Divestment executions are often forms of denouncement and delegitimization of an industry, such as in the fossil-fuel divestment movement. Negative public perception can lead to reform and changes in policy, both privately for the company and in the public sphere. Several states and localities did pass legislation ordering the sale of such securities, most notably the city of San Francisco. An array of celebrities, including singer Paul Simon, actively supported the cause. Disinvestment refers to the use of a concerted economic boycott to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change. The term was first used in the 1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed to pressure the government of South Africa into abolishing its policy of apartheid.

While most divestment transactions are premeditated, company-initiated efforts, at times this process could be forced upon them as a result of regulatory action. When there is a transfer of ownership, control and management, from the public sector to the private sector, specifically due to the sale of assets, it is called Privatization. When the transfer becomes effective, the government ceases to be the owner of such an undertaking.

Related Terms

Complete privatisation is a form of majority disinvestment wherein 100 per cent control of the company is passed on to a buyer. The equity allocation provides long-term growth and the debt exposure reduces the volatility of the returns, thus offering the benefits of asset allocation in a single product. The most common reason for divestment is to eliminate non-performing, non-core businesses. Companies, especially large corporations or conglomerates, may own different business units that operate in very different industries, and which can be quite difficult to manage or distracting from their core competencies. One major current instance is the impact of the pandemic, remote work, and the rise of technology use and their impact on offices, commercial real estate. On the contrary, Privatization is a transition of government-owned company, operation, unit or division to the privately-owned enterprise.

Under this approach, sponsored by State Senator Jacqueline Collins, public pensions are prohibited from investing in any corporation or private equity firm that conducts business in Sudan, unless authorized to do so by the U.S. Ever since India opened up its economy to the world, the government has been distancing itself from industrial production. Years of monopoly across several industries led to Public Sector Undertakings (PSU) running inefficiently. Thus, the government began the process of disinvesting from loss-making and inefficiently-run PSUs in the 1990s.

However, these are highly criticized, due to political reasons and become a matter of debate these days. Disinvestment is just the opposite of investment, i.e. it means pulling out the money invested in the company by selling the stake, either partially or fully. It is driven by the effective use of the resources, to earn the highest returns out of the money invested.

Since the late 1990s, disinvestment has become an almost regular feature of the Union budgets under successive governments, which set a target each year to raise funds from stake sales in public sector enterprises. Disinvestment has led to mixed results for the governments in terms of meeting the revenue targets. Governments select disinvestment candidates based on various factors, such as its existing stake in the company, private sector interest in ownership of that enterprise, general market conditions, expected value realisation etc. Items that are divested may include a subsidiary, business department, real estate holding, equipment, and other property, or financial assets. Proceeds from these sales are typically used to pay down debt, make capital expenditures, fund working capital, or pay a special dividend to a company’s shareholders.

The assets or undertakings which are no longer profitable or fit in the business strategy, are sold. Similarly, a company should comply with the legal policies and rules of the country in which it operates or is headquartered. The policy may require a relook at its strategic partnerships or assets held globally. The aim of disinvestment is to facilitate re-allocation of funds or resources to better use or monetise assets.

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These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘disinvestment.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. The development of a nation is highly dependent on the growth of the industrial sector and its growth. Privatization of various sectors is in vogue since the last few decades, as it is believed that there is a tough competition in the private sector, which brings in better offerings at reasonable prices and less corruption. All content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only.

Disinvestment is the action of an organization or government selling or liquidating an asset or subsidiary. Absent the sale of an asset, disinvestment also refers to capital expenditure (CapEx) reductions, which can facilitate the re-allocation of resources to more productive areas within an organization or government-funded project. Disinvestment refers to a strategy of selling off or liquidating some assets like plant, division, subsidiary, unit, etc, owned by the government or the organization. The strategy is adopted to reduce the losses incurred from non-performing assets, pulling out investment in a specific industry or sector, or to raise funds. Companies globally disinvest for financial, political, legal, or strategic reasons.

Dictionary Entries Near disinvestment

After disinvestment, AT&T retained its long-distance services, while the operating companies, referred to as the Baby Bells, provided regional services. Whether disinvestment results in the divestiture or the reduction of funding, the primary objective is to maximize the return on investment (ROI) related to capital goods, labor, and infrastructure. Privatization and disinvestment are undertaken with the aim of improving the efficiency of the enterprise.

Therefore, the company’s net worth becomes devalued and the owners of the company may lose substantial paper assets. In addition, institutional divestment may encourage other investors to sell their stocks for fear of lower prices, which in turn lowers prices even further. Finally, lower stock prices limits a corporation’s ability to sell a portion of their stocks in order to raise funds to expand the business. For example, a company may determine that its industrial tool division is growing faster and generating higher profit margins than its consumer tool division. If the difference in the profitability of the two divisions is large enough, the company may consider disinvesting (e.g. selling) the consumer division. After the disinvestment, the company could allocate both the sales proceeds and recurring capital expenditures to the industrial division to maximize its ROI.

Meaning of disinvestment in English

In the short run, this increased revenue will benefit organizations in that they can divert the funds to help another division that is not quite performing up to expectations. The norm is that divestment is done within the framework of restructuring and optimization activities. The exception would be if the company was being forced to divest a profitable asset or division for political or social reasons that could lead to a loss of revenue. Disinvestments, in most cases, are primarily motivated by the optimization of resources to deliver maximum returns. To achieve this objective, disinvestment may take the form of selling, spinning off, or reducing capital expenditures.

Since that year, it has divested operations by selling its pulp-and-paper manufacturing businesses to focus on real estate and timber. Privatization can take place in two ways, i.e. either by selling government-owned shares in an undertaking or lifting the restrictions that block private individuals and firms to take part in a particular industry. It also includes contracting out services provided by the public sector with private contractors. Finally, companies may engage in divestment for political and social reasons, such as selling assets contributing to global warming.

Additionally, companies divest their assets to obtain funds, shed an underperforming subsidiary, respond to regulatory action, and realize value through a break-up. Companies that are going through the process of bankruptcy will often be required by legal ruling to sell off parts of the business. The degree of disinvestment depends on the disinvestment policy of the government. hcm investors In business, disinvestment means to sell off certain assets such as a manufacturing plant, a division or subsidiary, or product line. The process of disinvestments mainly seeks to optimise the resources of an undertaking to enhance the return on investment. The different forms of disinvestment include a stock sale, asset sale, spin-off, or demerger of the undertaking.

• The government, whenever it so desires, may sell a whole enterprise, or a majority stake in it, to private investors.
• This information should not be considered complete, up to date, and is not intended to be used in place of a visit, consultation, or advice of a legal, medical, or any other professional.
• In simple words, Privatization implies the complete or partial sale of government’s equity in a state-owned undertaking, to the private sector.
• Ever since India opened up its economy to the world, the government has been distancing itself from industrial production.

The policy shift may make the business unviable, resulting in a sale of stake or ownership. In other instances, the policy shift may make the business illegal and hence necessitate a liquidation of the business. The passage of this law was widely seen as a reprisal for an incident in which Cuban military aircraft shot down two private planes flown by Cuban exiles living in Florida, who were searching for Cubans attempting to escape to Miami. The Washington-based company was a manufacturer of paper and paper products until 2004.

Understanding Divestment

In simple words, Privatization implies the complete or partial sale of government’s equity in a state-owned undertaking, to the private sector. The process raises funds which could be useful for the expansion as per the existing business plan. Many conservatives opposed the disinvestment campaign, accusing its advocates of hypocrisy for not also proposing that the same sanctions be leveled on either the Soviet Union or the People’s Republic of China.

But when it doesn’t, then the ownership is transferred to the private sector, which results in privatisation. It is also known as majority disinvestment or complete privatisation wherein 100 per cent control goes to the private sector. In some cases, however, a company may be forced to sell assets as the result of legal or regulatory action. Companies can also look to a divestment strategy to satisfy other strategic business, financial, social, or political goals.

This indicates that the bigger the ratio, the better the company’s financial position is. For example, a ratio of 3 means that a company has enough money to pay its total interest cost, even if this was multiplied by 3. The times interest earned ratio measures the ability of a company to take care of its debt obligations. times interest earned ratio The better the ratio, the stronger the implication that the company is in a decent position financially, which means that they have the ability to raise more debt. The times interest earned ratio , or interest coverage ratio, tells whether a company can service its debt and still have money left over to invest in itself.

For example, let’s say that the Times Interest Earned ratio is 3; that’s an acceptable risk for the investors. Businesses that have a times interest earned ratio of less than 2.5 are considered to be financially unstable. On the other hand, a company that uses a large amount of its capital as debt will have a low times interest earned ratio because of the high interest rates that they incur. Just like any other accounting ratio, it is advised not to compare your score against other businesses, but only with those who are in the same industry as you.

Understanding the Times Interest Earned (TIE) Ratio

In doing so, you can get a good idea as to how well your business is doing. Further, the Company may be bankrupt or have to refinance at the higher interest rate and unfavorable terms. Thus, while analyzing the solvency of the Company, other ratios like debt-equity and debt ratio should also be considered. Let us take the example of Walmart Inc.’s annual report for the year 2018 to compute its Times interest earned ratio.

To see how it all works, let’s look at how to calculate your interest coverage ratio. Potential investors and existing shareholders must be conscious of the company’s debt burden. For example, if Pebble Golf Course had EBIT of $100 and interest expense of $20, the times interest earned ratio would be 5.0 or 5x. Also, Interest Expense is an accounting calculation that is not always exactly correct, as when it includes premiums or discounts on bond sales, for example, instead of the given rate on the face of the bonds. Utility firms, for instance, are regularly making an income since their product is a necessary expense for consumers. In some cases, up to 60% or even more of these companies’ capital is funded by debt.

Definition of Times Interest Earned Ratio

ROA measures the organizations overall productivity of its assets (i.e. are the assets making the company money). If the company produces a high return on assets ratio, it will indicate that the company’s management has been… However, sometimes it’s considered a solvency ratio too, and that’s because it can estimate how able a company is to make interest and debt service payments. Interest payments are treated as a fixed expense that’s ongoing, considering they are, most of the times, made for the long-term. The times interest earned ratio measures a company’s ability to pay its interest expenses. Let’s say ABC Company has $5 million in 2% debt outstanding and $5 million in common stock. The firm has to generate more money before it can afford to buy equipment.

• The result illustrates how many times the company can cover its interest payments with its current income.
• You can find both of these figures on the company’s income statement.
• Rosemary Carlson is a finance instructor, author, and consultant who has written about business and personal finance for The Balance since 2008.
• Low TIE Ratio → On the other hand, a lower times interest earned ratio means that the company has less room for error and could be at risk of defaulting.
• For this internal financial management purpose, you can use trailing 12-month totals to approximate an annual interest expense.
• During the year 2018, the company registered a net income of $4 million on revenue of $50 million.

That’s because every company is different, with different parameters that must be taken into account. FREE INVESTMENT BANKING COURSELearn the foundation of Investment banking, financial modeling, valuations and more. We note from the above chart that https://www.bookstime.com/ Volvo’s Times Interest Earned has been steadily increasing over the years. It is a good situation due to the company’s increased capacity to pay the interests. Bring scale and efficiency to your business with fully-automated, end-to-end payables.