Question:

Due to the COVID pandemic, in recent months Solaris has suffered disruption to their earlier positive trend in sales and profitability. The company is therefore in need of additional external financing. Based on this analysis, explain how these developments would impact the companys leverage.

Analysis

debt equity ratio = total long-term debt / total equity

2019 = 294.0 / 135.9 = 2.16

2020 = 609.0 / 141.0 = 4.32

cash interest coverage ratio = (operating income + depreciation) / interest expense

2019 = (15.8 + 0.4) / 2.5 = 6.48 times

2020 = (21.8 + 0.4) / 4.8 = 4.63 times

The leverage has is quite high at 4.32 times in 2020. It has increased a lot from 2019 to 2020 due to the large increase in non-current liabilities (long term debt).

The cash interest coverage ratio has deteriorated from 2019 to 2020 due to the increased interest expense. The higher interest expense is due to higher long-term debt.

Overall, the leverage is high and the cash interest coverage is low. The company should decrease leverage to de-risk the financial position.