30 on $50 of capital, suffering a 60 percent loss. In other words, the effect of leverage is to increase the volatility of returns and increase the effects of a price change on the asset to the bottom line while increasing the chance for profit as well.