Ratios, financial 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. 

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. 

Capital structure is concerned with the ratio of borrowed capital to owner s equity. When inflation is low and the economy is stable, it is frequently cheaper to use borrowed money, if a company can secure lenders. However, a highly leveraged company—that is, one with a high debt-to-equity ratio—faces downside risk when business is bad. Stockholders receive high dividends when profits are good but bondholders expect the interest and principal to be paid on time, with the threat to a firm of insolvency and bankruptcy. Section 8.4.3 shows the effect of debt-to-equity ratio on company operations. Financial officers of companies are concerned with the optimum debt-to-equity ratio. 

Apart from a rating one could target the balance sheet as an indicator for bondholder value.Many evaluations of creditworthiness are based on financial ratios (e.g., debt to equity ratio, liquidity or profitability ratios).Measuring bondholder value in this way is always due to delay Balance sheets of listed corporations are published quarterly at... 

Capital Investment. Erom the viewpoint of a project, all of the capital that must be raised is external capital. Equity capital is the ownership capital, eg, common and preferred stocks or retained cash, whereas debt capital consists of bonds, mortgages, debentures, and loans. Nearly all investment involves a mixture of both types so as to maximize the return on investment (21). The debt ratio (debt/total capital) for the chemical industry is typically over 30%. Because financial details are not well known during the preliminary phases of project analysis, the investment is viewed simply as the total capital that must be expended to design and build the project. 

---