Professional paper
200-2500
Please make a summary of what I have learned from what I have wrote below:
1.
Hi Ryan & Everyone,
Sometimes, a high level of gearing could be the only choice for a company if it is to continue to keep the business alive. A high gearing ratio means that a company relies heavily on debt or loans, and less on shareholder’s equity. This, therefore, shows that in theory, and the organization has two options when it wants to fund its expansion. It can either be from loans or the investors of a company. Getting the funding from investor and shareholder equity is, however, hard due to two reasons.
First, one of the sources of shareholder’s equity is retained earnings. According to Andriesse & Mamoon (2017), retained earnings are the profits from a company that is designated to be paid out to the shareholders in the form of dividends. Companies sometimes chose to keep this money and use it to fund their expansion, hence increasing the value of their shares in the company.
This situation is, therefore, ideal if a company is making profits. However, when a company is barely surviving and on the brink of going under, the natural situation is that it would not be making profits but losses. This source of financing is therefore ruled out.
The second possible option form the shareholder’s equity is the sale of new shares to investors. The money can then be used in the expansion of the business. It is, however, instructive to note that investors look at the current performance and future potential of a business, and would not invest in a struggling business (Tykvov, 2018).
High gearing is, therefore, the only logical option.
Regards,
Mohammed Alblooshi
2.
Hi Tim & Everyone,
Gearing ratio is one of the most critical areas in the company, especially when looking at its financing. The gearing ratio generally looks at how leveraged a company is. It, therefore, looks at the ratio between debt and shareholders equity and capital in the financing of a business. So what is the impact of a high and a low gearing ratio? It is first necessary to note that there is no right or lousy gearing ratio. It all depends on the average in the industry or the critical competitors that a company faces. The gearing ratio, therefore, looks at the risk which a company is exposed to.
A high gearing ratio may impact a company negatively were it to face certain situations. According to Khalil & Khalil (2017), when a company has a high gearing, it means that it is highly leveraged. Therefore, the company sources most of its funds and financing from loans. Such high leveraging is risky for the company because, in case of high- interest rates, then it increases the possibility that a company may default on interest and principal payments. The default of these loans is also a possibility during times of low profits. Conversely, a low gearing has a good impact on a company because it means the company is exposed to moderate risk.
The investors and the lenders would, therefore, be confident about a company because it can pay its interest and principals payments as they fall due.
Regards,
Mohammed Alblooshi
3.
Hi Abigail & Everyone,
Caffe Nero is one of the high ranking Starbucks competitors. As per the financial reports of 2019 to early 2020, Caffe Nero posts a gearing ratio of 50 percent (ADVFN, 2019). Comparatively, Starbucks has a gearing ratio of 147.74 for this period. The question in this respect is that what does this huge disparity in gearing ratio mean for these two companies? One perspective to this case is that it demonstrates that Starbucks has large financial leverage than Caffe Nero (Carlson, 2019). In this view, financial leverage represents the money borrowed or debt that is used for increase sales volume (Carlson, 2019).
Therefore, Starbucks has a stronger financial leverage that implies increased sales and revenue (Carlson, 2019). . However, the disparity in gearing ratios between the two competing companies has financial implications. Specifically, Starbucks with gearing ratio of 147. 74 percent has higher financial risk compared to Caffe Nero with 50 percent ratio. Ideally, financial risk is said to be manageable when it between 25 to 50 %, however, it can be detrimental when this ratio goes beyond 50 percent (Carlson, 2019).
Meanwhile, it is important to note that Starbucks higher leverage does not necessarily mean that the company is in situation of financial distress (Carlson, 2019). Big companies like Starbuck sometimes have gearing ratios above 50 percent as they are regulated entities (Carlson, 2019). In fact, most of these large companies commonly use greater debt levels to advance and meet their operation needs (Carlson, 2019). It is strategy that is applied frequently by organizations like Starbuck that focus in capital intensive industries (Carlson, 2019).
Therefore, while Starbucks has a greater gearing ratio than Caffe Nero, this is just a strategy for gaining higher leverage and does not necessarily indicate that the company is in financial problems.
Regards,
Mohammed Albloosh
4.
Hi Tim & Everyone,
Retained earnings: firms usually make profits after selling a service or goods. The profit rewards are also known retained earnings (Investopedia, 2019). They are mainly used to pay dividends for shareholders and fund some other investment projects that are geared towards growth (Investopedia, 2019)
Venture capital: This is another method of financing where firms and business or even individuals come together to invest in a certain business or new projects (Hofstrand, 2013).
The company that receives the capital cedes or grants partial ownership to the investing firms (Hofstrand, 2013). In most cases, companies that provide venture capital to other firms or businesses do not want to take part in the daily management of concerned investment (Hofstrand, 2013). In this, management is delegated to the firm receiving the capital (Hofstrand, 2013). However, due diligence is often performed to ensure that the project being funded is sound and profitable (Hofstrand, 2013).
Government grants: Federal as well as state governments usually provide grants as incentives for businesses (Hofstrand, 2013). These are financial assistance such as tax credits and they are used for expanding or pursing a new business venture (Hofstrand, 2013).
Bonds: This form of financing involves a company issuing a bond as an approach of debt financing (Hofstrand, 2013). In this type of financing, the company pays back the indicated principle value and interest for the issued bond (Hofstrand, 2013).
Angel Investors: This refers to a situation where Individuals as well as businesses provide financial support to small-enterprises to allow them to expand and survive (Hofstrand, 2013). Angel investors are mainly driven by mission focus, but they also value profitability and business security when making financing decisions (Hofstrand, 2013).
Regards,
Mohammed Alblooshi
5.
Hi Izabela & Everyone,
Each business needs to strengthen its sources of finance to boost its growth. There are various sources of funds which the company can consider, but the primary cause is debt and equity. In each of the sources, there are cost and benefits which are associated with, and therefore the company should conduct due diligence before it settles on the cause of finance (Gartenstein, 2020). However, during the selection of the sources of funding, the business should take into consideration the cost and terms of the causes, and this will make the selection of the finance relative easier.
For instance, in Delta and American Airlines, their primary sources of finance are equity and debts.
There is a need to balance the ownership and the obligations to ensure the company debts are leveraged and does not affect the business progress in the market. Each company need finance to fund all the development project which the firm has and also meet its expenditure, and therefore the selection of the appropriate sources of the finance should be made in adherence of the factors (Gartenstein, 2020).
Also, there is a need for the firm to prepare all the gearing ratios and other related financial ratios, which would assist the firm in knowing its capability to repay its debts. With these appropriate measures, it would help the firm to get the best source of finance, which would be easy to manage.
Regards,
Mohammed Alblooshi
6.
In every business, finance is very crucial when budgeting and planning. Funding is also used in controlling costs and risks as well as the capital structuring. When starting a business, one always identifies the business objectives and goes ahead to find out from experienced people, on how much it may cost to begin.
The finance managers are responsible for maintaining the liquidity of cash to pay the employees and the business suppliers. Finance finds ways of improving the profitability of the business as they monitor risky areas through reports to the managers and owners (Toporowski, J.,2017).
In finance, a conceptual framework is a collection of objectives and ideas which help create consistency in the setting of standards in the business. It is imperative to develop this framework as it sets financial criteria as well as creating a basis for resolving commercial disputes. On the other hand, the economic structure increases the number of people using financial statements, hence growing confidence and understanding of financial reports (Jia, F., Blome, C., Sun, H., Yang, Y., & Zhi, B., 2019).
Often, firms require external funding to invest in development and research expand their businesses as well as avoiding competition. Some of these alternative funding policies include retained earnings, debt capital, and equity capital. Retailed earnings are the funds gotten from the profit a business makes. Firms also borrow money to keep their business running smoothly. Equity funding is where a company sells some part of it to investors in the form of shares (Sobiegraj, A., 2017).
Regards,
Mohammed Alblooshi
8.
Hi Michaela & Everyone,
Gearing ration illustrates the extent to which shareholders versus creditors finance the firm’s functions. It measures the company’s financial leverage. Gearing ration may include the obligation ratio, which is the average of total assets to full debts. Gearing ratio is essential to both the internal and external parties; for instance, financial institutions may use this information to decide on the number of loans to credit the company.
Gearing ratio is the foundation of the firm’s financial standings, and investors use these rations to detect risk in a given investment.
The most convenient method that a company can reduce its gearing ratio is by cumulating sales revenues and to be hopeful of high profits. The company can achieve this by increasing the sales rate, decreasing the costs of production while similarly raising the prices of commodities. The extra income earned can be used to pay back the debt. Inventory management is another effective method of minimizing liability to capital ratio (Maverick, 2020). The administration should buy the sizeable stock of goods to reduce the working capital wasted while purchasing surplus goods to satisfy customer’s needs.
Debt to capital ration can also be reduced by debt restructuring. A company can take the opportunity of low-interest rates on loans if it has been accessing loans at high prices on the previous transactions made. Debt restructure helps to reduce the expenses incurred by the firm on interests, and the company’s profitability will also improve (Maverick, 2020).
Restructuring of debts will furthermore boost capital store and net cash flows.
Regards,
Mohammed Albloosh
9.
Hi Elena,
There are different reasons why gearing ratio when it comes to examining the financial health or position of an organization. One of these justifications is that this ratio a reliable tool for establishing how a particular company is employing debt (Motilal Oswal, 2019). It is important to note that a business that is effective in debt management has little financial risk (Motilal Oswal, 2019). Effective utilization of debt imply that the company is receiving more value from the borrowed capital (Motilal Oswal, 2019). Thus, higher gearing ratio will therefore indicates greater risk of solvency (Motilal Oswal, 2019)..
Gearing ratio is an important variable in balance sheet statement. That said, a balance sheet is a vital document that is used to establish a business position of company (Motilal Oswal, 2019). As a result, it is appropriate to infer that gearing ratio plays an important role in evaluating the financial position of an organization (Motilal Oswal, 2019).
Accurate understanding of financial risk and solvency of an organization can sometimes be achieved by performing a comparative analysis of more than one ratio (Motilal Oswal, 2019). Gearing ratios is one of the ratios that is helpful in this respect. Specifically, Interest coverage is one of the ratios that can be used together with gearing ratio to examine how operating profits of a company are performing against debt (Motilal Oswal, 2019). In this way, the organization can identify if the profits generated are able to service the capital debt (Motilal Oswal, 2019). In this manner, better financial decisions that will promote sustainability and limit liquidation will be implemented.
Based on these findings, I would conclude that gearing ratio is an important measure for evaluating business position and risk of solvency and therefore company leadership should not ignore this financial tool.
Reference
Motilal Oswal (2019). Undersdanding the importance of Gearing Ratio. Retrieved from https://www.motilaloswal.com/article.aspx/1740/Understanding-the-Importance-of- Gearing-Ratio
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