JC PENNY COMPANY Case Solution
The reason behind this negative net profit ratio is that the JC Company is selling undifferentiated products in the market where same product can be found from several places where the critical success factor to provide consumers is selling something different or signing deals with companies to sell their products which have a strong customer base.
The current liquidity ratios and net profit margins are revealing a bad financial position for JC Penny. The management should take some immediate steps to make the liquidity position of the company better. Otherwise, the company will soon go bankrupt if they did not use any tactics to counter this worsening current position.
Leverage ratios give an idea about how the company capital structure is organized and how much debt is present in the company’s capital structure. Alongside equity, greater debt means greater financial risk, which also means that the company is running the risk of default on loans greater debt in the capital structure. Also close, this source of finance to obtain funds through this mode of finance in future when need for funds arise. Leverage ratios also represent the interest coverage ratio and cash to debt ratio, which is lenders favorite ratios to grant any loan. Companies that are in serious financial crises find it difficult to raise finance if they have adverse interest cover and cash to debt ratio.
JC Penny debt to equity ratio was 62% in 2011 quarter one and 68% in the quarter 4 of 2012 this ratio represents that company capital structure of almost two-thirds is based on debt, and the company is running a serious financial risk in terms of possible defaults. The capital structure should be an optimal mix of debt and equity in these modern times because sometimes having all equity based capital structure is not beneficial than an optimal mix. Debt provides tax shield, it is a cheaper source of finance but carry a considerable amount of risk too.
JC company will find it hard to raise further funds through debt, and they have to look at some other source of raising long-term finance probably equity. The interest coverage ratio of JC Company demonstrates that the company is not generating enough profits to pay out its interest to different creditors from whom they have financed major parts of their operations. The interest cover of JC company in 2011 quarter 1 was 2.78 times and in 2012 quarter 4. It is negative or nil which represents the companyâ€™s inability to pay out its interest obligations to different lenders, bondholders also tell fact about the debt as a source of finance that even if company debt to equity ratio is lower, the company would still be unable to raise finance through debt because of such adverse interest cover.
Furthermore, the current debt cash coverage ratio of the company represents its ability to pay out its debt from cash flow it generates from its operations. The cash debt coverage ratio of the JCP is below 1 which was 0.23:1 in 2011 and 0.14:1 in 2012 quarter 4. The debt cash coverage ratio below 1 is not considered favorable. This is the case of JC Penny.
WORKING CAPITAL MANAGEMENT
The working capital ratio provides important information regarding how the receivables, trade payables, cash, and inventory is managed by the company through different ratios such as, creditor turnover ratio tells how many days the company pays its creditors. Inventory days represents how many days company take to sell its inventory and receivables days gives a valuable info regarding how many days company receive cash from credit sales……………………
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