A business is not only interested in its profitability but also in its liquidity which indicates its capacity to meet its currently maturing obligations. Short term creditors particularly the suppliers of goods and services to the company demand that their rendered services and/or product deliveries must be paid on time. The salaries of employees are also included in this kind of short term obligations. If the company cannot meet its short term obligations, it may find itself unable insolvent or bankrupt to pay these short-term interested claims and the organization may suffer as possibly insolvency proceeding could initiated in courts.
This is where quick assets are needed. Quick assets basically include cash and cash equivalents, marketable securities and other short term investments and receivables. By getting the total of these assets and dividing the said total to current liabilities, one would get information that would indicate a company’s quick asset position in terms of quick ratio. In the instant case, quick ratios of J. C. Penny are 0. 87, 0. 86 and 1.
19 for the years 2008, 2007 and 2006 respectively which show that the company could almost readily meet its currently maturing obligations by just using quick assets as the ratios are almost equal to one (1. 0). A quick ratio of 1. 0 means that company has the same amount of quick assets to match it current liabilities. If the quick assets are added to inventories and other current assets, what is generated is also a measure of liquidity, -- the current ratio. Using said current ratio, the company’s liquidity position has become very convincing at 2. 02, 1. 90 and 2.
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43 for the years 2008, 2007 and 2006 respectively if the same standard ratio of 1. 0 is used. 3. 1. 3 Strength - Generally Acceptable Solvency or Leverage ratios J. C. Penny’s debt to equity ratios are 1. 69, 1. 96 and 2. 11 for the years 2008, 2007 and 2006 respectively. One could see that the same are generally acceptable considering that on the average the company was able to make a consistent reduction of the ratio for the past three years which could show the company’s long term health. Debt equity ratio is used to measure the ratio of total debts to total equity.
The higher is the ratio the greater is the exposure of the firm to debts, hence creditors would prefer low debt ratios due to greater cushion against creditor’s losses in case of liquidation. The stockholders may want more leverage because it signifies higher earnings because of tax considerations but they could only do so at a certain extent since increasing the debt to equity ratio could increase the risk of losing stability. The company’s proven capacity to effect a reduction of the debt to equity ratio is an evidence of long term stability and the present level at below 2.
0 is still generally acceptable. 3. 2 External Analyses This part of the paper will analyze and critically evaluate the competitive environments in order to identify the prevailing conditions in the wider environment and the dynamics of the specific industry that can potentially affect J. C. Penny. The immediate purpose for this part is to determine the industry opportunities and threats using Porter’s five forces model (Porter, 1980). Industry opportunities are characteristics of industry based on five forces could give go signals for industry players with greater profitability.
They must however be taken advantage by a wise industry player. Conversely, industry threats make the situations unfavorable to industry players, but wise player must be able to avoid or go around these threats in order to be successful or to survive in the industry. Industry opportunities and threats must be viewed from the point of view of the present number and capacities of existing players in the industry. 3. 2. 1 Threat: High threat of New Entrants Prospective new entrants could easily come in into the industry because of lack of economies scale.
The industry is not capital intensive industry where entrants would have to think twice if they could sustain their capitalization hence economies of scale would most likely not exist because investments to start business of this type may not be big. 3. 2. 2 Opportunity: Low Bargaining Power of Suppliers There is low bargaining power of suppliers in the industry as caused by a numerous number of retailers. This is therefore an opportunity that can be taken advantage by J. C. Penney Company. 3. 2.
3 Threat: Moderately high Bargaining Power of Buyers There is moderate high bargaining power of buyers because of the large number and scattered buyers all over the world. They could be individuals or institutions and they are the reasons why the industry still exists because they are the ones who need the products or services. Thus making customer or buyers happy is a concern of retailers like J. C. Penny but this causes use of corporate resources. There is also a low switching cost to as buyers could change brands anytime. 3. 2.
4 Threat: High Threat of Substitute Products The availability of readily available number of substitute products for a number of grocery items and products dealt with by the company makes it unfavorable for industry players that could possibly bring down the demand of industry products. There is therefore a high threat of this substitute products. 3. 2. 5 Threat - Very Strong Intensity of Rivalry among Competitors A strong rivalry in the industry is brought by the presence of few big players like Wal-Mart, Tesco and other big supermarkets.
The intensity of rivalry could bring down profitability as they fight for each other’s market shares. Although some players may have their own brands differentiation, customers may easily make comparison of the price, quality, durability, and many other aspects of different manufacturers of the products from existing players and this practice is being encouraged by the players as they advertise their products to the market. This redounds to lower profitability of the industry and hence it is a threat.
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