Abstract
Many individuals who have had great ideas have in most cases fallen short of their dreams mainly due to the fact that they could not find proper funding for their dreams. In most cases, there has been procrastination of startup of a business venture with the notion that in the near or distant future, there will be available funds to kick start the venture. To their disappointment, there have been stricter demands for loans and other financial assistance from lending institutions like commercial banks coupled with ever increasing interest rates on the loans applied for mainly due to financial crisis and collapse of stock markets. For this course, many have resulted in sourcing funds from as many quotas as they can and thus increasing the risk of default on loan repayment. In this case study, there will be consideration of three companies which are the Clorox Company, eBay and Darden Restaurants.
Introduction
When making an analysis on the stock market company to invest in, it is important to look at some crucial aspects of the company. In so doing, one is able to evaluate the level of volatility of the stocks as well as that of the company and make an informed decision on where to invest. In this case study, there will be consideration of three crucial companies all of which fall under the service industry. These companies are the Clorox Company that goes with the initials CLX in the stock market (Clorox Company, 2012), eBay whose stock market name is EBAY (eBay Inc., 2012), and Darden Restaurants whose stock market name is DRI (Darden Restaurants, 2012). The following is a brief profile of individual companies under consideration.
Profiles
The mention of the name eBay initiates the thought of sales and purchase of products online. eBay is one among the success stories that lingers in many lips. The company is also a member of Nasdaq 100 according to eBay Inc. (2012). EBay falls under the service sector under the catalogue and mail order house industry (eBay Inc., 2012). Started in the year 1995 during the digital revolution, eBay employs 27,770 employees that work fulltime (eBay Inc., 2012). Apart from owning eBay.com, the leading online merchandise platform, it also owns other subsidiary websites like StubHub.com, Half.com among others with a vast range of products on offer for sale and purchase by individuals and corporate (eBay Inc., 2012). EBay is headquartered in San Jose, California according to eBay Inc. (2012).
On the other hand, Darden Restaurants does not have index membership affiliation like eBay and Nasdaq 100 but like eBay, it falls under service sector (Darden Restaurants, 2012). Darden Restaurants, just like its name suggests it falls under the restaurants industry (Darden Restaurants, 2012). The main region of operation for Darden Restaurants is United States and Canada (Darden Restaurants, 2012) with its headquartering in Orlando, Florida. Darden Restaurants boasts of over 1900 branches with brand names ranging from red lobster to LongHorn Steakhouse to Olive Garden, to Bahamas Breeze, The Capital Grill and the Season 52 with an employee base of a staggering 178,500 according to Darden Restaurants (2012) as of December 16, 2011. The restaurants were started back in the year 1968 (Darden Restaurants, 2012).
Of the three companies under consideration, Clorox Company is the oldest of them all having come into existence in 1913 and whose headquarters is in Oakland, California according to Clorox Company (2012). Similar to Darden restaurants, Clorox does not have affiliation with Nasdaq 100 but it also falls under service sector (Clorox Company, 2012). Clorox has four major segments under which its operations are centered. The first is cleaning mostly with brand name Clorox, Lifestyle with brand names like K C Masterpiece, Hidden Valley and Brita among others, Household with brand name Glad and International segment with brand names ranging from Clorox, Javex, Glad, PinoLuz among others (Clorox Company, 2012). While operating in the house ware and accessories industry, Clorox has a customer base of over 8,100 (Clorox Company, 2012). The following section considers the financial information for each company under consideration.
Financial Information
The total current assets for eBay are $ 5.93 billion (eBay Inc., 2012) with Darden Restaurants’ total current assets being $ 50.20 million (Darden Restaurants, 2012) and Clorox Company’s being $ 297.00 million (Clorox Company, 2012). As far as market capitalization is concerned, eBay leads among the three companies with $ 42.60 billion (eBay Inc., 2012), followed by Clorox Company with $ 8.95 billion (Clorox Company, 2012) and lastly Darden Restaurants comes in at $ 6.35 billion (Darden Restaurants, 2012).
Interestingly, eBay’s enterprise value is at $ 38.69 billion (eBay Inc., 2012), a short fall of $ 3.91 billion were the company to be sold as it is – a red-flag for company investors. On the other hand, Darden Restaurants has an enterprise value of $ 8.61 billion, indicating positive outlook with a positive margin of $ 2.26 billion were the company to be sold at it is (Darden Restaurants, 2012). This is a similar case for Clorox Company which has an enterprise value of $ 11.56 billion, a clear positive difference of about $ 2.61 (Clorox Company, 2012).
It can be noted that eBay’s total debt is at $ 2.09 billion (eBay Inc., 2012), Darden Restaurants’ total debt being at $ 2.35 billion (Darden Restaurants, 2012) and Clorox Company’s debt being at $ 2.90 billion (Clorox Company, 2012). Despites its likelihood to be on the lower side while comparing market capitalization and enterprise value, it is evident that eBay is much more effective in debt servicing especially given their efficient systems like Pay Pal® that has proved effective in this case (Cents, 2012).
According to eBay Inc. (2012), the company has revenue of $ 11.65 billion (Cents, 2012). Darden Restaurants has a revenue base of $ 7.74 billion (Darden Restaurants, 2012) and Clorox Company’s revenue base is $ 5.31 billion (Clorox Company, 2012). EBay’s total debt/ equity ratio is at 11.66 (eBay Inc., 2012), Darden Restaurants’ total debt/ equity ratio at 136.91 (Darden Restaurants, 2012) and Clorox Company’s total debt/ equity is at 9.76 (Clorox Company, 2012). The profit margin, return on assets and return on equity ratios for eBay are 27.72 %, 6.01 % and 19.43 % respectively (eBay Inc., 2012). The profit margin, return on assets and return on equity ratios for Darden Restaurants is 5.80 %, 7.89 % and 25.08 % respectively (Darden Restaurants, 2012). The profit, margin and return on assets ratios for Clorox Company are 10.45 % and 13.47 % respectively (Clorox Company, 2012).
As far as trading information is concerned, eBay’s Beta is at 1.29 indicating that eBay’s stock market is 29 % more risky than the market trend (eBay, 2012). It is also noted that companies that are affiliated to NASDAQ have a tendency of having higher beta which offers these companies possibilities for higher returns while at the same time exposing these companies to higher risks over the market. Darden Restaurants has a beta of 0.7 which show that it is relatively safe while the safest of these companies is Clorox Company whose beta is at 0.41 meaning that it is more stable and less affected by the market trends (Clorox Company, 2012) and (Peavler, 2011).
Advantages of Debt over Equity Financing
There are various advantages that debt financing has over equity financing. While in equity financing investors own a portion of the company depending on the amount invested, debt gives the owner total control of the company’s trend, decisions as well as profits thereof (Peavler, 2011).
Another advantage is that for the interest on loan that is repayable to the commercial banks, there is tax deduction that tends to create a shield on some company income and thus the tax liability is lower (Peavler, 2011).
Since lenders expect you to just repay your loans on time, they are not partakers of the profits of the company (Peavler, 2011).
Additionally, since the traditional commercial bank loans have higher interest rates, it is possible for a small company to apply for Small Business Administration Loan for which according to Peavler (2011) has a better term.
Finally, since debt financing means no investors are involved, decisions are only in the interest of the owner and thus aversion of any possible lawsuit that might emanate from investors.
Personal Synthesis
Looking at the case study, the learner has been enlightened on various issues as pertains to business startup financing is concerned. Looking at eBay Inc. the best capital structure for such a company would be total liability mainly because the company seems to thrive in debt management as well as having high returns from the same. Additionally, eBay has higher chances of making risky decision to increase profitability as indicated by its association with NASDAQ and its beta of 1.29. This means that there are no investors to be answerable to while making decisions.
On the other hand, it seems that despite Darden Restaurants and Clorox Company having been in existence for a much longer period of time unlike eBay, there seems to be careful decision making instead of striving for profits. There seems to be an element of investor relation during decision making for both companies and thus the companies can best be described under debt and equity proportions of capital structure since decisions have to be in the interest of the company and investors alike.
Reference
Cents, C. (2012). Trading the good and bad of eBay’s business, Seeking Alpha. Retrieved February 10, 2012, from http://seekingalpha.com/article/351601-trading-the-good-and-bad-of-ebay-s-2-businesses?source=yahoo
The Clorox Company (2012). Key statistics. Retrieved February 10, 2012, from http://ca.finance.yahoo.com/q/ks?s=CLX
Darden Restaurants Inc. (2012). Key statistics. Retrieved February 10, 2012, from http://ca.finance.yahoo.com/q/ks?s=DRI
EBay Inc. (2012). Key statistics. Retrieved February 10, 2012, from http://ca.finance.yahoo.com/q/ks?s=EBAY
Peavler, R. (2011). Debt and equity financing. Retrieved February 10, 2012, from http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm
