For your final SLP, you will be doing some research on the capital structure of your four companies (Walmart, Amazon, Facebook, and Nike. You will also be doing an overall assessment of these four companies based on the research you did for your Module 1-4 SLPs.
Write a two- to three-page paper addressing the following issues:
- Go to investing.com or a similar page and find the long-term debt to total equity and the total debt to equity ratios for your four companies. Investing.com should also give you the industry averages for these ratios. Based on these ratios, do your four companies have a greater relative debt load than the average of their industry? Do any of them seem at risk for bankruptcy?
- How does the debt ratios align with the credit ratings you found for your Module 2 SLP or the beta that you found for your Module 3 SLP? Do the companies with higher debt ratios have lower credit ratings or larger betas, and do the companies with lower debt ratios have higher credit ratings and lower betas?
- Finally, what is your overall assessment of your four companies based on your research for your Modules 1-4 SLPs? Which ones do you think are good investments based on your research? Which companies do you think are bad investments? Rank your four companies from best to worst investment. This part of the assignment should be at least one page.
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Answer 1
(Reuters, 2018) (Retail-Index.com, 2018) (Aitken, 2017) (Yahoo finance, 2018)
The table above shows the solvency ratios of the companies of Wal-Mart Inc, Facebook Inc, Amazon Inc, and Nike Inc and its solvency position as compared to their industry mean. The measures used include.
This ratio uses the long-term debt portion of the company and compares it with its total equity. The debt-to-equity ratio shows if the company position is better regarding its solvency or not. The ratio figure of 0.5 or greater shows that the debt portion is greater than its equity portion. The same figure is lower than the 0.5 figure shows that the debt portion is comparatively lower than the equity portion of the company. The idea here is to have a ratio which is at least 0.5.
For Wal-Mart Inc, the Long-Term Debt ratio is 52.9. The industry average as derived from the website of Reuters shows an average of 58.44. Even though the company has a long-term debt to equity ratio greater than 0.5, it shows that the company long-term debt portion (and not the complete debt portion) is greater in value than its equity portion. However, looking at the mean industry long-term debt to total equity ratio, it can be said that the industry has the trend of having a higher long-term debt to equity ratios. The total debt to equity ratio of Wal-Mart is 62.37 which is lower than the industry average of 78.43. The company can work on lowering its ratio; however, it does not seem to be in any danger of bankruptcy.
For Facebook Inc, we could not find the Long-term debt to equity ratios, or else the ratio is zero as shown on the Reuters website. In the latter case, it shows that the company does not have any debt portion in its balance sheet and is solely dependent on the equity sources of financing. Furthermore, the industry average for this sector is 31.48, which shows that the company has been different as compared to its industry norms regarding the long-term debt dependency given that the zero here represents that. The zero ratio of total debt to equity ratio as compared to the 38.4 industry means shows the same picture. The company can increase its sources of debt financing. However, it does not seem to be near bankruptcy.
The long-term debt to total equity ratio for the company Nike shows the figure of 38.56. While the average industry ratio of this measure is 12.74 which is so far the lowest ratio of Long-term debt to equity for our investigated industries. The measure shows that the company has a lower dependency on the debt sources of financing and that the 38.56 ratio shows that the company has a greater portion of its balance sheet being spent on the equity portion. The industry means as mentioned, being the lowest shows that the industry of Nike tends to have a lower dependency on debt sourcing and thus, regarding what the company can be highly speculative. The total debt to total equity is 38.77 as compared to the mean of 15.78 showing a similar picture. The company can work on lowering its ratio; however, it does not seem to be in any danger of bankruptcy.
Amazon Inc shows a long-term debt to equity ratio of 33.1 with an industry average of 58.08. The company has a lower ratio showing lower depending on the debt sourcing as compared to its competitors in the industry. The Total Debt to Equity Ratio is similar showing that it complete debt portion is dedicated to the long-term debt. However, the industry mean for the Amazon Total Debt to Total Equity is as higher as 83.46 showing the stability of the Amazon is regarding its lower dependency on debt as compared to its competitors. It does not seem to be in any danger of bankruptcy.
Answer 2
The credit ratings of the four companies are shown in the table above and so are their beta values. The beta value of the Wal-Mart is 0.26, even though the company has greater debt ratios. While Facebook has a greater beta value of 0.7 as compared to its zero debt ratios. The Nike Company has 0.77 while the company’s debt ratio is lower than 0.5. Amazon Inc has a beta value of 1.81 which shows high risk and high return stock, whereas the company debt ratios are lower than 0.5. The credit ratings of Wal-Mart are AA, which is considered as a company with a very strong paying ability.
The debt ratio is, however, higher than 0.6. For Facebook Inc, the credit rating is BBB+ which is termed as adequate while having the lowest medium grade paying ability. However, the company does not have any debt. Nike Inc has the credit rating of AA- which shows strong credit paying ability of the company which is aligned with its debt ratios. Amazon Inc similarly has the credit rating of AA- with strong credit ability while its debt ratios are lower than 0.5 as well. However, it has a very speculative beta value.
Answer 3
Wal-Mart would be considered as the best investment from my perspective because of its credit ratings. The credit ratings of Wal-Mart are AA, which is considered as a company with a very strong paying ability. The beta value of the Wal-Mart is 0.26, even though the company has greater debt ratios. The overall assessment would be that the company has strong Financials to pay back its liabilities.
Nike would be considered as the second-best investment alternative as the company has lower than 0.55 debt ratios while the company Nike Inc has the credit rating of AA- which shows strong credit paying ability of the company which is aligned with its debt ratios. The beta value of the Nike Company is 0.77 while the company’s debt ratio is lower than 0.5. It can be considered a good investment with lower risk.
Amazon would be ranked as the third best investment alternative because of the credit ratings and lower debt ratios. Amazon Inc similarly has the credit rating of AA- with strong credit ability while its debt ratios are lower than 0.5 as well. However, it has a very speculative beta value. Even with this beta value of 1.81, it can be considered a good investment.
While Facebook has a greater beta value of 0.7 as compared to its zero debt ratios. The debt ratio is, however, higher than 0.6. For Facebook Inc, the credit rating is BBB+ which is termed as adequate while having the lowest medium grade paying ability. However, the company does not have any debt. As these zero values does not show the true picture of its liabilities and the credit rating is also the lowest among the four companies, it would be ranked as fourth.
References
Aitken, R. (2017). Snap’s Credit Profile Draws More Similarities To Twitter Than Facebook. https://www.forbes.com/sites/rogeraitken/
2017/03/24/snaps-credit-profile-draws-more-similarities-to-twitter-than-facebook/#18f3c6be4727
Retail-Index.com. (2018). Wal-Mart Stores, Inc. https://retail-index.emarketer.com/company/data/5374f24
d4d4afd2bb4446614/53baadb4404bea08f8cc
1261/ltst/false/wal-mart-stores-inc-credit-ratings
Reuters. (2018). Wal-mart Inc. https://www.reuters.com/finance/stocks/
financial-highlights/WMT.N
Yahoo finance. (2018). Walmart Inc. (WMT). https://finance.yahoo.com/quote/WMT/key-statistics?p=WMT
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