Background
We choose the target industry as Retail and specified six companies: Woolworth (WOW), Automotive Holding Group (AHG), Cash Converters International (CCV), Metcash (MTS), Myer and Kathmandu Holding Limited (KMD). WOW is a big retailer, which listed at the third position on ASX. In contrast, CCV is a small size retail company, which has the major concerns in second-hand goods. Comparing Myer with KMD, Myer is a mature company with a network of 66 stores in Australia, and KMD is still in expanding stage. Considering the character of close or wide, as MTS is a family runs company, which could be defined as closely scope and AHG classified as widely dimension.
Ⅰ. Current Financing Mix
Table 1
We defined the six companies comes from different diversification in Retail industry. For example, AHG is widely company and focus on car retail; KMD is a developing clothing company; WOW is a big company and sell food and grocer; Myer as same as a general shopping center; CCV sells second hand goods; and Metcash is a family firm and supply good to IGA1. As the different classification, their debt scale and amount are different as showed in Table 1. WOW has the largest debt amount nearly $7400 million. Meanwhile, KMD just has $62million debt amount.
Ⅱ. Current Leverage Ratio Analysis
Table 2&3
AHG occupies massive risk and return of capital structure as obvious D/E ratio (130.95%) comparing with the average automotive retail D/E ratio (50.93%).
The D/E ratio of Woolworth and Metcash are 51.81% and 58.67% respectively. Comparing with the average D/E ratio in Grocery and Food, Woolworth and Metcash hold lower risk and return. The average of General retail D/E ratio is 44.55%, while CCV and Myer take 32.94% and 47.60% respectively. In this case, CCV obtains less D/E ratio compare to the average, so that the relevant risk and return should be unapparent, in addition, Myer will be shown relatively overt risk and return in capital structure. The D/E ratio of KMD is 18.19%. Comparing with the average D/E ratio in Special Lines (32.61%), KMD shows less risk and return than the average.
Ⅲ. The Quantitative and Qualitative Analysis of Using Debt
The tables below demonstrate the advantages and disadvantages of using debt for every single specified company in retail industry.
Advantages
1. Tax shield
Table 42
Based on Table 4, the positive amount of tax shield will help lowers the cost of debt, lowers the cost of capital and ultimately enhance the value of the firms. Although the tax shield of CCV is negative from 2010 to 2012, it turned to be positive in 2013 and keep increased in 2014.
2. Motivating Managers
Based on the leverage hypotheses, the free cash flow mainly use to cover debt amount. The higher debt amount of company results in an effective management on decrease the internal risk of management.
Disadvantages
1. Liquidity
Table 53
As shown in Table 5, CCV, Metcash, AHG and KMD have the strong ability to alleviate their debt obligation，whilst Woolworths and Myer may not meet the obligations. For the negative net debt to cash flow ratio, CCV not have much debt to generate future cash flows, other companies have an excess ability to cover further debt amount.
2. Agency cost
As Myer and Metcash are family run companies, agency cost could be relatively low. In terms of Woolworth, CCV and AHG, they have diversified financial arrangement; the agency risk could be a significant aspect for debt financing. KMD is a growth company with few financing issues, agency cost may be relatively low in nowadays.
In total, according to the analysis above, AHG should take action to decrease the amount of debt obligations. WOW and Metcash has a relatively appropriate debt level. In addition, CCV, Myer and KMD still have excess ability to generate new debt.
3. Bankruptcy Cost
Company
Bankruptcy Costs
WOW
Woolworths got free cash flow of about $2000.37 million, on the base of EBIT at $4779.40 million4, which is not much fluctuated
