With a company like Seadrill Limited ( NYSE:SDRL) it is important to look at the debt side of the company. Understanding the debt side of the company will help an investor understand his/her risk more.
3. Total Debt to Total Assets Ratio = Total Debt / Total Assets
This is a metric used to measure a company’s financial risk by determining how much of the company’s assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company’s total assets.
A debt ratio of greater than 1 indicates that a company has more total debt than assets; meanwhile, a debt ratio of less than 1 indicates that a company has more assets than total debt. Used along with other measures of financial health, the total- debt-to-total-assets ratio can help investors determine a company’s level of risk.
- 2011 – $9.993 billion / $18.304 billion = 0.55
- 2012 – $10.761 billion / $19.632 billion = 0.55
- 2013 TTM – $11.394 billion / $21.801 billion = 0.52
Over the past three years Seadrill’s total-debt-to-total-assets ratio has decreased slightly. In 2011 the ratio was 0.55 while in 2013 the ratio decreased to 0.52. This indicates that since 2011 the company has been adding more asset value than total debt. As the number is currently below 1, this states that the risk to the company regarding its debt to assets has decreased slightly since 2011.
4. Debt ratio = Total Liabilities / Total Assets
Total liabilities divided by total assets. The debt ratio shows the proportion of a company’s assets that is financed through debt. If the ratio is less than 0.5, most of the company’s assets are financed through equity. If the ratio is greater than 0.5, most of the company’s assets are financed through debt. Companies with high debt/asset ratios are said to be “highly leveraged.” A company with a high debt ratio or that is “highly leveraged” could be in danger if creditors start to demand repayment of debt.
- 2011 – $12.327 billion / $18.304 billion = 0.67
- 2012 – $14.129 billion / $19.632 billion = 0.72
- 2013 TTM – $14.386 billion / $21.801 billion = 0.66
In looking at Seadrill’s total liabilities to total assets ratio over the past three years, we can see that the ratio has decreased. As the 2013 numbers are above the 0.50 mark, this indicates that Seadrill has financed most of the company’s assets through debt. As the number has decreased compared to 2011, so has the risk to the company.
5. Debt to Equity Ratio = Total Liabilities / Shareholders’ Equity
The debt-to-equity ratio is another leverage ratio that compares a company’s total liabilities with its total shareholders’ equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.
A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.
- 2011 – $12.327 billion / $5.977 billion = 2.06
- 2012 – $14.129 billion / $5.503 billion = 2.57
- 2013 TTM – $14.386 billion / $7.415 billion = 1.94
Over the past three years, Seadrill’s debt-to-equity ratio has decreased from a high of 2.57 to a low of 1.94. As the ratio is currently above 1, this indicates that suppliers, lenders, creditors and obligators have more invested than shareholders. 1.94 indicates a large amount of risk for the company. As the ratio is above 1 and considered high, so is the risk for the company.
6. Capitalization Ratio = LT Debt / LT Debt + Shareholders’ Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells the investors about the extent to which the company is using its equity to support its operations and growth. This ratio helps in the assessment of risk. Companies with a high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.
- 2011 – $8.574 billion / $14.551 billion = 0.59
- 2012 – $8.695 billion / $14.198 billion = 0.61
- 2013 TTM – $8.521 billion / $15.936 billion = 0.53
Over the past three years, Seadrill’s capitalization ratio has decreased from 0.59 to 0.53. This implies that the company has had more equity compared with its long-term debt. As this is the case, the company has had more equity to support its operations and add growth through its equity. As the ratio is decreasing, financially this implies a slight decrease of risk to the company.
7. Interest Coverage Ratio = EBIT (Earnings before interest and taxes) / Interest Expenses
The interest coverage ratio is used to determine how easily a company can pay interest expenses on outstanding debt. The ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by the company’s interest expenses for the same period. The lower the ratio, the more the company is burdened by debt expense, the higher the ratio the better. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.
- 2011 – $1.966 billion / $295 million = 6.66
- 2012 – $1.777 billion / $340 million = 5.22
- 2013 TTM – $3.040 billion / $397 million = 7.66
As the company’s Interest Coverage Ratio is moderately high at 7.66, this indicates that Seadrill is not burdened by debt expense. Seadrill has the ability to meet its interest expenses.
8. Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company’s operating cash flow with its total debt. This ratio provides an indication of a company’s ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company’s ability to carry its total debt. The larger the ratio, the better a company can weather rough economic conditions.
- 2011 – $1.816 billion / $9.993 billion = 0.18
- 2012 – $1.590 billion / $10.761 billion = 0.15
- 2013 TTM – $1.361 billion / $11.394 billion = 0.12
Over the past three years, the cash flow to total debt ratio has been declining. As the ratio is below 1, this implies that the company does not have the ability to cover its total debt with its yearly cash flow from operations.
Based on the debt ratios listed above, we can see steady results regarding the company’s debt. We can see that debt and liabilities have increased but the ratios indicate that the company’s growth has been keeping up than the increase in debt and liabilities.