Southern Michigan Debt

SOMC Stock  USD 18.65  0.05  0.27%   
Southern Michigan'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. Southern Michigan's financial risk is the risk to Southern Michigan 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).
Given that Southern Michigan's debt-to-equity ratio measures a Company's obligations relative to the value of its net assets, it is usually used by traders to estimate the extent to which Southern Michigan is acquiring new debt as a mechanism of leveraging its assets. A high debt-to-equity ratio is generally associated with increased risk, implying that it has been aggressive in financing its growth with debt. Another way to look at debt-to-equity ratios is to compare the overall debt load of Southern Michigan to its assets or equity, showing how much of the company assets belong to shareholders vs. creditors. If shareholders own more assets, Southern Michigan is said to be less leveraged. If creditors hold a majority of Southern Michigan's assets, the Company is said to be highly leveraged.
  
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Southern Michigan Bancorp Debt to Cash Allocation

Southern Michigan Bancorp currently holds 57.03 M in liabilities. Debt can assist Southern Michigan until it has trouble settling it off, either with new capital or with free cash flow. So, Southern Michigan'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 Southern Michigan Bancorp sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for Southern to invest in growth at high rates of return. When we think about Southern Michigan's use of debt, we should always consider it together with cash and equity.

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

Southern Michigan Corporate Bonds Issued

Most Southern bonds can be classified according to their maturity, which is the date when Southern Michigan Bancorp 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 Southern Michigan Use of Financial Leverage

Southern Michigan's financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures Southern Michigan's total debt position, including all outstanding debt obligations, and compares it with Southern Michigan's equity. Financial leverage can amplify the potential profits to Southern Michigan's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if Southern Michigan is unable to cover its debt costs.
Southern Michigan Bancorp, Inc. operates as the bank holding company for Southern Michigan Bank Trust that provides a range of commercial banking services to individuals, businesses, institutions, and governmental agencies primarily in the southwest Michigan communities. The company was founded in 1871 and is based in Coldwater, Michigan. Southern Michigan operates under BanksRegional classification in the United States and is traded on OTC Exchange.
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Other Information on Investing in Southern Pink Sheet

Southern Michigan financial ratios help investors to determine whether Southern Pink Sheet 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 Southern with respect to the benefits of owning Southern Michigan 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.