Capital structure analysis of Mattel, Clorox, and MGM Resorts

Companies Assessment

Finance is one of the most important parts of the business operations of any entity. Financial Management has a great strategic role to play in the future of any firm and it is the financial management and strategies that are in turn implicated on all other departments of the entity. The firm's financial management precisely deals with how the allocation of scarce resources will be done throughout the business. In large organizations it can be very complex and tricky and there are various factors that might impact a firm's financial decision. There is no single rule of how finances would be allocated in a firm and thus it varies according to the nature of business operations. It however is mostly fixated on the objective of generating increasing returns to scale as a final result. The backbone of the financial management of any company, big or small lies in the firm's capital structure (Sobel, 2010). The firm's capital structure primarily tells about how the company finances its overall business operations using an amalgamation of funds generated from various sources. This paper aims at analyzing how capital structure of three major corporate entities, Mattel, Clorox, and MGM Resorts International should ideally look like. It is to be noted that all three companies vary in their respective nature of business and operate in varied corporate environments.

Company Overview

Mattel is one of the world's premium toys and game company that holds a prestigious corporate portfolio as far as its goodwill is concerned. Mattel enjoys the ownership of various famous brands of toys and games, but is most popular for the world's most famous brand of doll, Barbie. The company is not only known for its strong brand positioning and a high degree of corporate social responsibility but is also known for the total quality management that is evident in all aspects of its business operations. The company has an international presence and is known for creation of various Disney characters.

Established in 1913, Clorox started off as the first commercial-based Bleach Company. The company started off in Oakland when five entrepreneurs, all originating in different specialization and only one having the knowledge pertaining to the product chemistry, partnered to form a company that produced cleansers by converting locally abundant Brine. The company was operational fully fledged by the end of 1914 with a share capital of U.S.$75,000. The first major clients included laundries, breweries, walnut processing sheds and municipal water companies situated in Oakland.

MGM Resorts International is one of the world's leading chains of hospitality service providers. The company owns a number of casinos, hotels, resorts and various other entertainment facilities across various destinations around the world. Today MGM Resorts International operates at an unmatched level of excellence and has been a consistent recipient of various accolades and honors.

While all three companies are huge and capital intensive in their own respective sectors, MGM remains the most capital intensive company with an extensive holding in various parts of the world.

Debt to Equity Financing

A very crucial strategic decision of any company comes when deciding about the sources from which funds would be generated in order to finance the business operations. For large capital intensive firms, this decision becomes even more crucial as each source of finance has its own pros and cons and can have significant implications on the firm's strategic goals.

While there are various sources that can generate funds for a company, however the extensive list can be narrowed down in two distinct classifications, which include the investors and the creditors. While both help in generating finances, the method of workability starkly differs and have both bring their own benefits and weaknesses for the company. Investors, as the name suggest, are people who put their own capital in the company against a share in the firm's profits, also referred to as dividends. The benefits that an investor might look for while putting his money in a certain company may go beyond merely earning a share in profit, depending upon the type and number of stocks and investor holds. Finances generated through investors are known as equity financing. Creditors, on the other hand, help generating finance for the company by lending capital to the firm. This type of financing is known as loan capital or debt financing and can be in various forms such as debentures, bank loans and leases. The debtor, which is the company taking the loan, is issued an agreed amount of capital against a security and a payment of interest is to be made at the agreed interest rates. A debt to equity ratio therefore explains the formation of a firm's capital structure. It indicates that what proportion of the firm's capital is financed by an equity capital and what proportion is financed by a loan capital. A company that has a higher proportion financed by a loan capital is known as a 'highly geared' company (Megginson & Smart, 2008). In general, large companies use an amalgamation of both equity and debt financing. While higher equity finance means higher profits being distributed out to the investors, a higher gearing or debt financing would mean increased interest expenses thus reducing the firm's profitability. A reduced profitability would in turn mean that not only the investors will get a lesser share in the company but also question the firm's financial strength to repay its loans to the creditors. A high debt to equity ratio is therefore never advisable as it would mean that the company relies more on borrowed capital and is bound to make repayments. A very high debt ratio can also pose threats of bankruptcy if the company fails to manage its cash flows and profitability efficiently.

Recommendations

As mentioned earlier debt ratios are of major concern for both investors and creditors, the primary financers of any company, in deciding whether or not to invest in or lend to the concerned company. While an investor would want to invest in a company that generates high profitability, a creditor will make loans easily to a company that is financially strong enough to make repayments and interest payments. Therefore, both investors and creditors would not prefer to generate funds for a highly geared company. Considering this, a high debt ratio is advisable for none of the three firms (Bragg, 2007).