# JC Penny Case Harvard Case Solution & Analysis

## JC Penny Case Case Study Solution

### Evaluating Liquidity and Use of Leverage

The combination of debt as well as equity in the capital structure is used to finance the business operations. Aleverage ratio is a financial measurement, which tends to assess the loan or debt percentage in the capital structure.

### Interest coverage ratio

The interest coverage ratio is widely used with the intent of evaluating the company’s ability to pay off the interest expense on debt. If thein terest coverage ratio is more than 2, it means that the company is strongly able to pay back its liabilities. In quarter 1 of year 2011, 2.78 was the company’s interest coverage ratio,which demonstrates that it can easily pay its interest expense on debt. With the passage of time, the ratio is reduced due to the decline in the profit generation from its operations. After quarter 2 of 2011, the interest coverage ratio has decreased over the period of time due to the increasing operating expenses. The company is not effective enough to control its operating expenses as the sales are increasing.

### Debt to capital ratio

The debt to capital ratio is used to calculate the financial leverage’s use by equaling its debt obligation to capital. It also measures financial solvency, capital structure and the degree of financial advantage. The company has low equity ratio and more debt ratio, indicating more financial risk. The debt is increasing from quarter 1 of year 2011 to quarter 4 of 2012, thus increasing the financial risk or burden for the company.

### Cash to debt ratio

The cash to debt ratio is mostly used to compare the company’s operating cash flow with its total debt. The ratio is used to show the company’s ability to cover its debt with the operating cash flows. A cash to debt ratio of JC Penny is increasing over the years, which shows that the debt is increasing, thus reducing the company’s ability to pay its debt obligations. In quarter 1 of year 2011, the cash to debt ratio of the company is 23.2 percent,which stipulates that JC Penny has generated 23.2% cash from its regular activities than debt. Then, the cash to debt ratio is decreasing with the passage of time, showing the inability of the company in accelerating its debt repayments. If the management of the company plans to acquire more debt for financing purpose, the company would require \$11014 million at the ending period.

The interest coverage ratio of JC Penny is decreasing and the financial position of the company is not consistent or stable, which shows that the credit rating of JC Penny is not good,  indicating that it is not able to obtain loan or debt for financing purpose.

### How JC Penney manages their working capital?

The efficiency and short term financial health of company can be assessed by using the working capital as a whole. The working capital of the JC Penny is positive, which stipulates that the company has enough available cash to spend on its day to day daily business operations.Despite of positive working capital, it has negative trend due to the fact that the company does not have enough current assets because of the decline in receivables and cash. This in turn, shows that the company is not efficient in managing its business operations. It is important for the company to effectively manage the cash in order to meet its short term debt by using current assets.

### Recommendations

After taking into consideration the analysis of the company’s liquidity position, it is identified that despite the fact of  sales increasing annualy, the company is not managing its operating expenses in an efficient manner. It is recommended that the company should not go for additional debt for financing purpose, since the company has more business risk.

As the business risk of the company is increasing, the credit rate is decreasing, due to which, the company is obtaining loans at higher interest rate. The company needs to raise the equity financing, because in case of increasing debt ratio and decreasing debt ratio, the credibility of the company would be affected in a positive manner. Also, the company would not require to pay higher rate of interest when it would have equity more than debt in its capital structure. Shortly, the company should raise capital in terms of equity financing.

### Comparing Dominion and JC Penny

The evaluation of the financial and liquidity position of the company is assessed by using the ratios. The current ratio of JC Penny is more than the current ratio of Dominion, which shows  good short term financial strength of JC Penny in comparison to Dominion. The quick ratio of both companies are less than 1 which means that both companies are  unable to pay off their debts obligations by using liquid assets. The working capital of JC Penny is positive and better than Dominion, which means the company can use its cash to pay off its day to day operations.

The debt to cash ratio of Dominion is increasing with minor margin, and the ratio is also increasing from quarter 1 2012 to quarter 4 2012, which means that both companies are reliant on debt financing, hence reducing their ability to pay back their debt obligations. The interest coverage ratio of JC Penny is negative,and for Dominion it is more than 2, which means that Dominion is quite able to pay interest expense on acquired debt as compared to JC Penny, hence re-electing good credit rating than JC Penny...........

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