Analysis of Solvency Ratios
Solvency ratios also known as long-term debt ratios measure a company ability to meet long-term obligations.
Solvency Ratios (Summary)
Debt Ratios
Coverage Ratios
Reynolds American Inc., solvency ratios
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
The solvency profile exhibits a period of moderate leverage expansion peaking in 2014, followed by a significant strengthening of the balance sheet and an enhanced debt-servicing capacity through 2016.
- Leverage and Capital Structure
- A gradual increase in leverage is observed between 2012 and 2014, with the debt to equity ratio reaching a peak of 1.12 and the debt to capital ratio peaking at 0.53. Following 2014, a marked reduction in these metrics occurred; by December 31, 2016, the debt to equity ratio declined to 0.61 and the debt to capital ratio fell to 0.38. The debt to assets ratio remained stagnant at 0.33 from 2013 through 2015 before decreasing to 0.26 in 2016, indicating a lower proportion of assets financed via debt.
- Financial Leverage
- The financial leverage ratio followed a trajectory consistent with other debt metrics, peaking at 3.36 in 2014. A subsequent downward trend is evident, with the ratio falling to 2.35 by the end of 2016. This decline reflects a reduction in the overall use of debt to finance assets, thereby lowering the company's financial risk profile.
- Debt Service Coverage
- Coverage ratios demonstrate a strong upward trend, signifying an improved ability to meet financial obligations. The interest coverage ratio rose from 9.35 in 2012 to 16.48 in 2016, notwithstanding a temporary decrease to 8.91 in 2014. Similarly, the fixed charge coverage ratio increased from 8.72 in 2012 to 15.84 in 2016. The convergence of lower leverage and higher coverage ratios suggests a substantial increase in the margin of safety regarding the company's solvency.
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Debt to Equity
Reynolds American Inc., debt to equity calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Current maturities of long-term debt | 501) | 506) | 450) | —) | 60) | |
| Long-term debt, less current maturities | 12,664) | 16,941) | 4,633) | 5,099) | 5,035) | |
| Total debt | 13,165) | 17,447) | 5,083) | 5,099) | 5,095) | |
| Shareholders’ equity | 21,711) | 18,252) | 4,522) | 5,167) | 5,257) | |
| Solvency Ratio | ||||||
| Debt to equity1 | 0.61 | 0.96 | 1.12 | 0.99 | 0.97 | |
| Benchmarks | ||||||
| Debt to Equity, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Debt to equity = Total debt ÷ Shareholders’ equity
= 13,165 ÷ 21,711 = 0.61
2 Click competitor name to see calculations.
The solvency trajectory indicates a distinct transition from a period of stable leverage to a significant capital expansion, followed by a marked improvement in the company's financial position.
- Total Debt Evolution
- Debt levels remained remarkably stable between 2012 and 2014, maintaining a value of approximately 5.1 billion US dollars. A sharp increase occurred in 2015, with total debt rising to 17.4 billion US dollars, before experiencing a reduction to 13.2 billion US dollars by the end of 2016.
- Shareholders' Equity Trends
- Equity showed a downward trend from 2012 to 2014, decreasing from 5.3 billion US dollars to 4.5 billion US dollars. This trend reversed abruptly in 2015, with equity surging to 18.3 billion US dollars and continuing to climb to 21.7 billion US dollars in 2016.
- Debt to Equity Ratio Analysis
- The debt to equity ratio rose from 0.97 in 2012 to a peak of 1.12 in 2014, coinciding with the decline in shareholders' equity. Although total debt increased substantially in 2015, the concurrent spike in equity brought the ratio down to 0.96. By 2016, the combination of reduced debt and increased equity led to a significant decline in the ratio to 0.61, indicating a substantial reduction in financial leverage and an enhanced solvency profile.
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Debt to Capital
Reynolds American Inc., debt to capital calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Current maturities of long-term debt | 501) | 506) | 450) | —) | 60) | |
| Long-term debt, less current maturities | 12,664) | 16,941) | 4,633) | 5,099) | 5,035) | |
| Total debt | 13,165) | 17,447) | 5,083) | 5,099) | 5,095) | |
| Shareholders’ equity | 21,711) | 18,252) | 4,522) | 5,167) | 5,257) | |
| Total capital | 34,876) | 35,699) | 9,605) | 10,266) | 10,352) | |
| Solvency Ratio | ||||||
| Debt to capital1 | 0.38 | 0.49 | 0.53 | 0.50 | 0.49 | |
| Benchmarks | ||||||
| Debt to Capital, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Debt to capital = Total debt ÷ Total capital
= 13,165 ÷ 34,876 = 0.38
2 Click competitor name to see calculations.
The solvency profile of the entity exhibits a period of stability from 2012 to 2014, followed by a substantial expansion of the balance sheet in 2015 and a subsequent deleveraging phase in 2016.
- Capital and Debt Volume Trends
- Total debt remained nearly constant between 2012 and 2014, fluctuating minimally around 5.1 billion USD. A dramatic increase occurred in 2015, with total debt rising to 17,447 million USD and total capital increasing to 35,699 million USD. By the end of 2016, total debt declined to 13,165 million USD, while total capital saw a slight reduction to 34,876 million USD.
- Debt to Capital Ratio Dynamics
- The debt to capital ratio trended slightly upward from 0.49 in 2012 to 0.53 in 2014. Despite the significant surge in total debt during 2015, the ratio returned to 0.49, demonstrating that the increase in debt was proportional to the growth in total capital. A significant decrease to 0.38 was recorded in 2016, indicating a shift toward a lower-leverage capital structure.
- Solvency Assessment
- The transition from a ratio of 0.53 in 2014 to 0.38 in 2016 reflects an improved solvency position. The reduction of absolute debt in 2016, while maintaining a high total capital base, resulted in a decrease in the company's reliance on debt financing relative to its total capital investment.
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Debt to Assets
Reynolds American Inc., debt to assets calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Current maturities of long-term debt | 501) | 506) | 450) | —) | 60) | |
| Long-term debt, less current maturities | 12,664) | 16,941) | 4,633) | 5,099) | 5,035) | |
| Total debt | 13,165) | 17,447) | 5,083) | 5,099) | 5,095) | |
| Total assets | 51,095) | 53,224) | 15,196) | 15,402) | 16,557) | |
| Solvency Ratio | ||||||
| Debt to assets1 | 0.26 | 0.33 | 0.33 | 0.33 | 0.31 | |
| Benchmarks | ||||||
| Debt to Assets, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Debt to assets = Total debt ÷ Total assets
= 13,165 ÷ 51,095 = 0.26
2 Click competitor name to see calculations.
The analysis of solvency indicators reveals a period of initial stability followed by a significant expansion of the balance sheet and a subsequent improvement in the leverage profile.
- Debt to Assets Ratio Stability (2012-2014)
- Between 2012 and 2014, the debt to assets ratio remained relatively constant, shifting slightly from 0.31 to 0.33. During this interval, total debt and total assets exhibited minimal volatility, indicating a consistent approach to capital structure and asset management.
- Balance Sheet Expansion (2015)
- A substantial increase in both total debt and total assets was observed in 2015. Total debt rose from 5,083 million to 17,447 million, while total assets grew from 15,196 million to 53,224 million. Despite the magnitude of this increase, the debt to assets ratio remained unchanged at 0.33, suggesting that the expansion was financed in a manner that maintained a proportional balance between liabilities and assets.
- Deleveraging and Solvency Improvement (2016)
- In 2016, a notable improvement in the solvency position occurred. Total debt decreased to 13,165 million, while total assets experienced only a marginal decline to 51,095 million. This result led to a significant reduction in the debt to assets ratio to 0.26, the lowest level recorded over the five-year period, reflecting a strengthened financial position and reduced reliance on borrowed capital.
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Financial Leverage
Reynolds American Inc., financial leverage calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Total assets | 51,095) | 53,224) | 15,196) | 15,402) | 16,557) | |
| Shareholders’ equity | 21,711) | 18,252) | 4,522) | 5,167) | 5,257) | |
| Solvency Ratio | ||||||
| Financial leverage1 | 2.35 | 2.92 | 3.36 | 2.98 | 3.15 | |
| Benchmarks | ||||||
| Financial Leverage, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Financial leverage = Total assets ÷ Shareholders’ equity
= 51,095 ÷ 21,711 = 2.35
2 Click competitor name to see calculations.
The company's capital structure underwent a significant transformation between 2012 and 2016, characterized by a substantial expansion of the balance sheet and a subsequent reduction in financial risk.
- Asset and Equity Expansion
- From 2012 to 2014, total assets and shareholders' equity remained relatively stable, with total assets slightly decreasing from 16,557 million to 15,196 million. A sharp inflection point occurred in 2015, where total assets surged to 53,224 million. This expansion was accompanied by a significant increase in shareholders' equity, which rose from 4,522 million in 2014 to 18,252 million in 2015, further increasing to 21,711 million by the end of 2016.
- Financial Leverage Analysis
- The financial leverage ratio exhibited volatility in the early period, rising from 2.98 in 2013 to a peak of 3.36 in 2014. Following the massive increase in assets and equity in 2015, the leverage ratio began a consistent downward trend, falling to 2.92 in 2015 and reaching 2.35 by December 31, 2016. This decline indicates a strengthening of the solvency position, as the proportion of equity relative to total assets increased, thereby reducing the company's reliance on external financing.
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Interest Coverage
Reynolds American Inc., interest coverage calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Net income | 6,073) | 3,253) | 1,470) | 1,718) | 1,272) | |
| Less: Income from discontinued operations, net of tax | —) | —) | 25) | —) | —) | |
| Add: Income tax expense | 3,618) | 3,131) | 817) | 1,023) | 681) | |
| Add: Interest and debt expense | 626) | 570) | 286) | 259) | 234) | |
| Earnings before interest and tax (EBIT) | 10,317) | 6,954) | 2,548) | 3,000) | 2,187) | |
| Solvency Ratio | ||||||
| Interest coverage1 | 16.48 | 12.20 | 8.91 | 11.58 | 9.35 | |
| Benchmarks | ||||||
| Interest Coverage, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Interest coverage = EBIT ÷ Interest expense
= 10,317 ÷ 626 = 16.48
2 Click competitor name to see calculations.
The company demonstrates a significant strengthening of its solvency position between 2012 and 2016. Although debt-related expenses increased over this period, the growth in operational earnings substantially outpaced the rise in costs, resulting in an improved capacity to meet interest obligations.
- Earnings before Interest and Tax (EBIT)
- Operational earnings exhibited a strong upward trajectory, increasing from 2,187 million USD in 2012 to 10,317 million USD in 2016. While a moderate decline was observed in 2014, the subsequent two years saw an aggressive acceleration in earnings, with EBIT increasing by approximately 303% between 2014 and 2016.
- Interest and Debt Expense
- Interest and debt expenses rose steadily from 234 million USD in 2012 to 626 million USD in 2016. A significant jump occurred in 2015, where expenses rose to 570 million USD from 286 million USD in the prior year, indicating an increase in the company's debt burden or higher borrowing costs during that period.
- Interest Coverage Ratio
- The interest coverage ratio reflects a general trend of improvement, despite a period of volatility between 2012 and 2014. After reaching a five-year low of 8.91 in 2014, the ratio climbed sharply to 16.48 by the end of 2016. This expansion indicates a heightened margin of safety and a reduced risk of insolvency, as the growth in EBIT far exceeded the growth in interest expenses.
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Fixed Charge Coverage
Reynolds American Inc., fixed charge coverage calculation, comparison to benchmarks
| Dec 31, 2016 | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | ||
|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | ||||||
| Net income | 6,073) | 3,253) | 1,470) | 1,718) | 1,272) | |
| Less: Income from discontinued operations, net of tax | —) | —) | 25) | —) | —) | |
| Add: Income tax expense | 3,618) | 3,131) | 817) | 1,023) | 681) | |
| Add: Interest and debt expense | 626) | 570) | 286) | 259) | 234) | |
| Earnings before interest and tax (EBIT) | 10,317) | 6,954) | 2,548) | 3,000) | 2,187) | |
| Add: Rent expense | 27) | 26) | 25) | 24) | 19) | |
| Earnings before fixed charges and tax | 10,344) | 6,980) | 2,573) | 3,024) | 2,206) | |
| Interest and debt expense | 626) | 570) | 286) | 259) | 234) | |
| Rent expense | 27) | 26) | 25) | 24) | 19) | |
| Fixed charges | 653) | 596) | 311) | 283) | 253) | |
| Solvency Ratio | ||||||
| Fixed charge coverage1 | 15.84 | 11.71 | 8.27 | 10.69 | 8.72 | |
| Benchmarks | ||||||
| Fixed Charge Coverage, Competitors2 | ||||||
| Coca-Cola Co. | — | — | — | — | — | |
| Mondelēz International Inc. | — | — | — | — | — | |
| PepsiCo Inc. | — | — | — | — | — | |
| Philip Morris International Inc. | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31), 10-K (reporting date: 2014-12-31), 10-K (reporting date: 2013-12-31), 10-K (reporting date: 2012-12-31).
1 2016 Calculation
Fixed charge coverage = Earnings before fixed charges and tax ÷ Fixed charges
= 10,344 ÷ 653 = 15.84
2 Click competitor name to see calculations.
The solvency profile demonstrates a substantial strengthening in the capacity to meet fixed financial obligations between 2012 and 2016. Despite increases in the absolute cost of fixed charges, the rapid growth in earnings has led to a significant expansion of the coverage margin.
- Earnings Before Fixed Charges and Tax
- Earnings exhibited a volatile but upward trajectory, beginning at 2,206 million US dollars in 2012 and reaching 10,344 million US dollars by 2016. A notable acceleration occurred between 2014 and 2016, during which earnings increased by approximately 300%, providing a robust buffer for debt service.
- Fixed Charges
- Fixed charges experienced a consistent increase throughout the period, rising from 253 million US dollars in 2012 to 653 million US dollars in 2016. A sharp increase is observed between 2014 and 2015, where obligations nearly doubled from 311 million to 596 million US dollars, suggesting a significant increase in leverage or contractual obligations during that interval.
- Fixed Charge Coverage Ratio
- The coverage ratio reflects a general improving trend, ending the period at 15.84 in 2016, compared to 8.72 in 2012. While a temporary decline to 8.27 occurred in 2014 due to a contraction in earnings, the subsequent years showed aggressive growth. The final ratio of 15.84 indicates that earnings exceed fixed charges by more than fifteen times, signifying low default risk and high financial flexibility.
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