Chai Watana Tannery Corporate Bonds and Leverage Analysis

CWT Stock  THB 1.11  0.01  0.91%   
Chai Watana Tannery has over 628 Million in debt which may indicate that it relies heavily on debt financing. . Chai Watana's financial risk is the risk to Chai Watana stockholders that is caused by an increase in debt.

Asset vs Debt

Equity vs Debt

Chai Watana's liquidity is one of the most fundamental aspects of both its future profitability and its ability to meet different types of ongoing financial obligations. Chai Watana's cash, liquid assets, total liabilities, and shareholder equity can be utilized to evaluate how much leverage the Company is using to sustain its current operations. For traders, higher-leverage indicators usually imply a higher risk to shareholders. In addition, it helps Chai Stock's retail investors understand whether an upcoming fall or rise in the market will negatively affect Chai Watana's stakeholders.
For most companies, including Chai Watana, marketable securities, inventories, and receivables are the most common assets that could be converted to cash. However, for Chai Watana Tannery, the most critical issue when managing liquidity is ensuring that current assets are properly aligned with current liabilities. If they are not, Chai Watana's management will need to obtain alternative financing to ensure there are always enough cash equivalents on the balance sheet to meet obligations.
  
Check out the analysis of Chai Watana Fundamentals Over Time.
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Given the importance of Chai Watana's capital structure, the first step in the capital decision process is for the management of Chai Watana 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 Chai Watana Tannery to issue bonds at a reasonable cost.

Chai Watana Tannery Debt to Cash Allocation

Chai Watana Tannery has accumulated 628 M in total debt with debt to equity ratio (D/E) of 115.0, indicating the company may have difficulties to generate enough cash to satisfy its financial obligations. Chai Watana Tannery has a current ratio of 1.23, suggesting that it is in a questionable position to pay out its financial obligations in time and when they become due. Debt can assist Chai Watana until it has trouble settling it off, either with new capital or with free cash flow. So, Chai Watana's shareholders could walk away with nothing if the company can't fulfill its legal obligations to repay debt. However, a more frequent occurrence is when companies like Chai Watana Tannery sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for Chai to invest in growth at high rates of return. When we think about Chai Watana's use of debt, we should always consider it together with cash and equity.

Chai Watana Assets Financed by Debt

Typically, companies with high debt-to-asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the Chai Watana's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Chai Watana, which in turn will lower the firm's financial flexibility.

Chai Watana Corporate Bonds Issued

Understaning Chai Watana Use of Financial Leverage

Leverage ratios show Chai Watana's total debt position, including all outstanding obligations. In simple terms, high financial leverage means that the cost of production, along with the day-to-day running of the business, is high. Conversely, lower financial leverage implies lower fixed cost investment in the business, which is generally considered a good sign by investors. The degree of Chai Watana's financial leverage can be measured in several ways, including ratios such as the debt-to-equity ratio (total debt / total equity), or the debt ratio (total debt / total assets).
Chai Watana Tannery Group Public Company Limited manufactures and exports leather finished products. Chai Watana Tannery Group Public Company Limited was founded in 1972 and is based in Muang, Thailand. CHAI WATANA operates under Auto Parts classification in Thailand and is traded on Stock Exchange of Thailand.
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Other Information on Investing in Chai Stock

Chai Watana financial ratios help investors to determine whether Chai 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 Chai with respect to the benefits of owning Chai Watana 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.