Evaluate Long Term Financing Method of Stemlife Company
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Evaluate the long term financing of Stemlife Company
Stemlife Company’s capital structure is made up of 100% equity. It has two types of equities; ordinary stocks and retaining earning. Stemlife issues two types of stocks; stocks capital and stocks premium.
There are several advantages of offering common stocks. First, by issuing common stocks the company can raise a large sum of money (Anonymous, etd). Secondly, the board of directors can decide on the amount of dividend paid to the stockholders (Anonymous, etd). Thirdly, the company needs not pay the stockholders if it is not doing well (Anonymous, 2006). The company also does not have a maturity date to repay the fund (Anonymous, 2006). There is also less restriction to follow in…show more content… The company has very little debt and its equity is definitely able to support all the money owing. Stemlife has a strong balance sheet as it has a high level of equity and low level of debt. This indicates that investing in this company will most probably provide a good return.
Debt equity ratio compares the relationship between liabilities with equity. It shows the level of assets funded with debt rather than equity. It also measures the ability of the company to maintain in the market in the long run. If the company has a ratio higher than the industry ratio, the company has a high probability of not being able to settle the debts (Anonymous, 2006). Stemlife’s debt to equity ratio is 11%. Thus, it should not be a problem for Stemlife to repay its debt. Stemlife should also be able to maintain in the market for long term as it has substantial assets to support its liabilities. This ratio also determines the company’s ability to obtain financing (Anonymous, 2006). There should not be a proble for Stemlife to get fund.
Return on Equity (ROE) ratio compares the net income to equity. This ratio shows the return a company gets through investing its equity (Anonymous, 2006). The greater the ratio the greater the return the company is earning. Stemlife has an ROE of 12% , which means for every ringgit of equity invests, the company gets a 12 cent increase in income. Stemlife’s investment is making profit.