Resource Capital Current Financial Leverage

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Resource Capital's financial leverage is the degree to which the firm utilizes its fixed-income securities and uses equity to finance projects. Companies with high leverage are usually considered to be at financial risk. Resource Capital's financial risk is the risk to Resource Capital stockholders that is caused by an increase in debt. In other words, with a high degree of financial leverage come high-interest payments, which usually reduce Earnings Per Share (EPS).
Please check the analysis of Resource Capital Fundamentals Over Time.
  
Given that Resource Capital's debt-to-equity ratio measures a company's obligations relative to the value of its net assets, it is usually used by traders to estimate the extent to which Resource Capital is acquiring new debt as a mechanism of leveraging its assets. A high debt-to-equity ratio is generally associated with increased risk, implying that it has been aggressive in financing its growth with debt. Another way to look at debt-to-equity ratios is to compare the overall debt load of Resource Capital to its assets or equity, showing how much of the company assets belong to shareholders vs. creditors. If shareholders own more assets, Resource Capital is said to be less leveraged. If creditors hold a majority of Resource Capital's assets, the company is said to be highly leveraged.
Given the importance of Resource Capital's capital structure, the first step in the capital decision process is for the management of Resource Capital to decide how much external capital it will need to raise to operate in a sustainable way. Once the amount of financing is determined, management needs to examine the financial markets to determine the terms in which the company can boost capital. This move is crucial to the process because the market environment may reduce the ability of Resource Capital Gold to issue bonds at a reasonable cost.

Resource Capital Financial Leverage Rating

Resource Capital Gold bond ratings play a critical role in determining how much Resource Capital have to pay to access credit markets, i.e., the amount of interest on their issued debt. The threshold between investment-grade and speculative-grade ratings has important market implications for Resource Capital's borrowing costs.

Resource Capital Gold Debt to Cash Allocation

As Resource Capital Gold follows its natural business cycle, the capital allocation decisions will not magically go away. Resource Capital's decision-makers have to determine if most of the cash flows will be poured back into or reinvested in the business, reserved for other projects beyond operational needs, or paid back to stakeholders and investors. Many companies eventually find out that there is only so much market out there to be conquered, and adding the next product or service is only half as profitable per unit as their current endeavors. Eventually, the company will reach a point where cash flows are strong, and extra cash is available but not fully utilized. In this case, the company may start buying back its stock from the public or issue more dividends.
The company has accumulated 7.79 M in total debt with debt to equity ratio (D/E) of 0.61, which is about average as compared to similar companies. Resource Capital Gold has a current ratio of 0.1, indicating that it has a negative working capital and may not be able to pay financial obligations in time and when they become due. Debt can assist Resource Capital until it has trouble settling it off, either with new capital or with free cash flow. So, Resource Capital's shareholders could walk away with nothing if the company can't fulfill its legal obligations to repay debt. However, a more frequent occurrence is when companies like Resource Capital Gold sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for Resource to invest in growth at high rates of return. When we think about Resource Capital's use of debt, we should always consider it together with cash and equity.

Resource Capital Assets Financed by Debt

Typically, companies with high debt-to-asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the Resource Capital's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Resource Capital, which in turn will lower the firm's financial flexibility. Like all other financial ratios, a a Resource Capital debt ratio should be compared their industry average or other competing firms.

Understaning Resource Capital Use of Financial Leverage

Resource Capital financial leverage ratio helps in determining the effect of debt on the overall profitability of the company. It measures Resource Capital's total debt position, including all of outstanding debt obligations, and compares it with the equity. In simple terms, the high financial leverage means the cost of production, together with running the business day-to-day, is high, whereas, lower financial leverage implies lower fixed cost investment in the business and generally considered by investors to be a good sign. So if creditors own a majority of Resource Capital assets, the company is considered highly leveraged. Understanding the composition and structure of overall Resource Capital debt and outstanding corporate bonds gives a good idea of how risky the capital structure of a business and if it is worth investing in it.
Resource Capital Gold Corp. engages in the exploration, development, and production of precious metal properties in North America. Resource Capital Gold Corp. was incorporated in 1989 and is headquartered in Vancouver, Canada. Resource Cap operates under Other Precious Metals Mining classification in the United States and is traded on OTC Exchange. Please read more on our technical analysis page.
Some investors attempt to determine whether the market's mood is bullish or bearish by monitoring changes in market sentiment. Unlike more traditional methods such as technical analysis, investor sentiment usually refers to the aggregate attitude towards Resource Capital in the overall investment community. So, suppose investors can accurately measure the market's sentiment. In that case, they can use it for their benefit. For example, some tools to gauge market sentiment could be utilized using contrarian indexes, Resource Capital's short interest history, or implied volatility extrapolated from Resource Capital options trading.

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Please check the analysis of Resource Capital Fundamentals Over Time. Note that the Resource Capital Gold information on this page should be used as a complementary analysis to other Resource Capital's statistical models used to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.

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When running Resource Capital Gold price analysis, check to measure Resource Capital's market volatility, profitability, liquidity, solvency, efficiency, growth potential, financial leverage, and other vital indicators. We have many different tools that can be utilized to determine how healthy Resource Capital is operating at the current time. Most of Resource Capital's value examination focuses on studying past and present price action to predict the probability of Resource Capital's future price movements. You can analyze the entity against its peers and financial market as a whole to determine factors that move Resource Capital's price. Additionally, you may evaluate how the addition of Resource Capital to your portfolios can decrease your overall portfolio volatility.
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Please note, there is a significant difference between Resource Capital's value and its price as these two are different measures arrived at by different means. Investors typically determine Resource Capital value by looking at such factors as earnings, sales, fundamental and technical indicators, competition as well as analyst projections. However, Resource Capital's price is the amount at which it trades on the open market and represents the number that a seller and buyer find agreeable to each party.

What is Financial Leverage?

Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing. In most cases, the debt provider will limit how much risk it is ready to take and indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending, the financial provider uses the assets as collateral until the borrower repays the loan. In the case of a cash flow loan, the general creditworthiness of the company is used to back the loan. The concept of leverage is common in the business world. It is mostly used to boost the returns on equity capital of a company, especially when the business is unable to increase its operating efficiency and returns on total investment. Because earnings on borrowing are higher than the interest payable on debt, the company's total earnings will increase, ultimately boosting stockholders' profits.

Leverage and Capital Costs

The debt to equity ratio plays a role in the working average cost of capital (WACC). The overall interest on debt represents the break-even point that must be obtained to profitability in a given venture. Thus, WACC is essentially the average interest an organization owes on the capital it has borrowed for leverage. Let's say equity represents 60% of borrowed capital, and debt is 40%. This results in a financial leverage calculation of 40/60, or 0.6667. The organization owes 10% on all equity and 5% on all debt. That means that the weighted average cost of capital is (.4)(5) + (.6)(10) - or 8%. For every $10,000 borrowed, this organization will owe $800 in interest. Profit must be higher than 8% on the project to offset the cost of interest and justify this leverage.

Benefits of Financial Leverage

Leverage provides the following benefits for companies:
  • Leverage is an essential tool a company's management can use to make the best financing and investment decisions.
  • It provides a variety of financing sources by which the firm can achieve its target earnings.
  • Leverage is also an essential technique in investing as it helps companies set a threshold for the expansion of business operations. For example, it can be used to recommend restrictions on business expansion once the projected return on additional investment is lower than the cost of debt.
By borrowing funds, the firm incurs a debt that must be paid. But, this debt is paid in small installments over a relatively long period of time. This frees funds for more immediate use in the stock market. For example, suppose a company can afford a new factory but will be left with negligible free cash. In that case, it may be better to finance the factory and spend the cash on hand on inputs, labor, or even hold a significant portion as a reserve against unforeseen circumstances.

The Risk of Financial Leverage

The most obvious and apparent risk of leverage is that if price changes unexpectedly, the leveraged position can lead to severe losses. For example, imagine a hedge fund seeded by $50 worth of investor money. The hedge fund borrows another $50 and buys an asset worth $100, leading to a leverage ratio of 2:1. For the investor, this is neither good nor bad -- until the asset price changes. If the asset price goes up 10 percent, the investor earns $10 on $50 of capital, a net gain of 20 percent, and is very pleased with the increased gains from the leverage. However, if the asset price crashes unexpectedly, say by 30 percent, the investor loses $30 on $50 of capital, suffering a 60 percent loss. In other words, the effect of leverage is to increase the volatility of returns and increase the effects of a price change on the asset to the bottom line while increasing the chance for profit as well.