A huge spike up is not a good sign. This increase in common shares occurs when employees exercise their stock options, secondary market offering or by conversion of convertible bonds, preferred shares or warrants into stock. A lower ratio generally indicates greater long-term financial safety.
A highly leveraged company has a limited debt capacity and the huge debt becomes a huge liability during a recession. It is the difference between the interest income generated and the amount of interest paid out to their lenders depositsdivided by total assets.
Figures are consolidated and restated. NPA are those assets for which interest is overdue for more than 3 months. Second, "cash is king", a company that does not generate cash over the long term is on its deathbed. It simply shows how effective the company is at using those assets to generate profit.
Return on assets tells you what percentage of every dollar invested in the business was returned as profit. Financial leverage ratio also known as financial leverage or leverage is a measure of how much assets a company holds relative to its equity. The leverage ratio of Lehman Brothers in was 30, no wonder it declared bankruptcy during the downturn.
It is similar to the gross margin of non-financial companies. The above chart tells you if the company is issuing additional shares thus decreasing your ownership. A high leverage ratio means that the company is using debt and other liabilities to finance its assets.
If customers begin to pull deposits, the bank might be suddenly strapped for cash. Stock dilution occurs when a company issues additional shares. Upgrade Membership to see 10 years of financial charts, valuation models and more exclusive features.
The most obvious risk of leverage is that it multiplies losses. Fiscal year ends in March. If the ratio is too high, it means the bank might not have enough liquidity to cover any unforseen fund requirements. An ideal company should not even issue a single additional share after an IPO.
An ideal company has a higher operating cash flow than its net profit income. A consistently falling or negative operating Cash Flow OCF despite a rising net profit is a cause for concern because of aggressive accounting techniques or high working capital requirements.
Leverage is a double-edged sword. A financial leverage ratio above 10 is aggressive. A bank that borrows too much money might face bankruptcy during a business downturn, while a less-levered bank might survive.
Return on equity measures the percentage of profit we make for every dollar of equity invested in the company. The higher the ratio, the greater risk will be associated with the firm. When a company can increase its profitability at a rate greater than the dilution then the dilution is acceptable but in most cases the company is not able to do so resulting in higher net income but lower EPS because of which the shareholders suffer badly.
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