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QuestionsCategory: Financials QuadrantInterest cover ratio vs interest service ratio
Gloria asked 1 year ago

Hi Victor/ Rusmin
I’m looking at CapitaLand FY2019 AR, on page 53, there are two debt ratios used (ICR &ISR).  What are the difference between these two ratios?
 
Thanks!

8 Answers
Victor Chng answered 1 year ago

Hi Gloria,
 
ICR uses the EBITDA divided by interest expense while ISR uses Operating Cashflow before Interest and tax divided by interest expense. 

Wilfred Yang answered 1 year ago

Just to build-on. For ICR, it s EBIT being used and not EBITDA. EBIT is also more conservative as depreciation and amortisation have been included.
Between ICR and ISR, the latter seems to more stringent since it looks at how many times the OCF can cover the interest, but it seems appropriate only if the business that collects cash quickly (e.g. grocer)?

Victor Chng answered 1 year ago

Hi Wilfred,
 
1.Yes you are right that typical ICR uses EBIT but in Capitaland case, they uses EBITDA.
 
2.Personally, I prefer ISR as it is more stringent as what you have mentioned. 
 
 

Gloria answered 1 year ago

Thanks Victor and Wilfred for the replies.
Would like to also ask if an PB should be used during valuation, since it’s a property business and hence asset heavy?  Otherwise, what else do you advise to use during valuation? 
Thanks in advance! 

Victor Chng answered 1 year ago

Hi Gloria,
 
Yes for company like Capitaland that is asset heavy, you can use PB ratio for valuation. You just have to plot the PB chart and find out what is their average PB ratio.

Gloria answered 1 year ago

Hi Victor 
I have another question related to CapitaLand’s FS.  It’s about other operating income and other operating expenses (in the income statement).
In the notes to financial statement, the line items that make up these two are mainly mark to market/ impairment loss/ gain/loss on disposal etc.  While we typically take these away (by lumping these in ‘extraordinary items’ in the spreadsheet, the nature of the property/ developer business seems to make these more ‘ordinary’.  Would you advise to included these?  If so, what should be included in the ‘extraordinary items’ in the spreadsheet.
 
Thanks very much again!

Victor Chng replied 1 year ago

Hi Gloria,

For the other operating income, under notes 28a shows the breakdown for the figure. Looking into the notes, not every figure should be extraordinary items (EI) . I will take those fair value gain, gain from disposal or impairment reversal as EI.

As for other operating expense, I will include them in.

Victor Chng replied 1 year ago

Mark to market is also an EI

Gloria replied 1 year ago

Hi Victor

Why is interest income (from fixed deposits, subsidiaries, associates and JV, investee companies and others, interest capitalised in development properties for sales) not under extraordinary income (i.e. not deducted away)?

Regarding development properties for sale (with reference to AR2009), may I confirm that inventory for Capitaland = development properties for sale + consumable stock?

Thanks!

Victor Chng replied 1 year ago

Hi Gloria,

You can at the interest income as EI also, just take sometime I think the figure is so small that it does not matter if you add or did not add.

Capitaland is not those inventory type of business hence the inventory turn over ratio does not matter to them. As for inventory, you can just use consumable stock.

Gloria answered 1 year ago

Hi Victor
I hope you don’t mind the many questions.  Would like to seek clarifications on the questions below too:
-With reference to CapitaLand AR2010, under note 23, it states that the number of issued and fully paid shares as at 31 Dec 2010 was 4,262.4 mil.  However, on page 100, it states that the number was 4,262.9 mil.  May I know why the difference between the two numbers?  I noticed that this was so in AR2009 too.
-For companies like CapitaLand whose financial year ends in Dec every year, which share price should I extract from the share price history every year (for use in the excel template)?
 
Thanks again!

Victor Chng answered 1 year ago

Hi Gloria,

No worries, just keep your questions coming. I am more than happy to answer them.

  1. The share count of 4262.4m is based on the date ended 31 Dec 2010 while 4262.9m is based on date ended 28 Feb 2011. The later may be due to share option exercise. Do note that when we do investing, we usually take the rough figure, hence, there is not much difference if you take any of the two share count. Unless, it is a big difference then you take the more conservative figure.
  2. You should extract the following year during 1 Mar. I explained in detail in this video which you may want to take a look. https://investmentquadrant.com/the-valuation-quadrant/price-earnings-ratio/