Distribuidora de Gas Corporate Bonds and Leverage Analysis
DGCU2 Stock | ARS 1,670 5.00 0.30% |
Distribuidora's financial leverage is the degree to which the firm utilizes its fixed-income securities and uses equity to finance projects. Companies with high leverage are usually considered to be at financial risk. Distribuidora's financial risk is the risk to Distribuidora stockholders that is caused by an increase in debt. In other words, with a high degree of financial leverage come high-interest payments, which usually reduce Earnings Per Share (EPS).
Distribuidora |
Given the importance of Distribuidora's capital structure, the first step in the capital decision process is for the management of Distribuidora 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 Distribuidora de Gas to issue bonds at a reasonable cost.
Distribuidora de Gas Debt to Cash Allocation
The company has a current ratio of 1.21, suggesting that it is not liquid enough and may have problems paying out its financial obligations in time and when they become due. Debt can assist Distribuidora until it has trouble settling it off, either with new capital or with free cash flow. So, Distribuidora'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 Distribuidora de Gas sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for Distribuidora to invest in growth at high rates of return. When we think about Distribuidora's use of debt, we should always consider it together with cash and equity.
Distribuidora 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 Distribuidora's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Distribuidora, which in turn will lower the firm's financial flexibility.Distribuidora Corporate Bonds Issued
Most Distribuidora bonds can be classified according to their maturity, which is the date when Distribuidora de Gas has to pay back the principal to investors. Maturities can be short-term, medium-term, or long-term (more than ten years). Longer-term bonds usually offer higher interest rates but may entail additional risks.
Understaning Distribuidora Use of Financial Leverage
Distribuidora's financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures Distribuidora's total debt position, including all outstanding debt obligations, and compares it with Distribuidora's equity. Financial leverage can amplify the potential profits to Distribuidora's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if Distribuidora is unable to cover its debt costs.
Distribuidora de Gas Cuyana S.A. engages in distribution of natural gas in Argentina. The company was founded in 1992 and is based in Mendoza, Argentina. DISTRIB GAS is traded on Buenos-Aires Stock Exchange in Argentina. Please read more on our technical analysis page.
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Distribuidora financial ratios help investors to determine whether Distribuidora 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 Distribuidora with respect to the benefits of owning Distribuidora 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.