Date of Research
Date of Research
Date of Research
Higher current ratio implies healthier short term liquidity comfort level. A
current ratio below 1 indicates that the company may not be able to meet its
obligations in the short run. However, it is not always a matter of worry if this
ratio temporarily falls below 1 as many times companies squeeze out short
term cash sources to achieve a capital intensive plan with a longer term
outlook. Reliance Industries’s average current ratio over the last 5 financial
years has been 1.43 times which indicates that the Company is comfortably
placed to pay for its short term obligations.
Companies operating with high long term debt to equity on their balance
sheets are vulnerable to economic cycles. In times of slowdown in economy,
companies with high levels of debt find it increasingly difficult to service the
interest on their borrowings as profit margins decline. We believe that long
term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a
company and its results of operations.
Reliance Industries’s average long term debt to equity ratio over the last 5
financial years has been 0.45 times which indicates that the Company operates
with low level of debt and is placed well to withstand economic slowdowns.
Interest coverage ratio indicates the comfort with which the company may be
able to service the interest expense (i.e. finance charges) on its outstanding
debt. Higher interest coverage ratio indicates that the company can easily
meet the interest expense pertaining to its debt obligations. In our view,
interest coverage ratio of below 1.5 should raise doubts about the company’s
ability to meet the expenses on its borrowings. Interest coverage ratio below 1
indicates that the company is just not generating enough to service its debt
obligations.
Since the Company operates with very low levels of debt, its average interest
coverage ratio over the last 5 financial years has been 11.62 times which
indicates that the Company can meet its debt obligations without any
difficulty.
Ownership pattern
In its latest stock exchange filing dated 31 March 2017, Reliance Industries
reported a promoter holding of 46.32 %. Large promoter holding indicates
conviction and sincerity of the promoters. We believe that a greater than 35 %
promoter holding offers safety to the retail investors.
REPORT
Submitted by
MARCH 2019