Ratio Analysis

Ratio Analysis

Introduction

This report provides the picture of financial performance of two companies which are Hudson Chemical and International Spirits Inc. The purpose of this report is to analyze that how effectively the companies are managing their capital structure and working capital in order to generate sound returns on companies' equity and assets. This will further help in understanding the trends, relationships and also in analyzing the strengths and weaknesses of the companies.

Discussion

Hudson Chemicals

Hudson Chemicals provides cleaning solutions for all domestic, industrial and commercial use. It also offers cleaning services for maintenance of buildings. The company was incorporated in 1929 and since then it is involved in providing best cleaning alternate to its customers.

Hudson Chemicals had issued corporate bonds, being an investor, one must analyse the financial performance of the company in order to forecast the credit risk associated with the bond and the company itself. Further, whenever an investor is beginning with the analyses of the company, he must consider the plans which the company is going to undertake as they would directly impact the company's performance and its credit rating.

The company's current Debt to Equity ratio is 0.3, which explains that the company's assets are financed 30% through debt and 70% through equity, i.e. company is majorly equity financed. The strategy of the company seems secure as the cleaning industry is a price sensitive industry where fluctuations in prices could impact demand and supply at the large extend. Therefore, the smart companies in this industry would also take the sound decision of financing more of its assets through equity, as capital raised through equity is not paid back. Further, unlikely debt financing, the return on equity financing is not fixed. This provides a permissible room for growth to the company (Welsh, 1996).

The current credit rating of the company's bond is A, which insures the investors that the company is a good and a safe invest, as company has good resources to pay back to its investors. But an investor must consider the decisions / plans which the company is planning to undertake. Like Hudson has guaranteed the long term debt of its associate, that in case the associate won't be able to pay back the debt of S995, 000, Hudson is going to pay back the Bank such a big amount. This would be a big and an additional / miscellaneous expense for Hudson which will affect the bottom line of the company.

If the guarantee materialized at any point than this will hit the ability of the company to cover its interest. Currently the interest coverage of the company is 4.72. However, the payment of $ 995,000 against the guarantee will reduce the operating profit (EBITDA) of the company. Currently, EBITDA is $ 4,450,000, which will be reduced to $ 3,455,000 after deduction of guarantee amount. This will further affect the interest coverage ratio, which will be decreased from 4.72 to 3.7.

This decision will also affect the company's capital structure as the company's balance sheet liabilities column will ...