Is it one that is nearly debt-free and earns over 20 per cent returns on capital employed in its business; or one with a debt-to-equity ratio of around one and RoCE of around 10 per cent?
Or is it a company with the leverage ratio of more than three and RoCE in a low single digit?
If rating agencies in India are to be believed, all three are equally safe with little or no chance of default on their debt.
Shree Cement, Indian Hotels, Cox & Kings, Century Textile and Reliance Infrastructure are all rated ‘AA’ for their domestic debt issues, despite contrasting financial ratios.
Shree Cement is nearly debt-free, has a RoCE of over 20 per cent and enough operating profit to cover six years of interest payment.
By comparison, Indian Hotels has a net debt-to-equity ratio of 2.1 times, reported losses last financial year and its operating profit was just 1.9 times its interest expenses.
Cement, textile and paper maker Century Textile’s leverage ratio was 3.6 times in 2013-14, it earned just 5.1 per cent on its capital and its operating profit was just enough to cover a year of interest payment.
Ditto for travel and tour operator Cox & Kings, which was struggling with a leverage ratio of three times at the end of March this year.
The financial ratios of Anil Ambani group’s Reliance Infrastructure are somewhere in the middle, but the company still enjoys similar ratings.
A Business Standard analysis of 248 of the BSE-500 firms based on the latest long-term credit ratings (excluding banking & financial firms), shows nearly 90 per cent of the firms (232) are investment grade with credit rating of BBB and higher, while 38 (15 per cent of the sample) are AAA rated.
The companies that did not get themselves rated as they did not plan to borrow were also excluded from the sample.
Analysts say the widening gap between a company’s financial ratio and its credit rating raises questions over the accuracy of credit ratings in the country.
“Credit ratings often give false sense of comfort to lenders,” says an analyst who does not wish to be named.
The case with Bhushan Steel was similar.
The firm, despite being one the most indebted in its sector and its market capitalisation being a fraction of its total debt, was rated A- (adequate safety and low risk of default)
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