Good afternoon sir,
I saw a news article that 22 firms listed on NGX face debts exposure of #21.3trn.
1. What does it mean?
2. And how does it affect shareholders of those companies ?
3. For mama Ngozi understanding what is debt to equity ratio?
Thank you
Good afternoon! So nice to have you here seeking to understand more about finance. Let's dive right into your questions: 1. What does it mean that 22 listed firms on NGX face debts exposure of #21.3trn?Imagine you have a provision store in the market where you sell your goods. Now, let's say you borRead more
Good afternoon! So nice to have you here seeking to understand more about finance. Let’s dive right into your questions:
1. What does it mean that 22 listed firms on NGX face debts exposure of #21.3trn?
Imagine you have a provision store in the market where you sell your goods. Now, let’s say you borrowed some money from different people, and the total amount you owe them is ₦21.3trn. That’s a lot of money! In simple terms, these 22 firms listed on the Nigerian Exchange Group (NGX) also owe a huge amount of money, just like you would if you borrowed money for your business.
2. How does it affect the shareholders of those companies?
If the firms owe a lot of money, it means they have significant debts to pay off. When a company has a lot of debt, it can affect the company’s financial health. If the firms struggle to repay these debts, it may impact their profitability, share prices, and even their ability to pay dividends to shareholders. As a shareholder, your investment in the company may be at risk if the company’s financial situation worsens due to these debts.
3. For Mama Ngozi to understand, what is debt to equity ratio?
Alright, Mama Ngozi, let’s break it down. Imagine you have a small farm where you grow tomatoes. Now, let’s say you borrowed some money to buy more land for your farm, and you also invested some of your savings in the farm. The debt to equity ratio is like comparing how much money you borrowed (debt) to how much of your own money you invested (equity) in your farm. It shows the balance between what you owe and what you own in your business.
So, in simple terms, the debt to equity ratio helps us understand how much a company relies on borrowed money compared to its shareholders’ funds. If a company has a high debt to equity ratio, it means they are relying more on borrowed money, which can be risky. On the other hand, a lower ratio indicates the company is using more of its own funds, which can be safer for shareholders like you, Mama Ngozi.
I hope this explanation helps you understand these financial concepts better. Feel free to ask more if you have any other questions!
See lessA high Debt-to-Equity (D/E) ratio means a company is using a lot of debt compared with shareholders’ equity to finance its business. For shareholders, it can mean higher potential returns but also higher risk. Example Suppose a company has: Debt: ₦800 million Shareholders’ equity: ₦400 million D/E =Read more
A high Debt-to-Equity (D/E) ratio means a company is using a lot of debt compared with shareholders’ equity to finance its business.
See lessFor shareholders, it can mean higher potential returns but also higher risk.
Example
Suppose a company has:
Debt: ₦800 million
Shareholders’ equity: ₦400 million
D/E = ₦800m ÷ ₦400m = 2.0
That means the company has ₦2 of debt for every ₦1 of shareholders’ equity.
What it means for shareholders
1. Higher financial risk 📈 The company must make interest and debt payments regardless of whether profits are strong. During difficult periods, this can put pressure on profits and cash flow.
2. Potentially higher returns Debt can help a company expand without issuing more shares. If the company earns more from borrowed money than the cost of that debt, shareholders can benefit through higher profits and potentially higher dividends/share value.
3. Greater downside during bad times If profits fall, interest expenses still have to be paid. A heavily indebted company can experience a much sharper decline in earnings available to shareholders.
4. Less financial flexibility A highly leveraged company may have less ability to borrow more money when it needs it.
5. Shareholders are behind creditors If a company becomes insolvent, lenders and other creditors generally have claims ahead of ordinary shareholders. High debt therefore increases the financial risk borne by shareholders.