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Equities and Fixed Income Investments - Assignment Example

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Equities and Fixed Income Investments

While the analysis of the free cash flow will indicate if the company enjoys an unobstructed flow of cash. The analysis of the free cash flow to equity will indicate if the company is in a position to service the equity holders after clearing all the expenses, reinvestment and repayment of debt. The analysis of the EBITDA indicates the cash flow from the operations (Hatten and Ruhland, 2005). The cash flow from the operations will indicate if able to optimize its operational performance. With the increase in the efficiency of the operations the cash flow of the firm will increase. Table 1: Tabulation of different ratios   2013 2012 2011 2010 2009 Gearing ratio 0.95 0.91 0.90 0.90 0.90 EBITDA 492.2 469.8 497.7 507.4 451 FCFE N/A -86.8 -89.9 -376.6 -162.1 FCFF N/A 252,286.60 239,185.37 220,906.19 2,284,070.11 Source: (Severn Trent Annual Report, 2013) Fig 1: Gearing ratio Source: (Severn Trent Annual Report, 2013) The gearing ratio increased considerably in the last 5 years. This indicates that Severn Trent increasingly resorted to debt financing. The increase in the debt financing puts Severn Trent in a risky state, since higher the debt, higher the chance of insolvency, if the company is not able to finance the debt with the revenue (Jang and Namkung, 2009). This also indicates that the company has already resorted to huge amount of debt financing Severn Trent is in a highly leveraged position due to the presence of significant percentage of debt in its capital structure. Being in a highly leveraged position indicates that the company has a strong credit score otherwise the investors would not have taken Severn Trent into confidence (Kutner, Nachtsheim and Neter, 2004.). The highly leveraged position of Severn Trent also puts enormous pressure on the company to finance the debts. Fig 2: EBITDA Source: (Severn Trent Annual Report, 2013) The EBITDA does not indicate a linear increasing trend or decreasing trend. It is a mixed trend of intermittent ups and downs. Earnings before interest, tax, depreciation and amortization are highest in year 2010, while it is lowest in the year 2009. The increasing trend in the EBITDA is an indication that the company is in a position to finance the interest payments quite efficiently (Miravete, 2003). Although the previous graphs already indicate that the company is already in a highly leveraged state. This means that although the EBITDA shows an increasing trend but the highly leveraged position of the company are putting severe pressure on the EBITDA due to the need to clear the interest payments (Pinhanez, 2001). Fig 3: FCFE Source: (Severn Trent Annual Report, 2013) The free cash flow to equity showing a constant negative trend for the past 4 years, which is a cause of concern. The negative value of the ratio indicates that the company has been suffering cash crunch for the past 4 years. This clearly indicates that the company faced trouble trying to clear the dividend for the equity holders (Stumpf, Dunbar and Mullen, 2001). This is because of the reason that the equity holders are paid only after clearing the expenses for reinvestment and debt repayment. The negative ratio of the free cash flow to the equity shareholders is a clear sign of the fact that the expense due to the reinvestment ...Show more

Summary

Equities and Fixed Income Investments Table of Contents Part 1 3 a 3 b 8 c. 11 d. 12 e 13 Part 2 15 Reference List 18 Part 1 a Whether the company in a position to issue debt securities or should it consider issuing equity instead? In order to find out if Severn Trent is in a position to issue debt securities or should it consider issuing equity is found out by the analysis of gearing ratio, FCFF, FCFE and EBITDA…
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