Introduction:
In this report, we will conduct an analysis of the financial leverage of the company and will also comment on the recent trends over the financing activities of the company. Overall, an extensive discussion will be made relating to the financial structure of the company and also the comparable firms.
Firm’s Leverage Policy: In comparison to Industrial Averages
For the purpose of evaluating the trend in the leverage policy of the company, we will be calculating the solvency ratios that will include analysis of the recent trend in debt management ratios and interest coverage ratio. In addition, we will also comment over the management’s discussion over the firm’s leverage policy:
i)Debt-Total Capital Ratio: Debt/ (Debt+Equity)
ii)Total Debt to Total Asset Ratio: Total Debt/ Total Assets
ii)Interest Coverage Ratio: Operating Earnings/ Interest Expenses
Leverage Analysis:
Referring to the above calculations, we find that although over the years, the debt management ratios have been constant, but in comparison to the industrial average, they are on higher side. For Instance, as for the Total Debt to Total Asset ratio, the multiple has remained constant at 0.39 indicating that around 39% of the assets of the company were financed with the debt position, while the industrial average is only 20%. This indicates that the company has aggressively financed its asset with debt financing. As for the Debt to Total Capital Ratio, the results were almost in line with industrial average of 0.30 as the ratio multiple of the company was constant at 0.31.
However, the outcome of interest coverage ratio was satisfying for us that indicated an increase from 2.16 to 4.15 pointing out that there is significant improvement in the interest payment capacity of the company.
Overall, the company is aggressively leveraged in comparison to the industrial average while its high debt position is justified with improvement in the interest coverage ratio.
Firm’s Leverage Policy: In comparison to comparable firms
i)Debt-Total Capital Ratio: Debt/ (Debt+Equity)
ii) Total Debt to Total Asset Ratio: Total Debt/ Total Assets
iii)Interest Coverage Ratio: Operating Earnings/ Interest Expenses
Leverage Analysis:
Referring to the calculations above, we find that Ardent is less aggressive in comparison to its competitors, Aristocrat and Crown Resorts. As for the Debt to Total Capital Ratio, while Ardent had constant ratio multiple of 0.31, both the other companies were found to be aggressively financed with ratio multiple of 0.50 and 0.77, respectively. However, in comparison to its competitors, Ardent has higher proportion of assets financed with debt with the ratio multiple of 0.39 while Aristocrat and Crown Resorts had debt-assets ratio multiple of 0.27 and 0.25, respectively.
Finally, the interest coverage ratio also indicated that Ardent has lower capacity to honor its interest obligations as during 2013, the company although increased its ITR ratio multiple to 4.15. However, the comparable firms had ITR multiple of 8.17 and 4.20, respectively.
Placement and Share-Buybacks:
During 2012, the company announced $50 Million institutional placement at $1.28 per security. This event was followed by a Security Purchase Plan that was oversubscribed that raised $22.2 million from the investors. As a result of this borrowing, the company entered into key acquisitions in its Health Club Division and also assisted additional growth capital for the Main Event Entertainment Business.
Target Leverage Ratios:
Referring to note of the financial statements, we find that the company has to work under Bank Covenants that prescribe the maximum target leverage ratios for the company. The same are discussed below:
- Gearing Ratio, i.e. Total Debt to Total Capital must not exceed 40%.
- Fixed Charge Coverage Ratio, i.e. Adjusted EBITDA to Fixed Charges, must be no less than 1.75.
- Debt serviceability ratio, being the ratio of debt to EBITDA adjusted for unrealizing and one off items must not exceed 3.25.
Recent Capital Expenditure of the company:
Referring to the Cash Flow Statement, we find that during the year 2013, the company has purchased plant and machinery worth $62.78 million and had also purchased business (net cash payment) for $67.51 Million.
As for Ardent Leisure Group, referring to the Statement of Financial Position, we find that the company has acquired term debt worth total of $343.91 million for all the mortgages of freehold property, leasehold mortgages over bowling centre, health club and marina leases held till date by the company.
Correspondence to Pecking Order Theory:
As per the pecking order theory of corporate finance, the cost of financing increases with asymmetric information. The theory states that retained earnings have no adverse selection problem, hence firms prefers to use internal funds and then proceed to issue debt, and only when it is no longer sensible to issue debt, they proceed with equity issue.
Referring to statement of financial position of the company, we found that the company has been least funded with retained earnings, followed by debt issue and then by equity financing. Hence, the company is not following Pecking Order Theory.
Works Cited
Andrea Leisure Group. (2013). Annual Report 2013. Andrea Leisure Group.
Asistocrat Lesiure Group. (2013). Annual Report 2013. Asistocrat Lesiure Group.
Crown Stars. (2013). Annual Report 2013. Crown Stars.
