Financial pros and cons - Essay Example

Operating margin: The Company has a better operating margin in 2003 of 19.60% over the previous years. This indicates the company is very efficient in managing its operating expenses to generate revenue. Return on Capital Employed: The Company have earned handsomely for its investors as return so far on its capital employed stands at approximately 25% which is far more than the cost of capital, assuming it to be at 10%. Debt Equity ratio: This ratio identifies the solvency of the firm by measuring the leverage position of a company.

Higher the ratio the more leverage a company is and vice versa and hence higher financial risk. Superior Living Inc. has a very low debt equity ratio i.e. 0.025 for 2003, which indicates the company has a very low financial risk as a result it will be very easy for the company to raise debt in the market and banks would be willing to provide loans to the company without much hassle. Raising money by going public indicates accepting money from investors in exchange of ownership and control of the company without the obligation of paying back the money.

The company as per its convenience benefits the investors by paying dividend from time to time. This sounds like easy money for the company but the flip side is that the ownership and control over the company would be foregone for the amount invested via equity financing. In the case of Superior Inc. the company is comfortably placed in terms of book debts. The debt equity ratio very low which means the company has not used debt to the extent it should have used. Generally the ideal debt equity ratio should be 1:2 but for Superior it’s around 1:40.

Therefore, the prudent course of action for Superior Inc. is too raise capital by debt financing route which also brings in tax advantage as interest paid on debts is deductible from profits and dividend paid on equity cannot be deducted from profits. Debt