Emera Pref F Corporate Bonds and Leverage Analysis
| EMA-PF Preferred Stock | CAD 20.55 0.15 0.74% |
Emera Pref'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. Emera Pref's financial risk is the risk to Emera Pref 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).
Emera |
Given the importance of Emera Pref's capital structure, the first step in the capital decision process is for the management of Emera Pref 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 Emera Pref F to issue bonds at a reasonable cost.
Emera Pref 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 Emera Pref's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Emera Pref, which in turn will lower the firm's financial flexibility.Emera Pref Corporate Bonds Issued
Most Emera bonds can be classified according to their maturity, which is the date when Emera Pref F 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 Emera Pref Use of Financial Leverage
Emera Pref's financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures Emera Pref's total debt position, including all outstanding debt obligations, and compares it with Emera Pref's equity. Financial leverage can amplify the potential profits to Emera Pref's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if Emera Pref is unable to cover its debt costs.
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Pair Trading with Emera Pref
One of the main advantages of trading using pair correlations is that every trade hedges away some risk. Because there are two separate transactions required, even if Emera Pref position performs unexpectedly, the other equity can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Emera Pref will appreciate offsetting losses from the drop in the long position's value.Moving together with Emera Preferred Stock
Moving against Emera Preferred Stock
The ability to find closely correlated positions to Emera Pref could be a great tool in your tax-loss harvesting strategies, allowing investors a quick way to find a similar-enough asset to replace Emera Pref when you sell it. If you don't do this, your portfolio allocation will be skewed against your target asset allocation. So, investors can't just sell and buy back Emera Pref - that would be a violation of the tax code under the "wash sale" rule, and this is why you need to find a similar enough asset and use the proceeds from selling Emera Pref F to buy it.
The correlation of Emera Pref is a statistical measure of how it moves in relation to other instruments. This measure is expressed in what is known as the correlation coefficient, which ranges between -1 and +1. A perfect positive correlation (i.e., a correlation coefficient of +1) implies that as Emera Pref moves, either up or down, the other security will move in the same direction. Alternatively, perfect negative correlation means that if Emera Pref F moves in either direction, the perfectly negatively correlated security will move in the opposite direction. If the correlation is 0, the equities are not correlated; they are entirely random. A correlation greater than 0.8 is generally described as strong, whereas a correlation less than 0.5 is generally considered weak.
Correlation analysis and pair trading evaluation for Emera Pref can also be used as hedging techniques within a particular sector or industry or even over random equities to generate a better risk-adjusted return on your portfolios.Other Information on Investing in Emera Preferred Stock
Emera Pref financial ratios help investors to determine whether Emera Preferred Stock is cheap or expensive when compared to a particular measure, such as profits or enterprise value. In other words, they help investors to determine the cost of investment in Emera with respect to the benefits of owning Emera Pref security.
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.