Business Planning and Development Essay Example | Topics and Well Written Essays - 1750 words

Business Planning and Development - Essay Example The company mainly operates in Asia, Europe and North America with its headquarters in New York. Research and analysis has shown that PVH currently has high level of debt and interest payments which is reflected in its high debt-to-equity ratio (showing that the company is highly geared). Furthermore, the company has a relatively small, concentrated customer base, intense competition which could lead to volatility in earnings and an underfunded pension plan. Therefore, it is increasingly important for PVH to secure its market position and reduce its dependence on debt rather than increasing it. Discussion Liquidity It is important to analyze the financial liquidity of PVH in order to ascertain its ability to take on more debt. The current ratio of a company reflects its ability to take on short term debts or debts within a period of 12 months (Baker & Powell, 2005). Usually a current ratio of PVH’s current ratio is 2.39 (NASDAQ, 2013) which reflects that for every $2.39 of cur rent assets, the company has $1 of current liabilities. Normally, companies having a current ratio over 1 are considered to have strong liquidity position or ability to pay off short term debts (Weil et al., 2012). This is visible in the case of PVH. Although the short term liquidity of PVH seems to be high (as indicated in the research), its long term liquidity remains very weak. Furthermore, the high current ratio may not be a good indication as a review of PVH’s Balance Sheet shows that majority of its current assets (almost a third of the dollar value) are tied up in inventory which indicates a major problem. This is because inventory may take time to convert to cash and may, therefore, negatively affect the company’s ability to pay off its short term liabilities (Ross et al., 2012). Therefore, the high liquidity indicated by the high current ratio may, in effect, be insignificant because of too much inventory being held. Furthermore, PVH’s cash flow stateme nt indicates a positive operating cash flow of 453m which, in itself (Yahoo! Finance, 2013), indicates a high level of cash availability and liquidity. However, the relevant figure in this case is not operating cash flow but levered free cash flow as the latter takes interest on debt into account. In short, levered free cash flow indicates a cash position of a firm after it pays off the interest on its debt (Penman, 2009) . This is a negative value (-45m) for PVH (Yahoo! Finance, 2013) which indicates high interest payments and suggests that the cash generated may not be sufficient to ensure continuity of the business in future. Debt position PVH’s financial position indicates an already high level of long term debt as a percentage of its total liabilities (roughly 58%). Furthermore, it is important to understand the financial leverage of PVH in order to further determine its ability take on the additional ?20 million. This is explained by the total debt to equity ratio which describes the relative proportion of debt and equity that the firm uses for financing its assets (Heitger et al., 2008). A higher ratio typically suggests an aggressive growth strategy with the effect of increased earnings, albeit often with high interest charges. Normally, a debt-to-equity ratio over 20% is not considered a healthy sign (NASDAQ, 2013). The total debt to equity ratio of PVH is very high (108.65) which suggests that the company is highly geared (NASDAQ, 2013). This already high debt indicates the high interest cha