Grupo Posadas SAB Corporate Bonds and Leverage Analysis

POSADASA  MXN 24.90  0.20  0.81%   
Grupo Posadas' 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. Grupo Posadas' financial risk is the risk to Grupo Posadas 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).
  
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Given the importance of Grupo Posadas' capital structure, the first step in the capital decision process is for the management of Grupo Posadas 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 Grupo Posadas SAB to issue bonds at a reasonable cost.

Grupo Posadas SAB Debt to Cash Allocation

Many companies such as Grupo Posadas, eventually find out that there is only so much market out there to be conquered, and adding the next product or service is only half as profitable per unit as their current endeavors. Eventually, the company will reach a point where cash flows are strong, and extra cash is available but not fully utilized. In this case, the company may start buying back its stock from the public or issue more dividends.
Grupo Posadas SAB has accumulated 8.09 B in total debt. Grupo Posadas SAB has a current ratio of 0.31, indicating that it has a negative working capital and may not be able to pay financial obligations in time and when they become due. Debt can assist Grupo Posadas until it has trouble settling it off, either with new capital or with free cash flow. So, Grupo Posadas' 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 Grupo Posadas SAB sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for Grupo to invest in growth at high rates of return. When we think about Grupo Posadas' use of debt, we should always consider it together with cash and equity.

Grupo Posadas 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 Grupo Posadas' operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Grupo Posadas, which in turn will lower the firm's financial flexibility.

Grupo Posadas Corporate Bonds Issued

Understaning Grupo Posadas Use of Financial Leverage

Grupo Posadas' financial leverage ratio measures its total debt position, including all of its outstanding liabilities, and compares it to Grupo Posadas' current equity. If creditors own a majority of Grupo Posadas' assets, the company is considered highly leveraged. Understanding the composition and structure of Grupo Posadas' outstanding bonds gives an idea of how risky it is and if it is worth investing in.
Grupo Posadas, S.A.B. de C.V. owns, operates, and manages hotels primarily in Mexico. Grupo Posadas, S.A.B. de C.V. was founded in 1967 and is based in Mexico City, Mexico. GRUPO POSADAS operates under Lodging classification in Mexico and is traded on Mexico Stock Exchange. It employs 15701 people.
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When running Grupo Posadas' price analysis, check to measure Grupo Posadas' market volatility, profitability, liquidity, solvency, efficiency, growth potential, financial leverage, and other vital indicators. We have many different tools that can be utilized to determine how healthy Grupo Posadas is operating at the current time. Most of Grupo Posadas' value examination focuses on studying past and present price action to predict the probability of Grupo Posadas' future price movements. You can analyze the entity against its peers and the financial market as a whole to determine factors that move Grupo Posadas' price. Additionally, you may evaluate how the addition of Grupo Posadas to your portfolios can decrease your overall portfolio volatility.

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.