Accounting Management

The debt-to-equity ratios indicate how risky the firms are. It measures the extent that the assets of a firm are financed by its debts and equity. Lower values of debt-to-equity ratio are favorable indicating the firm is slightly financed by debt. Higher debt-to-equity ratio is unfavorable indicating the firm is at higher risk because its operation heavily relies on debt. Investors usually prefer low debt-to-equity ratio as firms are being financed by their own resources rather than external lenders (Readyratios 2013). The market average of the debt-to-equity ratios in Airline industry in 2012 is 3. 88 (CSI Market 2013).

The Debt to Equity ratio calculated from the Singapore 2012 financial statement is 0. 67, which is far below the industry average. It indicates that the company is quite capable of generating enough cash to satisfy its debt obligations. But the such small ratio may also indicate that Singapore Airline is not taking advantage of the increased profits that financial leverage may bring (Readyratios 2013). The movement of the ratio from 2007 to 2012 showing a downward trend which is favorable. It indicates that the operation of Singapore Airline is highly relying on its own financial resources rather than debt.

Interest Coverage Ratio provides an insight of a company’s ability to pay the interest charges on its debt. The ratio below 1. 0 is generally considered as unable to generate enough cash to cover its interest for companies in any industry. The ratio of 1. 5 is considered as the minium requirenment for any companies to be able to finance its interest charges (Bergen, JV 2010). In the period 2010-2011, the interest coverage ratio for Singapore Airline is 1. 07, which shows that the company did not sustain earnings well above its interest requirements in that period.

But the ratio has a great improvement in the period of 2011-2012, the ratio reaches the minimum level of comfort. That said, the ratios is till far below the market average. The market average in 2012 is around 4. 0 (CSI Market 2013). However, the ratios from 2010-2012 showing an increasing trend that can be a positive signal of the company’s financial health. The Debt coverage ratio provides an insight of firms’ ability to generate enough cash to cover the annual interest and principal payments on debt (Jan, I 2013).

The ratio which is 1. 0 indicates that the net income of the company just cover its annual debt payment. And below 1. 0 indicates that the company is unable to cover its debt from its operations. The higher the Debt Coverage Ratio, the better liquidity position the company is at. The Debt Coverage Ratio of Singapore Airline has a dramaticly decreasing trend from 2010 to 2012, which may indicates the net income from operation is decreasing or the company made more investment in this period.

Company has increased significantly in investments especially in Non-equity for about $ 217. 3 (Singapore Airline 2012, p. 161). That said, the ratio is till favourable as the company is till quite capable to cover its debt repayments. Reference List: Bergen, JV 2010, Why interest Coverage matters to investors, INVESTOPEDIA, Viewd 22 May 2013 <http://www. investopedia. com/articles/basics/04/040804. asp> CSI Market 2013, Airline Industry: Financial Strength Information & Trends, Viewed 22 May 2013, <http://csimarket.

com/Industry/industry_Financial_Strength_Ratios. php? ind=1102> Jan, I 2013, Debt-to-Equity Ratio, AccountingExplained, viewed 24 May 2013 <http://accountingexplained. com/financial/ratios/debt-to-equity> Readyratios 2013, Reference: Debt-to-Equity Rato, viewed 22 May 2013, <http://www. readyratios. com/reference/debt/debt_to_equity_ratio. html> Readyratios 2013, Reference: Debt-Coverage_Ratio, viewed 22 May 2013, http://www. readyratios. com/reference/debt/debt_service_coverage_ratio. html