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FA asm III Long-term Financial Stability Part 1 Gearing ratio This study uses the formula: Gearing ratio = Long-term debts/Capital employed Therefore, Gearing represents the ability to pay long-term debts of a business and the ability to leverage long-term debts on capital employed The higher the ratio, the higher the risk for the company’s shareholders and lenders Gearing ratio of Boohoo Group Plc 14.00% 12.00% 12.38% 10.00% 9.75% 8.00% 6.73% 6.00% 4.00% 4.37% 2.00% 0.00% 2017 3.61% 2.62% 2018 2019 2020 44228 44409 Figure 1: Gearing ratio of Boohoo Group Plc from 2017 to August 2021 In general, Boohoo’s gearing ratio was less than 25% between 2017 and August 2021, indicating a stable and low-risk business but it still had volatility This index was lowest in 2019, about 2.62%% and highest in 2017, about 12.38% This happened because Boohoo’s long-term debts had nearly doubled (from 14,202 to 7,281) and had a big impact on capital employed, which had grown by just under twice In 2020, Boohoo had more lease liabilities in long-term debts, so gearing increased to 6.73% By February 2021, gearing decreased due to the adjustment in financial liabilities, while it increased to 9.75% in August because lease liability increased times compared to February Boohoo’s gearing increased in August 2021 is unlikely a disadvantage for Boohoo because they can increase lease liabilities to expand business activities but still come with more risks than at the beginning of the year Interest cover ratio The ratio shows the efficiency of using debts Although the business has good performance, it still has to pay a certain part of interest such as interest on long-term loans or interest to shareholders This rratio helps investors evaluate how many times the operating profit can cover the interest of the loans The lower it is, the more difficult it is to pay interest If this index is less than times, the enterprise will face the risk of bankruptcy because it cannot pay the interest of the loans Interest cover ratio of Boohoo Group Plc 450.00 413.67 407.50 400.00 350.00 300.00 292.36 250.00 233.07 200.00 150.00 100.00 41.67 50.00 0.00 0.00 2017 2018 2019 2020 44228 44409 Figure 2: Interest cover ratio of Boohoo Group Plc from 2017 to August 2021 In general, Boohoo has an Interest cover ratio greater than 2, so the business has no difficulty in paying interest However, there is a strong fluctuation in general Since 2017 does not have interest payable data, this index of Boohoo is highest in February 2021 (413.67) and lowest in August of the same year (41.67) This is because operating profit more than quadrupled (from 124,100 to 25,000) while interest payable doubled (from 300 to 600) Part Gearing ratio Interest cover ratio Aug-20 4.05% 338.50 Aug-21 9.75% 41.67 X X Figure 3: Long-term Financial Stability Ratio of Boohoo Group Plc Boohoo’s business tends to deteriorate when comparing data from the beginning of 2020 to August 2020 and the beginning of 2021 to August 2021 The increase in Gearing and the decrease in Interest cover indicates that Boohoo is having a harder time repaying its long- term debts and interest Boohoo should have a plan to improve this situation before the risk of the business is increased and maintain it at a more stable level https://www.investopedia.com/ask/answers/121814/what-good-gearing-ratio.asp ... Long-term Financial Stability Ratio of Boohoo Group Plc Boohoo? ??s business tends to deteriorate when comparing data from the beginning of 2020 to August 2020 and the beginning of 2021 to August 2021 The. .. cover ratio of Boohoo Group Plc from 2017 to August 2021 In general, Boohoo has an Interest cover ratio greater than 2, so the business has no difficulty in paying interest However, there is a strong... fluctuation in general Since 2017 does not have interest payable data, this index of Boohoo is highest in February 2021 (413.67) and lowest in August of the same year (41.67) This is because operating
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