J.C Penney Company Harvard Case Solution & Analysis

Interest Coverage Ratio:

The interest coverage ratio shows that how many times company has operating profit available to pay off the debt. The higher ratio is seen as more favorable. If the ratio is more than 2, it represents a strong ability to pay off debt. Hence; in case of JC Penney the interest coverage ratio in quarter 1 of 2011, was 2.78, it means company has strong ability to pay its interest rate. In 2011, quarter 2  interest coverage ratio decreased, the reason is decrease in operating profit. As company sales has increased but company’s operating expenses increased more than increased in sales. After that, in all year’s interest coverage ratio is in negative. Which show that company is in losses and not able to pay interest expense. The main reason of losses is company-operating expenses. Company does not effectively control their expenses, as company sales were increasing.

Cash to Debt Ratio:

This is the coverage ratio, which compares the company’s operating cash flow to its total liabilities. The main purpose of this ratio is showing the company’s ability to cover total debt with the cash flow. The higher the ratio means company has better ability to carry its total debt. Hence, in case of JC Penney Company is increasing their debt ratio yearly, the company is decreasing their ability to pay its debt. In quarter 1 2011, company cash to debt ratio is 23.2% which means that company has 23.2% cash available to pay its debt. After that in all quarter, this ratio has decreased. It is not a good sign for the company. It indicates that company is able enough to carry its total debt. If the management further go debt financing the management will require $11,014 million at ending period.

WORKING CAPITAL:

Working capital of the company measure company’s efficiency and short-term financial health. We calculate the working capital by current assets-current liability. If current assets are, lower than current assets is called working capital deficit. According to J C Penney, working capital is positive. It means company has enough short-term assets to cover short-term liabilities. As company’s working capital is declining over the time period. The reason in company’s decrease in current assets is because of decline in cash and receivables. It shows that company is not operating in the most efficient manner. The company has to manage their cash to meet the business day-to-day expenses. Inventory of the J C Penney is higher, the company should have to keep it as low as possible to avoid over production.

Estimate JCP’s

External funding required

RECOMMANDATIONS:

As assume that, JCP will face $1.5 billion loss in 2013 and the cash will be required $1 billion in order to operate efficiently. On the basis of these data, calculate pro forma income statement, balance sheet and cash flow statement of 2013. In previous year, company is facing more loss even company is not able to pay their interest expense. While sale of the company is increasing yearly, but the company is not effectively managing their operating expenses. The company has to manage their operating expense in good manner. As the company has more business risk, the company should not go for further risk by getting loan. As company risk is increasing company, the credit rating of the company is decreasing. That is the reason JC Penny is getting loans at a higher rate. The management has to increase the debt at higher rate in order to operate the business. Management should go for the equity finance because if debt ratio decreased and equity ratio increased, it will positively effect on the credibility of the company. The company also has not to pay higher interest expenses, if company has equity more than debt in their capital structure. There are some disadvantages of finance through equity that is ownership will dilute company has to offer more shares. As increased in outstanding share there will be decreased in earning per share. Nevertheless, equity financing is better than the debt for this company.......

 

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