Azevedo Travassos Corporate Bonds and Leverage Analysis

AZEV3 Stock  BRL 0.85  0.03  3.66%   
Azevedo Travassos holds a debt-to-equity ratio of 0.52. . Azevedo Travassos' financial risk is the risk to Azevedo Travassos stockholders that is caused by an increase in debt.
  
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Given the importance of Azevedo Travassos' capital structure, the first step in the capital decision process is for the management of Azevedo Travassos 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 Azevedo Travassos SA to issue bonds at a reasonable cost.

Azevedo Travassos Debt to Cash Allocation

Many companies such as Azevedo Travassos, 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 a current ratio of 0.43, 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 Azevedo Travassos until it has trouble settling it off, either with new capital or with free cash flow. So, Azevedo Travassos' 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 Azevedo Travassos sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for Azevedo to invest in growth at high rates of return. When we think about Azevedo Travassos' use of debt, we should always consider it together with cash and equity.

Azevedo Travassos 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 Azevedo Travassos' operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Azevedo Travassos, which in turn will lower the firm's financial flexibility.

Azevedo Travassos Corporate Bonds Issued

Understaning Azevedo Travassos Use of Financial Leverage

Azevedo Travassos' financial leverage ratio measures its total debt position, including all of its outstanding liabilities, and compares it to Azevedo Travassos' current equity. If creditors own a majority of Azevedo Travassos' assets, the company is considered highly leveraged. Understanding the composition and structure of Azevedo Travassos' outstanding bonds gives an idea of how risky it is and if it is worth investing in.
Azevedo Travassos S.A. provides engineering and general construction services in Brazil. Azevedo Travassos S.A. was founded in 1922 and is based in So Paulo, Brazil. Azevedo Travassos operates under Engineering Construction classification in Brazil and is traded on Sao Paolo Stock Exchange.
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When running Azevedo Travassos' price analysis, check to measure Azevedo Travassos' 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 Azevedo Travassos is operating at the current time. Most of Azevedo Travassos' value examination focuses on studying past and present price action to predict the probability of Azevedo Travassos' future price movements. You can analyze the entity against its peers and the financial market as a whole to determine factors that move Azevedo Travassos' price. Additionally, you may evaluate how the addition of Azevedo Travassos to your portfolios can decrease your overall portfolio volatility.

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.