The metrics in the capital structure section give insight
into the capital structure of the firm i.e. how much debt and equity
it uses to fund itself. These analytics are important in valuations
and cost of capital calculations, yet they can also prove useful in
credit analysis in terms of the likelihood of bankruptcy e.g. highly
leveraged firm ceteris paribus versus a firm with little or no
leverage. This section also contains the number of shares – an
input in the previous per share figure section, and the dividend
figure (which is then used to calculate the dividend payout ratio).
Debt to equity
= liabilities divided by equity (indicates the use of debt
relative to equity, the higher the figure the higher the use of
leverage, a similar ratio the equity multiplier also indicates
this, however D/E ratio is widely used also)
Interest coverage
= EBIT (Earnings Before Interest & Tax) divided by interest
expense (also called times interest earned, basically this
ratio shows how well a company is covering its interest expense,
in terms of credit risk this ratio is a good gauge – simply
the higher the ratio the better able the company is to cover its
interest payments (and hopefully principal also!).)
Shares
Number of common stock on issue, taken from notes to the
financial statement. The figures used in our analysis are
basic, but variations can include factoring in the effect of
preference shares, warrants, convertible debt etc, to come up
with diluted share figures or average figures.
Dividends paid
This figure is dividends paid, i.e. the amount of dividends that
were paid over the financial year – taken from the statement
of cash flows (under financing cash out flows), this is not
the same as dividends declared, so there may be differing
figures…
Dividend
payout ratio
= Dividends paid divided by NPAT (represents the proportion
of profits paid out to share holders – the opposite of this is
the retention ratio (i.e. 1-dividend payout ratio), the dividend
payout ratio shows how much of the profits the shareholder can
expect to receive in cash – while also revealing how much
profits are reinvested into the firm… flowing on from that is
the sustainable growth rate discussed in a later section).
