INVESTMENTS

Equity and Fixed Income Investments

Equity and Fixed Income Investments

Introduction

According to finance researchers a strong portfolio can only be constructed when investors diversify their investments in different nature of securities and assets. Investment has been classified into two major asset classes which are equity and fixed income. Fixed income investment could be in bonds, CDs and interest bearing securities while Equity investment refers to stocks and securities trading in stock market.

It is essential that investors must deem their aims and risk tolerance while allotting investment between fixed income and equity securities. The focus of this paper would be on advising Severn Trent Plc concerning who are seeking to raise finance by issuing debt securities. Begin a capital market specialist, a clear and detailed report profiling of Severn Trent Plc of various options will be provided.

Discussion

Overview of Severn Trent Plc

Severn Trent plc is a UK based water and waste Utilities corporation listed in FTSE 100. This company offer and treat water and water waste in domestic region as well as international region. Severn Trent has two main businesses that are Severn Trent Water and Severn Trent Services.

Part 1: Company Evaluation

Using financial statements of Severn Trent plc the following items has been evaluated.

Company position to issue Debt Securities or Equity

Debt and equity securities are financial instruments and companies use these instruments to finance their operations. Debt securities are borrowed fund on which company has to pay interest through the tenure. As far as equity securities are concern, company issue shares to the general public and pay dividend after recovering entire expenses. Dividend payment is less than the interest payment on debt (Melicher, Norton, 2011, p. n.d).

Source: 'Severn Trent Plc' annual report 2012, pp. 79-139

Gearing ratios

2011

2012

LT Debt to Equity

Long-Term Debt /Shareholders' Equity

3.93

4.43

Total Debt to Equity

Total Debt / Shareholders' Equity

3.95

4.52

Interest Coverage

EBIT / total interest

2.16

1.98

Severn Trent plc debt financing trend has been increased from 2011 to 2012. In 2011, total debt was £4,344,400,000 while in 2012 it increased to £4,398,800,000 due to increase in Current Debt and Capital Leases to 89,300,000 while Long-Term Obligations reduce in 2012 from 4,320,500,000 to 4,309,500,000. Since, overall increase was higher than reduction; this resulted in Total Debt to Equity in 2012 to be 4.52 from 3.95 in 2011. This states that company has financed their majority of their operation via debt while very small portion has been financed through equity. This scenario further states that company is highly leverage and is not a good indication towards investors. Long term debt to equity is also increase from 2011 to 2012 i.e. 3.93 to 4.43.Interest coverage ratios is 2.16 in 2011 while it reduced to 1.98 in 2011 due to increase in borrowing and profit did not increased with same percentage as loans (Veronesi, 2011, p. 35).

The leverage trend of Severn Trent plc indicates that company does not have enough capacity to pay off their debt payments. Company has been burden much by debt expenses. According to finance theory, company interest coverage ratio is ...