This report aims to review total debt/equity ratios, company betas, profitability ratios, company revenue, assets, and liabilities, to examine the nature of the operations of the companies (eBay, Clorox, Alaska Airlines), and to provide the information on the optimal capital structure, advantages and disadvantages of debt financing and of equity financing, and more.
To start with, eBay Inc. is an American company that provides services in the areas of online auctions (its main field of activity), e-commerce, and instant payments. Besides, the company manages the eBay website and its local versions in several countries, owns PayPal.
The Clorox Company is an American company widely-known for its liquid household bleaches. In addition, Clorox provides the following brand names:
Household chemicals - a complete range of cleaning products;
GLAD - food packaging;
STP - car chemicals;
Armor All - car care products;
Fresh Step and Ever Clean - cat litter supplies.
Alaska Airlines is an Airline backbone of the United States of America headquartered in SeaTac, a suburb of Seattle (WA), USA. As its main transit hubs, Alaska Airlines uses the Seattle-Tacoma International Airport and Ted Stevens Anchorage International Airport; additional hubs are located at Portland International Airport and Los Angeles International Airport.
Now let us pay our specific attention to the total current assets and long-term assets of all these three companies.
The first company is eBay - its total current assets are 21,398,000. The company's long term assets include 37,074,000 - they were received from accumulated amortization, long term investments, intangible assets, and other recourses such as "…physical items or rights that are owned by the business (Duchac, Reeve, & Warren, 2007, p. 114).
The second company is Clorox - the company's total current assets are 1,376,000. Total assets consist of 4,355,000 - these long term assets were also received from accumulated amortization, long term investments, intangible assets, goodwill, and other assets.
The third company is Alaska Air Group - its total current assets are 1,595,500. Total assets contain 5,195,000 received from long term investments, intangible assets, goodwill, accumulated amortization, and more.
Focusing on total current liabilities and long-term liabilities of Ebay, it is possible to say that they include 10,924,000. In turn, total current liabilities consist of 16,209,000. The company's current liabilities include: short-term debt; accounts receivable; advances to customers, etc.
Total current liabilities and long-term liabilities of Clorox are 2,061,000 and 4,490,000 respectively. The company's current liabilities are amounts that Clorox should pay to creditors within twelve months.
Alaska Air Group's total liabilities are 1,509,600, and long-term liabilities include 4,021,800. The company's current liabilities include: short-term debt; minority interest; negative goodwill; accounts receivable, and more.
Revenue is some amount an individual can spend over a period of time without changing the size of his/her capital. Generally speaking, it is money or property received by the entity as a result of an activity for a certain period of time. At the time, eBay has revenues of 14.07B. According to well-known analyst Colin Gillis, "that's a significant run…The core story behind eBay is that they are doing all the right things" (Perlroth, 2012, para. 3). These are really truly words because eBay is a perfectly-operated company that runs its business worldwide. The Clorox Company's revenues are well -spread among its major divisions and include 5.60B. In turn, Alaska Air Group has revenues of 4.66B.
The debt/equity ratio (D/E) is "a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets" (Peterson, 1999, p. 92).
Focusing on the total debt/equity ratios of all the above-mentioned companies, it is possible to say that eBay has the total debt/equity ratio of 21.66. In return, Clorox has the total debt/equity ratio of 4,775.00. As for Alaska Air Group, it has the total debt/equity ratio of 74.95. It is essential to focus attention on the debt/equity ratio when observing the heath of a company. If the ratio begins to grow, the company is funded by the lenders rather than from their own financial resources. This fact can be a fairly dangerous trend. That is why the creditors and investors are mostly interested in the low debt-to-equity ratios since their interests are much better protected in the case of a downturn. Therefore, the companies with the low debt-to-equity ratios are much more attractive to the creditors or investors.
Profit margin is a critical indicator for any company. In a simple definition, it is "a measure of the net gain (or loss) of revenue minus expenses" (Graff, 2006, p. 30). At the time, eBay's profitability (profit margin) includes 18.54%. The Clorox Company has 10.03%, and Alaska Air Group's profit margin consists of 6.79%.
Now let us talk about return on assets, and return on equity ratios of all these three companies. eBay - return on assets: 5.67%, return on equity: 13.45%. The Clorox Company - return on assets: 13.55%, return on equity: N/A. Alaska Air Group - return on assets: 6.89%, return on equity: 24.35%.
Return on assets is a financial ratio that characterizes the full return of all the organization's assets. Ratio shows the organization's ability to generate profit, excluding its capital structure (financial leverage), the quality of asset management. Return on equity is a net profit compared with a net worth of the organization. This is a critical financial measure of return for any investor that shows the effectiveness of capital invested in the business.
Beta is an index, which is calculated for a security or a portfolio of securities. It is a measure of market risk, which reflects the variability of yield securities (portfolio) in relation to the profitability of the portfolio (market) in the mean (average market portfolio). EBay's beta is 0.95, while The Clorox Company's beta consists of 0.39. As for Alaska Air Group, its beta includes 0.84. Each company can face significant risks concerning its business processes. If a beta coefficient is higher than 1, it means that the portfolio is unstable. However, a beta of less than one means that the portfolio is stable. That is why the conservative investors are primarily interested in this ratio and prefer stocks with the low levels of it. Thus, the higher the beta coefficient, the more risky is the investment object.
Examining the riskiness of all three companies, it is possible to say that their beta coefficients are not higher than one, and consequently their portfolios are less sensitive to the price movements.
The business's ability to flexibly use the bonds and other debt instruments in financing the firm's capital plans plays an important role in increasing the production's efficiency. Own internal sources occupy a leading place in financing the firm's capital plans. However, borrowed attracted financial resources are second in the degree of preference. Debt financing is aimed at raising funds on terms of maturity, interest payment and repayment. These conditions mean that the resources received must be returned to a lender in full and at pre-determined time. Thus, debt "includes all interest bearing liabilities, short term as well as long term" (Damodaran, 2005, p. 7).
The advantages of debt as a way to attract investments are as follows:
the company's direction retains full control over the company;
interest payments on debt are usually related to cost price;
terms and conditions of the obligation are known in advance;
the lender does not participate in the distribution of company profits.
The disadvantages of debt financing:
obligatory presence of guarantees, which beyond the size of the provided loans;
credit crunch;
the risk of default on the loan;
Loss of future flexibility.
According to Damodaran (2005), equity "can be deï¬ned either in accounting terms (as book value of equity) or in market value terms (based upon the current price)" (p. 7).
The advantages of equity financing:
Unlimited funding;
Unlimited terms of fund-raising.
The disadvantages of equity financing:
Considerable difficulties with the issue of shares and their placing on the market;
Loss of control over the activities of the company.
The companies are recommended to rely more on equity financing in the early stages of their existence, since it may be difficult for such companies to service debt until they obtain secure cash flow.
The optimal capital structure is a unique set of financing instruments of the enterprise, which levels information asymmetry and meets a given level of control. The optimal capital structure that effectively balances risk and return for strategic purposes must necessarily increase the company's value. The optimal capital structure is always a compromise between risk and return, and if the equilibrium is reached, it should bring the desired maximization of the market price per share of stock.
Taking the above-mentioned information into consideration, it is possible to draw a conclusion that the above-mentioned companies have to form the optimal capital structure, which should be directed to the solution of such problems: formation of sufficient capital, ensuring the required rate of economic development of the enterprise; providing conditions to maximize the return on capital at an acceptable level of financial risk; ensuring the continued financial equilibrium in the process of enterprise development, and ensuring an adequate level of financial control of the business from its owners.
