Sotherly Hotels Series Corporate Bonds and Leverage Analysis
| SOHOB Stock | USD 17.05 0.43 2.59% |
Sotherly Hotels Series has over 317.53 Million in debt which may indicate that it relies heavily on debt financing. With a high degree of financial leverage come high-interest payments, which usually reduce Sotherly Hotels' Earnings Per Share (EPS).
Asset vs Debt
Equity vs Debt
Sotherly Hotels' liquidity is one of the most fundamental aspects of both its future profitability and its ability to meet different types of ongoing financial obligations. Sotherly Hotels' cash, liquid assets, total liabilities, and shareholder equity can be utilized to evaluate how much leverage the Company is using to sustain its current operations. For traders, higher-leverage indicators usually imply a higher risk to shareholders. In addition, it helps Sotherly Stock's retail investors understand whether an upcoming fall or rise in the market will negatively affect Sotherly Hotels' stakeholders.
For most companies, including Sotherly Hotels, marketable securities, inventories, and receivables are the most common assets that could be converted to cash. However, for Sotherly Hotels Series, the most critical issue when managing liquidity is ensuring that current assets are properly aligned with current liabilities. If they are not, Sotherly Hotels' management will need to obtain alternative financing to ensure there are always enough cash equivalents on the balance sheet to meet obligations.
Sotherly |
Given the importance of Sotherly Hotels' capital structure, the first step in the capital decision process is for the management of Sotherly Hotels 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 Sotherly Hotels Series to issue bonds at a reasonable cost.
Sotherly Hotels Series Debt to Cash Allocation
As Sotherly Hotels Series follows its natural business cycle, the capital allocation decisions will not magically go away. Sotherly Hotels' decision-makers have to determine if most of the cash flows will be poured back into or reinvested in the business, reserved for other projects beyond operational needs, or paid back to stakeholders and investors.
Sotherly Hotels Series has accumulated 317.53 M in total debt with debt to equity ratio (D/E) of 7.56, indicating the company may have difficulties to generate enough cash to satisfy its financial obligations. Sotherly Hotels Series has a current ratio of 0.76, indicating that it has a negative working capital and may not be able to pay financial obligations in time and when they become due. Note, when we think about Sotherly Hotels' use of debt, we should always consider it together with its cash and equity.Sotherly Hotels 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 Sotherly Hotels' operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of Sotherly Hotels, which in turn will lower the firm's financial flexibility.Sotherly Hotels Corporate Bonds Issued
Most Sotherly bonds can be classified according to their maturity, which is the date when Sotherly Hotels Series 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 Sotherly Hotels Use of Financial Leverage
Sotherly Hotels' financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures Sotherly Hotels' total debt position, including all outstanding debt obligations, and compares it with Sotherly Hotels' equity. Financial leverage can amplify the potential profits to Sotherly Hotels' owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if Sotherly Hotels is unable to cover its debt costs.
Sotherly Hotels Inc. is a self-managed and self-administered lodging REIT focused on the acquisition, renovation, upbranding and repositioning of upscale to upper-upscale full-service hotels in the Southern United States. Sotherly Hotels Inc. was organized in 2004 and is headquartered in Williamsburg, Virginia. Sotherly Hotels operates under REITHotel Motel classification in the United States and is traded on NASDAQ Exchange. It employs 10 people. Please read more on our technical analysis page.
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Check out the analysis of Sotherly Hotels Fundamentals Over Time. For information on how to trade Sotherly Stock refer to our How to Trade Sotherly Stock guide.You can also try the Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
Is Trading space expected to grow? Or is there an opportunity to expand the business' product line in the future? Factors like these will boost the valuation of Sotherly Hotels. If investors know Sotherly will grow in the future, the company's valuation will be higher. The financial industry is built on trying to define current growth potential and future valuation accurately. All the valuation information about Sotherly Hotels listed above have to be considered, but the key to understanding future value is determining which factors weigh more heavily than others.
The market value of Sotherly Hotels Series is measured differently than its book value, which is the value of Sotherly that is recorded on the company's balance sheet. Investors also form their own opinion of Sotherly Hotels' value that differs from its market value or its book value, called intrinsic value, which is Sotherly Hotels' true underlying value. Investors use various methods to calculate intrinsic value and buy a stock when its market value falls below its intrinsic value. Because Sotherly Hotels' market value can be influenced by many factors that don't directly affect Sotherly Hotels' underlying business (such as a pandemic or basic market pessimism), market value can vary widely from intrinsic value.
Please note, there is a significant difference between Sotherly Hotels' value and its price as these two are different measures arrived at by different means. Investors typically determine if Sotherly Hotels is a good investment by looking at such factors as earnings, sales, fundamental and technical indicators, competition as well as analyst projections. However, Sotherly Hotels' price is the amount at which it trades on the open market and represents the number that a seller and buyer find agreeable to each party.
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.