LONG TERM DEBT

Times interest earned ratio It shows how many times the interest expenses are covered by the net operating income (income before interest and tax) of the company. It is a long-term solvency ratio that measures the ability of a company to pay its interest charges as they become due. It is computed by dividing the income before interest and tax by interest expenses. Analysis Loans and borrowings are cheap source of finance primarily because the interest cost is usually tax deductible, unlike dividend payments. However, interest costs are necessary payments unlike dividends which are optional to management's intent. Therefore, the level of debt financing must be at an acceptable level and should not exceed the point which exposes an organization to unacceptably high financial risk. Interest cover of lower than 1.5 times may suggest that fluctuations in the profitability could potentially make an organization vulnerable to delays in interest payments. That is why times interest earned ratio is of special importance to creditors. They can compare the debt repayment ability of similar companies using this ratio. Although profitability is not absolutely essential to maintain liquidity in the short term, profitability of operations is crucial to enable an organization to meet its debt servicing obligations in the long run. Management may also use interest cover ratio to determine whether further debt financing can be undertaken without taking unacceptably high financial risk. Interpretation Times interest earned in Sept-2007 Times interest earned in Sept-2008 Times interest earned in Sept-2009 Times interest earned in Dec-2010 1.58 1.22 1.12 1.25

The ratio is showing a declining pattern from 1.58 to 1.22 to 1.12.

Net earnings continuously going down. Interest payments have continuously increased. Debentures & bonds are redeemed and hence the rising interest. Reserves are being utilized in redeeming the debentures.

The year 2012 show a loss of 851 mn with interest obligations shooting high to 970 mn. Since the mandatory interest obligation has to be fulfilled even if the company is incurring loss, the times interest earned ratio is less than 1, i.e. 0.12 (2012).

Fixed charge coverage ratio Fixed charge coverage is a ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. Higher value of fixed charge coverage means a greater ability of a business to repay its interest and leases. There is a declining trend in the fixed charge coverage which is interrupted by a substantial fall from September 2007 and then the declining trend continues till 2012. When we observe the components of the formula i.e. EBIT, interest paid and leases, we see that the EBIT and lease payment figures demonstrate an decreasing trend till sep 2009 and then increase in dec 2010 and again fall till 2012 whereas interest paid shows a increasing trend till dec 2010; after which there is a gradual fall from 2011 but 2012 increase to 970.4. Thus we can conclude that it is the EBIT that concludes the most to the fluctuation in fixed charge coverage. Apart from that, the growth trend in intreast paid is proportionately greater than lease payments which explains the gradual decrease in the fixed charge coverage over the years.

Debt ratio Is a ratio of total liabilities of a business to its total assets. It is a solvency ratio and it measures the portion of the assets of a business which are financed through debt. The debt ratio in all the six years is less than 1 which means that the company has more assets than debts. The lower the company depends on debt for assets formation, the less risky the company is. The ratio indicates that the company is in a position of paying its debts. Excessive debts results in very heavy interest and principle repayment burden. There is instability in the debt ratio % from 2008 to 2012, the % is increasing. This is not a good sign as the more the debt ratio the higher the companys risk increases. The borrowings from bank and foreign investors has reduced in 2012, whereas the other borrowings have increased this has impacted the debt ratio. The liabilities have reduced. Reserves and funds have reduced from 4214.40 in 2011 to 3568.00 in 2012. I.e. 15 % reduction. This shows that the reserves are paid, means that that the liabilities are paid. The other borrowings have roused from 2250.00 in 2011 to 5016.00 in 2012 i.e. 123% rise that has increased the liabilities of the company. They must have

borrowed these funds for operations but there is no rise in sales revenues in 2012. Borrowing has increased the debt ratio. When analyzing the balance sheet, it is seen that there is a rise in the intangible assets in March 2012 it has gone up to 15.7 which was 0 in 2011. This explains that this rise has contributed in assets, but at the same time ( see the above table) investments have gone down in 2012 , inventories have gone up in 2012 and deferred tax assets have increased drastically from 7.4 to 240.9 in 2012 this has impacted the debt ratio to increase.

Debt Equity Ratio:

Trends of Debt : Equity Ratio Period Fin Year Sept'07 Sept'08 Sept'09 Dec'10 Dec'11 Dec'12 Total Liabilities (Rs.Crs) 1546 1383 1518 1637 1878 1756 Long Term Debts Value % to Total (Rs.Crs) Liabilities 281 18% 385 490 479 537 612 28% 32% 29% 29% 35% Debt : Shareholders Eqity Equity (Rs.Crs) Ratio 35.5 8 41.1 40.4 39.8 39.2 39.2 9 12 12 14 16

Definition: A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.
1)

The debt equity ratio of 8 to 16 is a very high ratio, which indicates that the company is using a very high level to finance its operations. 2) Very high level of debts is not acceptable because of the high interest burden it creates for the company and its earnings. High interest burden reduces the earnings of the company. However in the case of Videocon, the component of long term debt as a percentage of total liabilities has been as low as 18% in sep 2007 & as high as

35% in the year ending December 2012. Such a low percentage of long term debts dos not affect the earnings of the company. All in all the debt equity ratio depicts being high is not going to impact th earnings of the company.