PriceSmart Inc (PSMT)

Financial leverage ratio

		Aug 31, 2023	Aug 31, 2022	Aug 31, 2021	Aug 31, 2020	Aug 31, 2019
Total assets	US$ in thousands	2,005,610	1,808,400	1,705,790	1,656,820	1,296,410
Total stockholders’ equity	US$ in thousands	1,107,040	991,073	915,345	831,719	797,351
Financial leverage ratio		1.81	1.82	1.86	1.99	1.63

August 31, 2023 calculation

Financial leverage ratio = Total assets ÷ Total stockholders’ equity
= $2,005,610K ÷ $1,107,040K
= 1.81

The financial leverage ratio measures the extent to which a company relies on debt financing as opposed to equity financing. It is calculated as total assets divided by total equity. A higher financial leverage ratio indicates a greater reliance on debt financing, which can magnify returns on equity when business is booming but also increase the risk of financial distress in the event of economic downturns.

Looking at the financial leverage ratio of Pricesmart Inc. over the past five years, we can observe a decreasing trend from 1.63 in 2019 to 1.81 in 2023. This trend indicates that the company has been reducing its reliance on debt financing in comparison to equity financing.

The financial leverage ratio of 1.81 in 2023 suggests that for every dollar of equity, Pricesmart Inc. has $1.81 in assets, of which $0.81 is financed through debt. This indicates a moderate level of leverage, which may be viewed as relatively conservative compared to higher leverage ratios.

From a strategic perspective, a decreasing financial leverage ratio can signal a conservative financial policy, as the company is relying less on debt to fund its operations and growth. However, it's important to note that a lower financial leverage ratio does not necessarily translate to an optimal capital structure. Companies should consider the cost of debt, tax implications, and the benefits of financial leverage in decision making.

In conclusion, the decreasing trend in Pricesmart Inc.'s financial leverage ratio suggests a shift towards a more conservative capital structure, potentially indicating a strategy of reducing financial risk and enhancing financial stability. However, it's crucial for the company to carefully balance debt and equity financing to achieve an optimal capital structure that maximizes shareholder value while managing financial risk.