Otis Worldwide Corp Corporate Bonds and Leverage Analysis
| 4PG Stock | EUR 94.48 0.42 0.44% |
Otis Worldwide's financial leverage is the degree to which the firm utilizes its fixed-income securities and uses equity to finance projects. Companies with high leverage are usually considered to be at financial risk. Otis Worldwide's financial risk is the risk to Otis Worldwide stockholders that is caused by an increase in debt. In other words, with a high degree of financial leverage come high-interest payments, which usually reduce Earnings Per Share (EPS).
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Given the importance of Otis Worldwide's capital structure, the first step in the capital decision process is for the management of Otis Worldwide 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 Otis Worldwide Corp to issue bonds at a reasonable cost.
Otis Worldwide Corp Debt to Cash Allocation
Many companies such as Otis Worldwide, 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.
Otis Worldwide Corp has accumulated 6.1 B in total debt. Otis Worldwide Corp has a current ratio of 0.95, 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 Otis Worldwide until it has trouble settling it off, either with new capital or with free cash flow. So, Otis Worldwide's 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 Otis Worldwide Corp sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for Otis to invest in growth at high rates of return. When we think about Otis Worldwide's use of debt, we should always consider it together with cash and equity.Otis Worldwide 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 Otis Worldwide's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Otis Worldwide, which in turn will lower the firm's financial flexibility.Otis Worldwide Corporate Bonds Issued
Most Otis bonds can be classified according to their maturity, which is the date when Otis Worldwide Corp has to pay back the principal to investors. Maturities can be short-term, medium-term, or long-term (more than ten years). Longer-term bonds usually offer higher interest rates but may entail additional risks.
Understaning Otis Worldwide Use of Financial Leverage
Otis Worldwide's financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures Otis Worldwide's total debt position, including all outstanding debt obligations, and compares it with Otis Worldwide's equity. Financial leverage can amplify the potential profits to Otis Worldwide's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if Otis Worldwide is unable to cover its debt costs.
Otis Worldwide Corporation manufactures, installs, and services elevators and escalators in the United States, China, and internationally. The company was founded in 1853 and is headquartered in Farmington, Connecticut. OTIS WORLDWID operates under Specialty Industrial Machinery classification in Germany and is traded on Frankfurt Stock Exchange. It employs 70000 people. Please read more on our technical analysis page.
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Additional Information and Resources on Investing in Otis Stock
When determining whether Otis Worldwide Corp is a strong investment it is important to analyze Otis Worldwide's competitive position within its industry, examining market share, product or service uniqueness, and competitive advantages. Beyond financials and market position, potential investors should also consider broader economic conditions, industry trends, and any regulatory or geopolitical factors that may impact Otis Worldwide's future performance. For an informed investment choice regarding Otis Stock, refer to the following important reports:Check out the analysis of Otis Worldwide Fundamentals Over Time. You can also try the Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.
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.