Debt/equity ratio

Two other factors that need to be considered in project evaluation that are not expressly found in financial statements are inflation and debt-equity ratio. 

The financial crisis in the Far East during the late 1990s exposed the high debt levels of the petrochemical operations, which were not being serviced. This has forced restructuring of the industry in order to reduce debt levels. For instance some companies had debt/equity ratios of well over 300%. Since restructuring, these levels have been reduced. 

Figure 122 shows an estimate of ammonia production costs at various locations. In this figure the capital-related costs are based on a debt/equity ratio of 60/40. With 6 % depreciation of fixed assets and spare material, 8 % interest on debts and 16 % ROI on equity, corresponding to a total of about 16.5 % of the total capital involved. The total capital includes the LSTK price for plant and storage, cost of the off-sites for an industrialized site, in-house project costs, spare parts and catalyst reserves, working capital. 

Adapted from Kohan and Wilhelm (1980). Nonregulated industrial financing is 100% equity and 15% DCF-ROR regulated utility financing is 65/35 debt/equity ratio. 

Table 8.32 Debt/Equity Ratios for Selected Companies ...

For natural gas at US 0.5/MM BTU, the feedstock cost element in the product is about US 5/bbl. The total fixed and variable operating costs are estimated at another US 6/bbl. The total required selling price will depend on fiscal regimes, debt/equity ratio, type of loans, corporate return requirements, the premium for the very good quality of the products etc. 

For example, in the United States, an average debt/equity ratio may be in the range of 20/80 to 40/60 but in Japan the reverse ratios are common. We contend that this directly or indirectly favors the innovative process. 

Financial ratios are condensed data reporting quantifiable facts. With their help, complicated facts, structures, and procedures of corporations are depicted in a simple way to permit a fast and comprehensive overview. Thus, financial ratios are appropriate for the complex task of comparative credit quality assessment. To simplify the methodology, the number of financial ratios used should not be too large, and every financial ratio must be economically plausible. The selection of particularly appropriate financial ratios is a significant component of every rating methodology. These financial ratios should represent areas of relevance for creditors as exactly as possible, like debt/equity ratio, profitability, and liquidity. In this context, not only the level of these financial ratios is important but also their development over time. 

The amount of equity considered safe for any investment is about 30% of the total value (debt equity ratio = 2.1). Therefore, an investor should collect about US 100 million in assets. If this is possible, the other investing opportunities are more profitable (e.g., in beer production and the plastic industry), and the risk of investing in a fertilizer project would transfer the capital to other projects. 

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