DISCOVERY COMMUNICATIONS Current Financial Leverage

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DISCOVERY COMMUNICATIONS's financial leverage is the degree to which the firm utilizes its fixed-income securities and uses equity to finance projects. Companies with high leverage are usually considered to be at financial risk. DISCOVERY COMMUNICATIONS's financial risk is the risk to DISCOVERY COMMUNICATIONS stockholders that is caused by an increase in debt. In other words, with a high degree of financial leverage come high-interest payments, which usually reduce Earnings Per Share (EPS).
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Given that DISCOVERY COMMUNICATIONS's debt-to-equity ratio measures a company's obligations relative to the value of its net assets, it is usually used by traders to estimate the extent to which DISCOVERY COMMUNICATIONS is acquiring new debt as a mechanism of leveraging its assets. A high debt-to-equity ratio is generally associated with increased risk, implying that it has been aggressive in financing its growth with debt. Another way to look at debt-to-equity ratios is to compare the overall debt load of DISCOVERY COMMUNICATIONS to its assets or equity, showing how much of the company assets belong to shareholders vs. creditors. If shareholders own more assets, DISCOVERY COMMUNICATIONS is said to be less leveraged. If creditors hold a majority of DISCOVERY COMMUNICATIONS's assets, the company is said to be highly leveraged.
Given the importance of DISCOVERY COMMUNICATIONS's capital structure, the first step in the capital decision process is for the management of DISCOVERY COMMUNICATIONS 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 DISCOVERY COMMUNICATIONS INC to issue bonds at a reasonable cost.

DISCOVERY COMMUNICATIONS Financial Leverage Rating

DISCOVERY COMMUNICATIONS INC bond ratings play a critical role in determining how much DISCOVERY COMMUNICATIONS have to pay to access credit markets, i.e., the amount of interest on their issued debt. The threshold between investment-grade and speculative-grade ratings has important market implications for DISCOVERY COMMUNICATIONS's borrowing costs.

DISCOVERY COMMUNICATIONS Debt to Cash Allocation

As DISCOVERY COMMUNICATIONS INC follows its natural business cycle, the capital allocation decisions will not magically go away. DISCOVERY COMMUNICATIONS's 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. Many companies eventually find out that there is only so much market out there to be conquered, and adding the next product or service is only half as profitable per unit as their current endeavors. Eventually, the company will reach a point where cash flows are strong, and extra cash is available but not fully utilized. In this case, the company may start buying back its stock from the public or issue more dividends.
The company has accumulated 15.03 B in total debt with debt to equity ratio (D/E) of 1.19, which is about average as compared to similar companies. DISCOVERY COMMUNICATIONS has a current ratio of 1.83, which is within standard range for the sector. Debt can assist DISCOVERY COMMUNICATIONS until it has trouble settling it off, either with new capital or with free cash flow. So, DISCOVERY COMMUNICATIONS's shareholders could walk away with nothing if the company can't fulfill its legal obligations to repay debt. However, a more frequent occurrence is when companies like DISCOVERY COMMUNICATIONS sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for DISCOVERY to invest in growth at high rates of return. When we think about DISCOVERY COMMUNICATIONS's use of debt, we should always consider it together with cash and equity.

DISCOVERY COMMUNICATIONS 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 DISCOVERY COMMUNICATIONS's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of DISCOVERY COMMUNICATIONS, which in turn will lower the firm's financial flexibility. Like all other financial ratios, a a DISCOVERY COMMUNICATIONS debt ratio should be compared their industry average or other competing firms.

Understaning DISCOVERY COMMUNICATIONS Use of Financial Leverage

DISCOVERY COMMUNICATIONS financial leverage ratio helps in determining the effect of debt on the overall profitability of the company. It measures DISCOVERY COMMUNICATIONS's total debt position, including all of outstanding debt obligations, and compares it with the equity. In simple terms, the high financial leverage means the cost of production, together with running the business day-to-day, is high, whereas, lower financial leverage implies lower fixed cost investment in the business and generally considered by investors to be a good sign. So if creditors own a majority of DISCOVERY COMMUNICATIONS assets, the company is considered highly leveraged. Understanding the composition and structure of overall DISCOVERY COMMUNICATIONS debt and outstanding corporate bonds gives a good idea of how risky the capital structure of a business and if it is worth investing in it.
Discovery, Inc., a media company, provides content across various distribution platforms in approximately 50 languages worldwide. The company was founded in 1985 and is headquartered in Silver Spring, Maryland. DISCOVERY COMMUNICATIONS is traded on London Stock Exchange in UK. Please read more on our technical analysis page.

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Please continue to Trending Equities. Note that the DISCOVERY COMMUNICATIONS information on this page should be used as a complementary analysis to other DISCOVERY COMMUNICATIONS's statistical models used to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.

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When running DISCOVERY COMMUNICATIONS price analysis, check to measure DISCOVERY COMMUNICATIONS's market volatility, profitability, liquidity, solvency, efficiency, growth potential, financial leverage, and other vital indicators. We have many different tools that can be utilized to determine how healthy DISCOVERY COMMUNICATIONS is operating at the current time. Most of DISCOVERY COMMUNICATIONS's value examination focuses on studying past and present price action to predict the probability of DISCOVERY COMMUNICATIONS's future price movements. You can analyze the entity against its peers and financial market as a whole to determine factors that move DISCOVERY COMMUNICATIONS's price. Additionally, you may evaluate how the addition of DISCOVERY COMMUNICATIONS to your portfolios can decrease your overall portfolio volatility.
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Please note, there is a significant difference between DISCOVERY COMMUNICATIONS's value and its price as these two are different measures arrived at by different means. Investors typically determine DISCOVERY COMMUNICATIONS value by looking at such factors as earnings, sales, fundamental and technical indicators, competition as well as analyst projections. However, DISCOVERY COMMUNICATIONS's 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.
By borrowing funds, the firm incurs a debt that must be paid. But, this debt is paid in small installments over a relatively long period of time. This frees funds for more immediate use in the stock market. For example, suppose a company can afford a new factory but will be left with negligible free cash. In that case, it may be better to finance the factory and spend the cash on hand on inputs, labor, or even hold a significant portion as a reserve against unforeseen circumstances.

The Risk of Financial Leverage

The most obvious and apparent risk of leverage is that if price changes unexpectedly, the leveraged position can lead to severe losses. For example, imagine a hedge fund seeded by $50 worth of investor money. The hedge fund borrows another $50 and buys an asset worth $100, leading to a leverage ratio of 2:1. For the investor, this is neither good nor bad -- until the asset price changes. If the asset price goes up 10 percent, the investor earns $10 on $50 of capital, a net gain of 20 percent, and is very pleased with the increased gains from the leverage. However, if the asset price crashes unexpectedly, say by 30 percent, the investor loses $30 on $50 of capital, suffering a 60 percent loss. In other words, the effect of leverage is to increase the volatility of returns and increase the effects of a price change on the asset to the bottom line while increasing the chance for profit as well.