Zahid BhattiReg. No. 1431-310258

Financial Leverage Its Effects and Ways of Raising Capital

Financial Analysis of Noon Pakistan Limited

Debt and Equity Analysis Noon Pakistan limited has raised capital by 34% of Equity and 66% Debt in the year 2008. In the year 2009 the proportion of equity is decreased from 34% to 25% and on the other hand the debt of the company is increased from 66% to 75%.

Where as in 2010 the proportion of equity is increased from 25% to 28% and proportion of debt is decreased from 75% to 72%.In 2011 the debt has decreased to 64% and equity has increased to 36%.

The Debt to Equity Ratio measures how much money a company should safely be able to borrow over long periods of time.

The debt to equity ratio is increased from 2008 to 2009 that is 0.74 to 0.85

Debt Equity Ratio Analysis

But then it is decreased in the year 2010 to 0.65 because of the fluctuations in debt and equity proportions. Whereas in the year 2011 the debt and equity ratio has increased to 0.85.

Debt to Capital ratio shows the proportion of a company's debt to its total capital,

The debt to capital ratio is increased from 2008 to 2009 that is 0.66 to 0.75 respectively.

It is decreasing in 2010 and 2011 that is 0.72 and 0.64 respectively, which shows that the company has reliance on capital rather than debt.

Debt to Capital Ratio Analysis

The debt/asset ratio shows the proportion of a company's assets which are financed through debt.

The debt to assets ratio in 2008 is 0.48 and it is increasing in 2009 to 0.59 .

But it showed a decrease in 2010 to 0.52 and than again decreased in 2011 to 0.41.

This shows that the company is having positive net worth.

Debt to Assets Ratio Analysis

The financial leverage ratio indicates the extent to which the business relies on debt financing.

The financial leverage of the company in the year 2008 is 4.08 and is increasing to 5.13 in the year 2009.

Financial Leverage Analysis

But it is decreasing in 2010 to 5.08 in 2011 the leverage ratio is decreased to 4.40. That shows the company has greater reliance on equity.

A calculation of a company's ability to meet its interest payments on outstanding debt.

The interest coverage ratio of Noon Pakistan ltd is high is 2008 which shows that the firm will have no difficulty in meeting its debt obligations.

It showed a decrease in 2009 by 3.15 to 0.61 and than again increased in 2010 and 2011 from 1.5 to 2.37 respectively.

Interest Coverage Ratio Analysis

As a result of our analysis of noon Pakistan limited we can comment that the company has greater reliance on debt rather than equity the over all equity of the company shows a declining trend and debt is rising. due to which the company’s debt equity, debt to capital and debt to asset ratio is continuously increasing.

Conclusions

Financial leverage of the company is very high which is risky for Noon Pakistan Limited it also shows that the company is taking more and more debt due to which taking further debt in future will not be possible.

Nishat Mills Limited has raised capital by 86% of Equity and 14% Debt in the year 2008 and 92% and 8% in the year 2009.

Where as in 2010 the proportion of equity is increased from 92% to 97% and proportion of debt is decreased from 8% to 3%.

In 2011 the debt has decreased to 2% and equity has increased to 98%.

Financial Analysis of Nishat Mills Limited

The debt to equity ratio is continuously decreasing in all years that is in 2009 it decrease from 0.17 to 0.09.

In the year 2010 it decreased to 0.03 whereas in the year 2011 the debt equity ratio is only 0.02.

Debt Equity Ratio Analysis

The debt to capital ratio is decreasing from 2008 to 2009 that is 0.14 and 0.08 respectively.

The debt to capital ratio is still decreasing in 2010 and 20011 that is 0.03 and 0.02 respectively, which shows that the company has reliance on capital rather than debt.

Debt to Capital Ratio Analysis

The debt to assets ratio in 2008 is 0.13 and it is decreasing in 2009 to 0.09.

In 2010 and 2011, the Debt to Asset ratio has decreased to 0.04 and 0.02 respectively.

Debt to Assets Ratio Analysis

The financial leverage of the company in the year 2008 is 1.26 and is decreased to 0.94 in the year 2009.

And also showed the decreasing trend in 2010 and 2011 that is 0.79 and 1.06 respectively.

Financial Leverage Analysis

The interest coverage ratio of Nishat Textile Limited is falling from 2008 to 2010 that is 4.9,2.6 and 2.5 respectively.

Whereas it increased in 2011 to 7.4. Which shows that the firm is not having difficulty in meeting its debt obligations.

Interest Coverage ratio Analysis

As a result of our analysis we conclude that the over all leverage of the company is low as the major source of the raising capital is owners equity and Nishat Textile Mill have less reliance on debt and the company have capacity to pay off it debts 7.4 times.

Conclusions

It is less risky for a company to have a low ratio of financial leverage. With a low leverage companies can meet its debt obligations and there is an opportunity for it to find new lenders in the future.

The companies with high leverage don’t have capacity to borrow more funds whereas the low leverage companies can borrow funds at the time they need.

Any time companies use debt financing, they are running the risk of bankruptcy. The more debt financing it uses, the higher the risk of bankruptcy.

Recommendations

If you don’t make loan payments on time, you can ruin your credit rating and make borrowing in the future difficult or impossible.Company can do both debt and equity financing but the proportion of debt should be lower than proportion of equity so that the leverage ratio would be lower and it is beneficial for the company to pay off its debt.

It is more risky for a company to have a high ratio of financial leverage. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future.

In short what is best; debt or equity financing? It depends on the situation. Your financial capital, potential investors, credit standing, business plan, tax situation, the tax situation of your investors, and the type of business you plan to start all have an impact on that decision.