Business Ratios

The debt ratio of BP plc is given by the total liabilities (both short and long term) divided by the total assets. In this case, the debt ratio is 180,573÷300,193=0,60. The debt to equity ratio is given by the total liabilities divided by the total equity. In this case, the ratio is given by 180,573÷119,620=1,51×100=151%. The debt ratio for short term liabilities is given by current liabilities divided by the total assets. In this case, the debt ratio is 77,586÷300,193=0,26 and the debt ratio for long term liabilities is given by 102,987÷300,193=0,34. The debt to equity ratio for short term liabilities is given by 77,586÷119,620=0,65×100=65%. The debt to equity ratio for long term liabilities is given by 102,987÷119,620=0,86×100=86%. The ratios are too small for the debt ratio, which reveals that borrowed funds have not been used much to finance the company operations. The debt to equity ratios are large showing that the funds provided by the owners are huge in comparison to those funds given out by the creditors. The shareholders are the key decision makers for the company based on the debt to equity ratios (Bragg, 2007). The company should not increase its debt, but should come up with steps to reduce its debt.

The debt to equity ratio of ExxonMobil is given by

167,932,000÷165,863,000=1,012×100=101,2% and the debt to equity ratio for Royal Dutch Petroleum company is given by 175,167,000÷185,183,000=0,945×100=94,5%. British Petroleum plc has a high debt to equity ratio of the three companies since it is a publicly funded company and is heavily funded in its operations by the shareholders funds. The company has also partnered with numerous companies that are funded fully by the owner’s funds. The Royal Dutch Petroleum Company has the lowest debt to equity ratio and hence is funded mostly by borrowed money than the owner’s funds. Since debt finance lowers the firm’s cost of capital and its tax deductibility (Shim & Siegel, 2000). The company is not obligated heavily to its shareholders and, therefore, they cannot lose much in case the company plunged into bankruptcy.

In module 4 SLP, I have learned about the debt to equity ratios of three different companies in a similar industry and how they differ from each other. I have mastered the learning objectives of the outcome of debt and equity financing on the company performance, capital requirements, tax remittance and profitability. A firm’s optimal capital structure is the one, which strikes a balance between the ideal debts to equity ratio and minimizes the cost of capital. It is also the debt to equity ratio that provides in depth analysis to the potential investors of the risky nature of a firm. Determining an optimal capital structure is a major requirement for any corporate organization’s department of finance (Ross, Westerfield, & Jordan, 2004).

The advantages of equity finance are that it is a permanent source of finance and its cost is not a legal obligation. It lowers the firm’s gearing level and boosts the credit rating and credibility of the firm. The funds are used with flexibility and the owner’s of the firm contribute valuable ideas to the company’s operations. Equity finance is disadvantageous due to its costly nature compared to debt, partial loss of ownership of the shareholders in decision making, high floatation costs and wastage of time in getting equity finance (Shim & Siegel, 2000). The advantages of debt finance is that the cost of debt is fixed no matter the profit made, less formalities are required to raise it, the loan does not influence the company decisions and the loan reduces with the passage of time and decreases the burden for the borrower with the repayments. The disadvantage of this form of finance is that it increases the firm’s gearing ratio, it is conditional, it lowers the company share value if used excessively and it requires collateral, which is highly negotiable or marketable and thus reducing its availability.

The determination of the optimal capital structure requirements of a firm is a vital decision since it gives an insight of how risky or indebted the company will be to potential investors. The choice between debt and equity financing for the firm is a major decision since it gives the company’s direction in terms of profits made and the returns anticipated by the shareholders. As a matter of fact, a critical evaluation is, therefore, necessary for the company due to its growth, expansion and the performance of the company stock in the exchange market. Lastly, an evaluation also helps to analyze the potential risks posed by a company, which is unable to fulfill its financial obligations when they fall due.

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