FINANCIAL STRATEGIES AND THEIR IMPACT ON PERFORMANCE ON COMPANIES - Free Essay Example

Sample details Pages: 3 Words: 1039 Downloads: 5 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? LOLC which was incorporated in 1980 commenced its operations by providing leasing facilities for vehicles, machineries and etc. Today it has grown to a well diversified group and has invested in wide array of segments in financial sector and also has entered other growth potential sectors namely leisure, IT, renewable energy, fleet management, plantations and construction. Chevron carries on business of blending, importing, distributing and marketing of lubricant oils and greases and had a monopoly in the local lubricant market from 1994 to 1999 and now facing the competition primarily from Lanka Indian Oil Corporation (LIOC) and another four players, as the lubricant market opened up. Don’t waste time! Our writers will create an original "FINANCIAL STRATEGIES AND THEIR IMPACT ON PERFORMANCE ON COMPANIES" essay for you Create order The financial strategies followed by LOLC and Chevron over the years and their impacts on performance are mainly discussed under raising of funds (financing) and management of those funds (investing including distribution to shareholders) with main objective of increasing shareholders wealth while satisfying other stakeholders expectations. Then the impact of financial strategies on performance of these two entities is discussed to form a point of view on the effectiveness of said strategies. Being in the financial services sector LOLC is highly geared and financing is mainly generated from savings and deposits. Further, LOLC has advantage of financial backing by 20 international funding organizations. The gearing ratio as at 31 March 2010 was xx%. In contrast to LOLC, Chevron is fully equity funded. The main objective of financing is to use the optimum mix (financial leverage) of equity and debt (getting relatively cheap debt as well as resulting tax benefits on interest) thereby to minimize the cost of capital while minimizing the financial distress cost. Accordingly, LOLC has been able to reduce its cost of capital to 12.37% as at 31st March 2010 from 20.24% in 2009. The cost of equity of Chevron as of 31 December 2009 was around xx% (based on CAPM model and using Chevron beta of xx). Chevron is subject to tax at 35% and if it had used debt (say 30%) the cost of capital would have been reduced to xx% taking debt interest rate of 10% to 11%. It is worthwhile to note that Chevron has been profitable throughout and with its Group strength it is better placed to negotiate terms on debt. LOLC has been following residual dividend policy as its main focus is on growth. Accordingly, average dividend ratio for last 10 years was xx%. However, in last 10 years Chevron has mainly concentrated on its core business with no substantial investments and hence entire earnings had been distributed as dividends (in fact dividend per share was higher than earnings per share except in the years 2000 to 2002). Chevron policy of paying 100% of earnings as dividends in the absence of other reinvestment opportunities is commendable as it provides opportunity for shareholders to go for alternative investments. In assessing the performance of the financial strategies I have mainly focused on Economic Value Added (EVA) and Total Shareholders Return (TSR). As far as the LOLC is concerned the EVA per share for year 2010 taking into consideration the cost of capital and ROI (XX%) were LKR XXXX and for Chevron (ROI of xx%) EVA was LKR XXXX. The total average TSR for both companies for the period from year 2001 to 2010 (LOLC) and 2000 to 2009 (Chevron) were xx% and xx% respectively (comprising of dividend yield of xx% and xx% and capital gain yield of xx% and xx% for LOLC and for Chevron respectively). Therefore both companies have managed to add value to shareholders wealth due to profitability levels maintained coupled with sound focus on other financial parameters. This is evident from the market appreciation of share prices whereby the share price of LOLC which stood at LKR XX at end of 2001 increased to LKR XXX by end of September 2010 (a total increase of xx%) and the corresponding prices f or Chevron were LKR 50 and LKR 141.75 (a total increase of xx%) respectively. In addition to EVA and TSR, the measures such as ROE, Gross Margin, Operating Profit Margin and Net profit margin (NP) have improved. As an example LOLC NP for 2010 was 16.7% and it is an increase of 118% over 2009 and in the case of Chevron NP was 17.2% and shows an increase of 62% against 2008 In terms of cash flow management LOLC based on the maturity analysis the assets and liabilities as of 31 March 2010 which will get matured within a year were LKR XXX and LKR XXX respectively. The Non Performing Loan (NPL) ratio of LOLC is around 5.5% against industry average of 8% and records the lowest among the key players. This has been achieved due to the strong controls over the recoveries implemented. Chevron current ratio was 2.16:1 against 3.03:1 in year 2008. Further, quick ratio was 1.32:1 against 1.19:1. Chevron still has opportunity for further improvement as both current and quick ratios were slightly higher. The inventory residence period for 2009 and 2008 were 93 and 91 days respectively while the debtors residence periods were 32 and 31 days respectively. Therefore Chevron should act to reduce inventories given the same for LIOC stood at xx days by end 2009. In terms of cash flows generated LOLC generated positive cash flows in 2010 but it had a negative cash flow in 2009. However, Chevron has been generating positive cash flows throughout. : Conclusion The above brief study indicates that both LOLC and Chevron have been profitable and have been adding value to shareholders. But the corporate and financial strategies followed are different in terms of strategic focus, financing, investing and distribution policies. LOLC has focused on growth and has diversified (related and conglomerate) rapidly. However, given high gearing and also the fact that its primary expertise lies in the financial services sector, LOLC has to manage investments to ensure that the returns earned are above its required rate of return as any failure may wipe out shareholders equity resulting in a severe financial distress. This is the situation faced by financial institutions due to recent global financial crisis namely AIG, Lehman Brothers and etc. The situation with Chevron is different as it has primarily focused on its core business function to position in that segment over the years. However, it has to consider the financing mix to reduce the cost of capital if it intends to invest in other sectors as the present cost of capital (based 100% equity financed) may not provide the right yard stick to select among projects and would result in rejection of positive NPV projects.