CREDIT CRISIS AND THE RECESSION

How have highly geared companies coped with the credit crisis and the recession?



How have highly geared companies coped with the credit crisis and the recession?

Research Question

What is the impact of recession on the financial performance of a company

Sector in Focus

The sector that has been chosen for this research is a retail business. The research will aim to focus on the impact of recession on retail stores. The two retail companies which have been selected are Kohl Corp and Macy Inc.

Research Methodology

The data will be collected through secondary research technique. The data will be gathered from the financials of the respective companies to answer the research question.

Credit crisis and recession

The course of the study involves detailed financial analysis of the two companies Kohl Corp. and Macy Inc. The study will focus on the changes made in the financial structures of the companies to cope up with the recession and credit crisis. Highly geared companies are those companies which have high leverage in their capital structure. Different financial analysts and companies use this ratio to determine the measure of financial leverage in the financial; structure of the company. The gearing ratio denotes a degree to which a firm's activities are supported by credit financing (Hollander 2011, Pp. 12-36). The higher the gearing or leverage ratio of the company the riskier it is for the company. Companies with a high level of debt in their capital structure are exposed to higher “gearing” that can result in the bankruptcy of the company.

Kohl Corp.

Kohl Corp. is a retailer that is engaged in the specialty of departmental stores. The retailer offers a wide variety of products including footwear, accessories, house wares and other soft home products. Kohl Corp. is operating in 929 different stores in about 47 states of America.

Macy Inc.

Macy Inc. is also a retailer, which is operating in the form of departmental stores. It deals in the range of merchandise including women's, men's and children's apparel and accessories. It also offers cosmetics, home furnishing and other household goods. It is operating in 45 different states of America through 45 states of America.

Comparison of financial performance of Kohl Corp. and Macy Inc.

Profitability Ratios

Macy Inc.'s Return on Investment (ROA) was 1.62 while its Return on Equity was high at 7.51% for the year 2010. In comparison, Kohl Corp.'s ROA and ROE both stood taller than Macy Inc. did (Olsen 1998, pp. 10-18). The Return on Investments also portrayed a better value in Kohl Corp.'s analysis while Macy Inc.'s was only 7.68%. The EBITDA Margin was as low as 4.7% in Macy's analysis even though the tax rate was only 30.97% compared to 37.59% of Kohl Corp.'s. Macy Inc. does not pose a good picture as far as the profitability of the organization is concerned. In fact, it seems that Macy has to shape up in order to compete with Kohl Corp. in the near future.

Liquidity Ratios

Liquidity ratios presented a fair picture of the organization Macy ...