Sumitomo Global: Assessing Energy Stocks.
Sumitomo Global looks at some of the leverage ratios used in separating the wheat from the chaff in the oil and gas industry.
High levels of debt can hamper any business, but it is especially true of the energy sector which is such a capital intense industry. Sumitomo Global looks over the main leverage ratios that analysts use to evaluate the financial well being of a company.
The Interest Coverage Ratio is used by energy sector analysts to assess a company’s ability to meet the interest payments on its current debt. The higher the ratio, the lower the risk that it will fail to meet its commitments. Sumitomo Global recommends a company have at least a 2-to-1 ratio and preferably 3 or more.
The debt to equity ratio is probably the most popular of leverage ratios, measuring total liabilities against shareholder equity. This will show the ratio of debt to equity with which the company has financed its assets.
One of the more important debt ratios is the debt to capital ratio. This shows the company’s debt liabilities in relation to its total capital. This will help to evaluate the company’s financial structure and how its operations are being financed.
Debt can be an important tool that helps to maximize shareholder returns, however having too much can put undue strain on a company when interest rates rise or an economic downturn hits. A company that is holding too much debt will find it difficult to raise more capital from investors due to the greater associated risk. Sumitomo Global regularly uses the above ratios as part of its analysis arsenal when evaluating energy stocks.
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