4 Leverage Ratios you should look into while analysing Energy stocks
A thread 🧵👇🏻
#investing #finance
A thread 🧵👇🏻
#investing #finance
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Energy stocks are capital intensive in nature & thus use debt to run its business.
Using debt is not entirely a bad thing as it can increase shareholders return.
Reason - Cost of debt is lower than cost of equity.
However, very high debt can put pressure on the company.
Energy stocks are capital intensive in nature & thus use debt to run its business.
Using debt is not entirely a bad thing as it can increase shareholders return.
Reason - Cost of debt is lower than cost of equity.
However, very high debt can put pressure on the company.
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Now let’s look into the 4 Ratios.
1) Debt-to-EBITDA
This ratio is useful in knowing how many years of EBITDA would be necessary in order to pay back all the debt.
Typically, it can be alarming if the ratio is over 3, but this can vary depending on the industry.
Now let’s look into the 4 Ratios.
1) Debt-to-EBITDA
This ratio is useful in knowing how many years of EBITDA would be necessary in order to pay back all the debt.
Typically, it can be alarming if the ratio is over 3, but this can vary depending on the industry.
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2) EBIT/Interest Expense
Also called the interest coverage ratio, is used to determine a firm's ability to pay interest on outstanding debt.
The greater the multiple, the less risk to the lender. An energy stock should cover their interest by at least a factor of 2:1.
2) EBIT/Interest Expense
Also called the interest coverage ratio, is used to determine a firm's ability to pay interest on outstanding debt.
The greater the multiple, the less risk to the lender. An energy stock should cover their interest by at least a factor of 2:1.
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3) Debt-to-Capital
It is used to know a firm's financial structure. If a stock has a high
D/C ratio compared to its peers, then it may have a higher default risk.
Energy stocks seems to have about a 40% D/C threshold. Above that level, debt costs increase considerably.
3) Debt-to-Capital
It is used to know a firm's financial structure. If a stock has a high
D/C ratio compared to its peers, then it may have a higher default risk.
Energy stocks seems to have about a 40% D/C threshold. Above that level, debt costs increase considerably.
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4) Debt-to-Equity
It is calculated by dividing total liabilities by shareholders equity.
The ratio indicates what proportion of equity & debt a company uses to finance its assets.
However, this ratio can widely vary among energy stocks, depending on their size.
4) Debt-to-Equity
It is calculated by dividing total liabilities by shareholders equity.
The ratio indicates what proportion of equity & debt a company uses to finance its assets.
However, this ratio can widely vary among energy stocks, depending on their size.
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What other ratios do you think one should look at while analysing a energy stock?
@caniravkaria @SwarnashishC @Jitendra_stock @datta_arvind @kuttrapali26 @SumitResearch
@Anshi_________ @Rishikesh_ADX
@AvadhMaheshwar2
Happy Learning!🙂
What other ratios do you think one should look at while analysing a energy stock?
@caniravkaria @SwarnashishC @Jitendra_stock @datta_arvind @kuttrapali26 @SumitResearch
@Anshi_________ @Rishikesh_ADX
@AvadhMaheshwar2
Happy Learning!🙂
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