Rayovacs Financial Position from 20002004 and Rationale for the Acquisition of Tetra Holdings - Case Study Example

The mostly used stability ratios are gearing (also called leverage) and debt-to-equity ratios (Leo, 28). However this ratio declines sharply in the year 2001 and even further to the least recorded debt-to-equity ratio of 2.05 in the year 2002. This is the year where the business has the highest stability of all five years. The business increases its debt sharply in 2003 recording the highest debt-to-equity ratio of 6.65. This is the year when the business is least stable. Reduced debt-to-equity ratio boosts the business a little in 2004. The gearing ratio starts relatively high at 0.86 in the year 2000.

The ratio falls to 0.72 in the year 2001 and even further to 0.67 in 2002, coming out as the least recorded gearing ratio of all the five years. This is the year when the business is most stable. The ratio increases sharply in 2003 to a record 0.87, the highest recorded ratio of all three years. This is the year when the business is least stable (more vulnerable). The ratio declines a little bit in 2004 to record at 0.81 as the business stabilizes a bit. In the year 2005, Rayovac acquired Tetra Holdings of Germany for $555 million where $50 million was financed through long-term debt.

The question we may want to deal with at the moment is whether the debt was justified. Performance-wise Tetra Holdings showed some good results with annual sales of $223 million as of the end of 2004. The annual sales were an improvement from the $179 million sales made in 2001, showing that the company growing and its territories expanding and thus justifying the acquisition by Rayovac. Calculation of the Return on Capital Employed (ROCE) may also be used to justify the acquisition as below.

The positive ROCE implies that the company will be able to generate returns from its capital base and hence the acquisition is justifiable. A negative ROCE would raise an alarm as this would imply that the company is generating losses from its capital base.