ASYMMETRIC INFORMATION AND CAPITAL STRUCTURE ANALYSIS

Asymmetric information and Capital Structure analysis

Asymmetric information and Capital Structure analysis

Ratio Analysis:

Leverage Ratios:

Leverage ratios demonstrate how much debt the company is using to finance its assets and operations. These ratios are of particular interest to investors and indicate a level of risk. Info Systems Technology (TST) is more leveraged (46 cents of every dollar of long-term capital is in the form of long-term debt) in comparison to the industry and health care sector. A significant proportion of TST capital structure is financed by long-term, interest bearing debt, which makes them more vulnerable. If Info Systems Technology (TST) does not generate enough cash to pay debts (principal and interest), Info Systems Technology (TST) is at risk towards their creditors and this is a cause of concern, as this will affect their inflow of working capital. Info Systems Technology (TST) is at further risk if returns on their investments fall below the cost of borrowing. However, this does create an advantage in that the interest paid on the debt is deductible in determining income subject to income taxes (Mergent Online, 2005).

Despite the above, Info Systems Technology (TST) does have the ability to meet their annual interest payments with a satisfactory times interest earned ratio. TST debt equity ratio is declining indicating the issuance of shareholders equity to raise more capital.

Liquidity Ratios:

Liquidity ratios measure a company's short-term ability to generate cash to pay current maturing obligations or in cases of emergency. These ratios are also of particular interest to investors. Info Systems Technology (TST) has a high liquidity ratio. Info Systems Technology (TST) has the best ability to liquefy assets quickly (within one year) in order to meet current obligations. In 2001, TST quick ratio (1.1) was a concern as they were very close to not being able to pay their current liabilities. Info Systems Technology (TST) improved this position in 2002, almost too far to 1.75, but as of 2005 they stand at 1.48, which is reasonably good. A weakness of TST position is that in 2002, both their current and quick ratios were at a level where Info Systems Technology (TST) has excess cash left over after meeting current obligations. Info Systems Technology (TST) was not able to take full advantage of cash available to them to invest that could lead to additional revenue. They rectified that weak area in 2003 by improving the surplus cash into research and development and stand at a decent liquidity ratio as of 2005.

Efficiency Ratios:

Efficiency ratios demonstrate how efficiently an organization is using its assets and how quickly certain assets are turned into cash. Info Systems Technology (TST) has the best receivable turnover ratio, in comparison to its competitors and the industry. This means that it takes Info Systems Technology (TST) the fewest days to collect cash from debtors. However, they are still taking approximately 56 days to collect on their accounts receivables, which given their higher leverage may be beneficial to ...