Interest cover: a mixed bag

A first glance comparison based on interest cover between this year’s Top 200 companies and those of 2009 will strike home two realities listed entities and shareholders had to grapple with over the past 12 months.

Dwindling earnings, in the face of a economic recession; or higher interest bills, brought about by either higher debt levels or an increase in the cost of capital due to the scarceness of liquidity in the global downturn.

A combination of both factors has also been a regular feature.

Interest cover measures net income against total interest payments.

Debt accrues an interest charge, which the company has to finance.

The interest cover ratio effectively measures a company’s ability to service its debt.

What shareholders don’t want is for operating profits to be dissipated by a large interest bill.

What it should look like

Theoretically, net income should cover interest at least one times, but that would mean all net income earned are used to service debts – leaving no profit available for reinvestment into the business.

Companies with an interest cover ratios less than one times should definitely be avoided.

If they can’t pay interest it means they’ll have to skimp on other crucial expenditure – and paying dividends aren’t a priority (or possibility) at all.

Back to the comparison between the two sets of tables. Interest cover ratios have fallen significantly since our previous Top 200.

Last year’s 200th ranked company – Credit U Holdings – had a ratio of 5.82 times compared against Tongaat’s (200th this year) 3.75 times.

The same decline is obvious when comparing the median: last year it was (interestingly) Tongaat (18.55 times) as opposed to Buildworks in 2010 (10.91 times).

While it would be misleading to use the top four or five groups as comparatives, the declining trend is also evidenced in the top section of the table.

Other than previous years, the top 30 covers a mixed bag of industries, including investment funds and private equity specialists (Oasis, Remgro, Real Africa Holdings), small technology counters, (Compu-Clearing OUTsourcing, TeleMasters), media players (African Media Entertainment, Caxton), construction industry representatives (Cashbuild, B&W Instrumentation and Electrical), resources and exploration group, both juniors and major players (Anglo Platinum, Chrometco) as well as financial services groups.

Interest-ing

Despite the general declining trend, some companies have managed to reduce their interest bill significantly in relation to their earnings.

In that regard, Grindrod (currently 9.15 times compared with 6.41 times before), Palamin (23.24 times to 20.43) and Wescoal (13.5 times to 10.65) are examples.

The most interesting reading – or perhaps amusing – are those companies ranked well outside the Top 200: operating groups with negative interest cover of up to -10 times.

Pity the poor shareholders who are waiting (and waiting) for a return on their investments here.

 - Finweek

To view the Interest Cover Table, click here
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