Finance is a broad discipline that covers major concepts that revolves bot only the management of the organization's money but also the management of the company by how finance relate with other disciplines. One of the major disciplines within finance is corporate finance. Corporate finance primarily deals with work capital management, capital structure, and capital budgeting. Its primary aim is to maximize the shareholder's equity in both short-term and long-term financial strategies and more so, putting various strategies into practice.
Capital Budgeting
An organization must come up with a budget that will guide it throughout a fiscal year on the projects that it should carry out without experiencing financial distress. Failing to come up with a budget is like planning to fail because the organization does not know which level it can go without financial pressure. On the contrary, if it adopts the budget system, it is with no doubt that before undertaking a project, all monetary factors and risks should be considered. In respect to this, an organization should consider capital budgeting because it revolves the long-term projects that it considers implementing ( Malenko, 2018). Since a project can be positive or negative, the company through the finance department should not assume but should take all necessary measure to know if the project is acceptable or not acceptable. One measure is the use of Net Present Value, and if it is positive, then they can continue with the projects. Also, the payback period should be essential to help the organization determine how long it would take to get back its invested money.
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Capital Structures
In most cases, an organization can opt to carry out a project if it has a positive NPV but lack the needed initial investment or initial cost to start the project. At this point, the company, through the financing department, can opt to take a loan from a bank to finance the project. If the project lapses in a one-year time, the company will take a cost equity loan that is repayable within one year, and if the project takes at least five years, then the company may opt for cost of debt. The cost of equity and cost of debt are the most preferred and well-known cost structures which a company can choose from depending on the size ( Serfling, 2016). Since it is the responsibility of the organization to maximize shareholder's wealth, the maximization is at a Weighted Average Cost of Capital (WACC) or minimum hurdle rate. The WACC equals tax plus cost of equity plus cost of debt. Therefore, the company should be very considerate on how to distributes its wealth and the same time benefit from its proceeds ( Serfling, 2016).
Working Capital Management
The probability of a company becoming insolvent is high. Failing to manage appropriately, it means the organization will be doing zero work ( Mathuva, 2015). In respect to this, the organization's short-term obligations should be solved or entirely paid by short-term assets, and long term assets should pay the long-term liabilities. By doing so, the company cannot borrow money to settle debts, and this makes it profitable and solvent.
ETSY Organization
Etsy Organization is a public traded Company since it launched its first IPO in the year 2015. As a public traded company, the organization belongs to the public, and the public must receive an accurate and fair view financial report in every fiscal year. In a comprehensive financial report, all the three segments of the corporate finance are addressed, and after all the transactions, a well-presented financial statement is provided to show the financial health status of the company. In respect to this, the following if the financial analysis of the Etsy Organization and how the public or the shareholders should interpret the information.
Gross margin ratio tells a company or the investor how much the company incurred to produce or to work out its operations, and is calculated by finding the percentage of gross profit to net sales ( Haskins, 2016). Therefore, in the Etsy situation, its gross margin is 64.54% in 2015, 62.35% in 2014, and 61.78% in 2013. The stated data stipulates that in 2015, the company earned 64 cents in its operations and incurred 36 cents to make the operations functions, in 2014, the company earned 62 cents in its operations and incurred 38 cents to make the operations functions, and in 2013, the company earned 61 cents in its operations and incurred 39 cents to make the operations functions. The data shows that the cost of doing business has been reducing at an increasing rate, and the organization has been able to make considerate profits. Therefore, investing in a company is a considerable good idea.
Working capital ratio stipulates the ability of the company to settle its obligations, and it is calculated current assets / current liabilities ( Liang et al., 2016). According to the organization’s financial statement, the working capital ratio for the three from 2013 to 2015 is 4.0, 3.06, and 4.48, respectively. The information presented shows that the organization is solvent since it has been in a position to settle its obligations using its current assets.
References
Haskins, M. E. (2016). Ratios Tell a Story—2017.
Liang, D., Lu, C. C., Tsai, C. F., & Shih, G. A. (2016). Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research , 252 (2), 561-572.
Malenko, A. (2018). Optimal dynamic capital budgeting. Available at SSRN 1710884 .
Mathuva, D. (2015). The Influence of working capital management components on corporate profitability.
Serfling, M. (2016). Firing costs and capital structure decisions. The Journal of Finance , 71 (5), 2239-2286.
