Decision for Making Investments - Brown Shoe Company - Case Study Example

Financial Research Report Decision for making Investments: Decision are always very difficult to make, as its effect on the concerned area are long lasting. We make decisions everyday some are routine we do not bother to use too much thinking for making such decisions due to its routine nature. We are used to make such decisions everyday that is why we don’t think about it too much when taking it. Some decisions are really difficult to make because of complex of its complexity, or sometime such decisions involves something we care about. The decision about which I am writing this is of this kind that is a complex decision as it involve the investment of funds or the thing about which our client concerns the most that is their funds. The decision about investment is very difficult as if proper tact, care and professional knowledge is not used it will not only drown the funds but will also put on stake our reputation. While taking decision about investment we (Financial managers) take into consideration the following things regarding a company about whom we may give suggestion to our clients for investment, our client in this case is interested in long term investment that is in companies who’s short term profitability are low but there are prospects for the future growth and in near the company will grow and the investment will become worthy: Security of the Investment: This is the first and foremost factor which we consider while making any decision for investment that whether the investment we will be secured? Will the company be able to satisfy this amount after its being wind up, that is the company have sufficient assets that will pay its owners after satisfying the creditors of the company. Or in other words the investments we are going to make will return in future sufficiently and the capital investment will remain there without losing its value (Beenhakker, 1996). Profitability: The second and other important thing that a client expect and we check is that whether that company to be selected for the investment is profitable? And would it be able to sustain its current profitability in future if this is satisfied after calculating some profitability ratios for the company using its recent financial information we move on to the next factor that needs consideration for this kind of decision (Northcott, 1992). Potential for future growth: The Company have potential for growth in near growth in near. This can be verified from taking into consideration into financial information of the company regarding the class of assets that the company holds including machinery and change accepting human resource capital, to frame change and go forward does the company have a proper plan for this that is does it have reserves in its financial statements that will allow the company or push the company towards growth in future. Considerations for this sector may include an insight into the company’s financial statements’ capital, assets (especially non-current assets), and cash flows of the entity (Beenhakker, 1996). Which will indicate that whether or not this company is capable of growing in future? Types of company’s Industry: The type of company’s affects the investment decision as well, therefore prior to taking such decision understanding of the company’s industry is very important in order to identify risks and rewards related to such industry. We consider the type of goods the company produce and whether it is perishable or not, the market for such goods that is whether it is a necessity or a luxury item (Northcott, 1992). Its pricing structure and the identification of a prospective customer base, which is whether it would be sold quickly or the company will have to pay for its storage costs due to non-availability of customers. Production of cost effective goods: The goods that the intended company produces is cost effective? Does it follows the quality control procedures for such production? The production capacity of the company is the next question that whether the company’s production is capable of producing high quality goods that capture the market by catching customer’s attention (Beenhakker, 1996). Does the company produce goods that covers a wide range of customers that is it can increase its revenues in future? Expectation of Goodwill: The client also expect that in few years the company will make name by selling high quality goods at reasonable prices. And after this the company will also be able to charge for its goodwill by selling franchises or other intangible assets of the company to other organizations outside the company’s jurisdiction of business making it a global company (Richard Pike, 2006). After taking into consideration I have selected Brown Shoe Company a leading footwear manufacturing cum trader publicly trading company having more than 130 years of experience in industry producing a wide range of products and is a global organization with a passion to innovate and grow instantly by valuing its customers’ needs and shareholders trust in company for earning profits and name. After about 130 years of experience with the help of committed staff the company today is a $2.6 billion company achieving global status in footwear industry and its products are worn by people of all ages and from all walks of life. The company serves its wide customer range with a broad range of variety under three heads which are Family, Healthy living and Contemporary Fashion through its more than 1200 outlets in America. The company sell a lot of brands under the above heads in different areas. (Brown, 2015) Rationale for Such Selection: The reasons for such selection are as follows History/Experience of the Company: The Company has a history or we can say experience of 130 years!!! Which a big time is to understands every aspect of the industry and thereby make policies for cost reduction and making goodwill by selling high quality goods at reasonable prices reaching customers and gaining their trust in company’s products. The company utilized this opportunity very well and gain the confidence of the customers in its products and are known for integrity in the customer and shareholders circle. The company had experienced many springs and autumns in its career and evolved a best suitable structure for running its business operations after such driving a long journey (Northcott, 1992). Therefore to invest in newly established or underdeveloped organization it is better to invest in an established and well-structured organization not only to secure your investment but to expect future certain profitability and growth. Company’s Industry: The Company is operating in footwear industry and is an in house manufacturer cum trader cum exporter. The company has a track record of manufacturing quality goods and selling it in other countries as well. As the company is trading in necessities (that is footwear) therefore after taking into consideration the company’s track record it is a worth investing company for you as you are a long term investor who needs security of investment and return on such investment which is more likely than not probable here, so it is advised that you may invest here. (Beenhakker, 1996) Potential for Growth: The Company has high potential and wish for growth this fact can be easily identified after analyzing the financial results of the company at its site that is the assets of the company are increased from that of the last quarter as depreciation is increased from the last is increased by 3 million (51 to 53), net sales are increased from 702.9 million to 729.3 million. (Tharp, 2015). The company with having a broad range of design choices creates a very large customer base thereby encircling individuals belonging to all walks of life. The company has potential for change and changes very promptly in accordance with any change in the circumstances, this fact is evident from the same source that is the company’s financial statements available on its site that the company has closed six stores while in the same quarter it opened 12 more stores in areas where revenues are expectedly higher than the previous place. (Tharp, 2015) Profitability of Company: The Company is delivering favorable results since its incorporation in this sector thereby satisfying its shareholders. The company can do the same in future. As the company is running a seasonal business due to which some up down situation could have occurred but due to commitment and intelligence indecision making and policy designing this factor is also being mitigated and the company has shown favorable results for its third quarter of 2014 that is the earning per share have been increased from $.63 to .75. (Tharp, 2015). Corporate Governance Structure: The Company have a long of being guided by a value system that emphasizes integrity and trust at all levels of organization. The company have longstanding policies and practices to ensure that the company is managed with integrity and in best in interests of the shareholders. In addition the company is committed to upholding sound principles of corporate governance and to meeting the requirements of federal and state laws and the rules of New York stock exchange. (shoes., 2015) The commitment made by the company’s management in providing governance certifies the company’s future growth in terms of revenue growth, goodwill building and capturing market share thereby enhancing the value of investor’s investment. Transparency of the company’ Operations: After being governed by a strict governance structure formulized by higher management keeping in view the national and other territorial laws affecting company’s business. The company also keeps a transparent system of financial reporting towards its stake holders and other users of the financial statements by providing its quarterly financial statements on its website and maintaining an audit committee in order to ensure timely audit of financial statements and its availability towards the intended users. Ratio Analysis and Its Support for the Decision Rationale for the Decision in terms of ratios Ratio analysis has its limitations. The basic limitation is the data from which such ratios are calculated. Ratios are clues or indicators, but not proofs. However it provides some guide lines for future forecasting. (Furr, 1997) Current Ratio: Is the ratio of current assets to current liabilities. From this ratio the ability of the company to pay for its current obligations from its available current assets. (Furr, 1997) Current ratio= Current assets/ Current assets = 389,129,000/782,919,000 (Tharp, Brown shoes, 2015) =2.01 that is 2:1 which means that the company has double amount of current assets than current liabilities that is suggesting it as a worthy place for investment. Quick ratio: Is the ratio of quick assets to current liabilities that is it helps us in getting information about the entity’s ability to pay for its current liability if it is asked for today to pay all of its current liabilities. And can be calculated as follows. Quick ratio= cash or cash equivalent / current liabilities =39080+138217+37845/389129 =215142/389129 (Tharp, Brown shoes, 2015) =.55 that is the company is able to pay half of its current liabilities if it is due today. This ratio is relevant for short term investor and therefore it is not relevant for our case and it is good as well as this circumstances does not happens in ordinary circumstances. Earnings per share ratio: This ratio also relate to short term investment decision making and is the ratio between dividend declared and total paid up capital of the company. The earning per share of the company is also better that is $.75 which is much better and is in growing status from $.68 (Tharp, Brown shoes, 2015). This increasing trend suggests as golden opportunity. Price Earnings ratio: Is the ratio among price of the share to earnings per share. Which is also a short term decision making factor and not relevant to our case, however it can be calculated as follows. Price earnings ratio= earnings per share/ price of share = .75/30.89 (Tharp, Brown shoes, 2015) =2.43 % that is if an investor invest any amount will get a 2.43% return. Return on Capital Employed (ROCE): Is the ratio between the total capital of the company and its revenue which helps in understanding the company’s ability to use its capital effectively. (Furr, 1997) ROCE= Total net profit/ total capital =33,113/44,328 (Tharp, Brown shoes, 2015) =74.70% that is the company is using its capital or assets more than 70% capacity which is a positive factor and provides suggestion for investment. Assets turnover/ Plant turnover: Is the ratio of net sales to total fixed tangible assets which defines that how much of the assets of the company is returning to the company. And can be calculated as follows Asset turnover ratio= Total net sales/ Total assets =729,277/426941 (Tharp, Brown shoes, 2015) =1.71 that is the company’s assets are returning the company very high returns and that the assets are utilized very well by the company which suggests this as worthy opportunity for a long term investor to invest in the company. References/ Sources References Beenhakker, H. L. (1996). Investment Decision Making in Private and Public Sectors. Green word Publishing Group. Brown. (2015, March 8). Brown Shoes. Retrieved from brownshoes.com: http://brownshoe.com/brown-shoe-company/ Furr, D. E. (1997, February 2). Scholorship.richmond. edu. Retrieved from richmond.edu: http://scholarship.richmond.edu/cgi/viewcontent.cgi?article=1128&context=masters-theses Northcott, D. (1992). Capital Investment decsion Making. Cengage Learning EMEA. Richard Pike, B. N. (2006). Corporate Finance and investment, Decisions and Strategies. Fiancial Times Prentice Hall. shoes., B. (2015, march 8). Brown shoes. Retrieved from brownshoes.com: http://investor.brownshoe.com/corporate-governance/highlights Tharp, P. R. (2015, march 8). Brown Shoe company. Retrieved from brownshoe.com: www.brownshoe.comhttp://investor.brownshoe.com/sites/brownshoe.investorhq.businesswire.com/files/doc_library/file/BrownShoeInvestorCenter-BrownShoeCompanyReportsThirdQuarter2014Results-2014-11-25.pdf Read More