Long-term Investments Covering margin

 

What is Long-term Investments Covering margin ?

 

This margin expresses, in terms of absolute value, the normal structure of the sources/investments balance. It indicates if the own equity invested by the body of shareholders (shareholders’ equity) plus long-term debts (medium/long-term financing) which would be the total amount of Long term investmments (Equity plus Long term Debts) that means the Covering Margin of II level.

This indicator is a KPI whose nature is patrimonial because it measures the physiological structure of investments in absolute terms, considering all sources of permanent capital (equity + medium / long-term sources including contributions and shareholder financing) in the balance sheet.
 
When this margin is positive, it means that the enterprise’s long-term investments presents a structure appreciably balanced which means on the other hands it means that long term investments  (fixed assets) are covered by the sources of permanent capital (resources coming from equity and shareholders' loans + external loans and liabilities).
 
 

What is it for ? 

 
The equity balance as determined in this KPI takes into account the sources of permanent capital (i.e. the medium-long term liabilities = equity plus long-term liabilities) in order to indicate whether the choices made by the management relating to the use of the sources of capital in covering financial needs have been balanced and do not create risks for creditors. In fact, it is well known that a company invetments are balanced if it uses sources of capital destined to remain in the company for a long period, so-called long term investments have been used to cover fixed assets (ot total assets minus current assets) while the sources of financing short term capital such as current liabilities (short-term debts) are used to cover current assets (working capital and the overall operating cycle such as cash available, marketable securities,accounts receivables and inventory plus expenditures that will expire withing one year from the balance sheets date and that represent a typical prepayment from an expense that has not yet been incurred like the insurrance).
 
It is an indicator typically used by the doctrine of balance sheet analysis, structural analysis both by margins and by ratios. As a fact of the matter, this type of structural analysis has the main purpose of understanding the capital and financial equilibrium of a company in terms of invested capital and sources of financing which determine the typycal financial risk coming from the structure.
 
With a Credit Risk Management perspective, this indicator KPI can be used together with others KPI, in order to understand metrics on company's risk and company's ability to repay funds with a deep learning on enterprise financial structure such as the followings:
 
  1. Covering margin
  2. Working Capital
  3. Net Commercial Assets
  4. Liquidity - current liabilities
  5. Equity to Fixed Assets Ratio (EAR)
  6. Long Term Financing to Equity ratio
  7. Current ratio

 

 

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