Leverage ratio of tobacco production manufacturers

Information agency Credinform prepared а ranking of leverage ratio of tobacco production manufacturers. The ranking list includes industry’s largest companies and is based on turnover as stated in the Statistics register, with the reference period of 2012. The first 10 companies, selected by turnover, later were ranked by increase of leverage ratio value.

Leverage ratio is calculated as the relation of borrowed and own funds of enterprise financing. The ratio belongs to a group of indicators, characterizing the structure of company’s capital. In other words, it helps to estimate the degree of company’s independence from loans. Ratio’s recommended value shouldn't exceed unity, otherwise speaking, borrowed funds shouldn't exceed the own funds. Many economists believe, that the optimal ratio’s value is 0,5 - when borrowed and own funds are equal. Thereby too low ratio’s value is considered as the missed opportunity of company’s capital profitability improving by attraction of third-party sources of financing.

According to experts, about 86% of Russian tobacco market is controlled by multinational corporations. The share of domestic manufacturers is small and their main activity is – production of economy brands.

According to 2012 results, the first place of ranking list takes CJSC Liggett-Ducat with the leverage ratio of 0,27. The company’s management, with rather low share of borrowed funds, has managed to become the third within the industry. Perhaps, increase in the share of third-party sources of financing will promote the improvement in financial results. The company has the high solvency index GLOBAS-i®. That characterizes it as financially stable.

The second place of ranking list takes LLC Cres Neva with the leverage ratio of 0,34. Despite the fact, that the company is in the TOP-10 list of the largest companies in terms of turnover and it has the high solvency index GLOBAS-i®, the company’s management should think about growth of borrowed funds share in order to increase profitability.

Probably the most interesting situation has industry’s leaders - CJSC Philip Morris Izhora and CJSC British American Tobacco-SPb. The companies show essentially different attitude to business source of funding organization, having the highest rates of revenue for 2012, 59 299 and 31 932 mln. RUB. respectively. Thus, the industry’s leader in terms of turnover - CJSC Philip Morris Izhora has the leverage ratio of 0,75, that corresponds to the standard recommendations. The second industry’s company in terms of turnover - CJSC British American Tobacco-SPb has the leverage ratio of 13,3. That is much more than 1 and testifies of overabundance of borrowed funds in company’s sources of financing structure and dependence of such business on external sources of loans. However, both companies have the highest solvency index GLOBAS-i®. The risk of debt default is - minimum. Thus, for comprehensive and full assessment of the company’s financial position, you should consider the total number of various financial and non-financial factors. It should be noted, that the assessment, based only on 1 indicator, would be incomplete and biased.