Corporate Finance Case Study
COVANTA HOLDING CORPORATION (CVA)
COVANTA HOLDING CORPORATION (CVA)
Anish Puri
Corporate Finance
2/21/2018
A good company has a competitive advantage over other firms venturing the same line of business. This is contributed by good leadership by management and proper marketing skills which seeks both short term and long-term objectives of the company. To achieve this, the company revenue has decreased as from 2014 to 2016 with the company seemingly have ventured into different sectors of business it requires thorough investigation and audit to identify the cause of decline in revenue
Earnings in a firm is basic in order to capture the worth of investors especially average investors to be willing to invest in the firm , the role of the owners of the company in their supervision of the management of the company and the role they play to ensure balancing of voting rights ,dividends pay out ,balance of debt and equity among the creditors of the company and the stakeholders the role or interest of the Government in terms of investing in the business the regulation policies .the welfare of the community surrounding the company.
Earnings stability of the firm is also a key aspect it predicts the firm's pattern of growth through cutting expenses through citing the business venture that is collapsing or reduction of staff to reduce salary cost. Organisation structure has evaluated its business poorly through employees in job positions they cannot manage effectively thus reducing the inventory turnover, poor lines of communication politics and mismanagement that shifts focus from engaging the competitors in the stock market business and focusing on internal wrangles, lack of proper control of capital, increased production cost poor human resource performance thus labour are aggrieved party
Lack of innovation in the firm which leads to lack of engaging the average investors in better product management. Macro-economic risks such as the economy of the state such as inflation of prices, fall of value of currency the management should adopt measures to counter the challenges and establishing of new opportunities
Level of interest rate of borrowing from creditors is fluctuating and for a big company is preferable to reinstitute finance through sell of bonds and shares to raise capital to service its finance ,comparing the company’s market value for shares with their rival competitors in order to attract more investors in the firm, in this case, the majority shareholders have the higher stake thus have superior voting rights than the ordinary shareholder thus the average shareholder can easily sell their shares for lack of participation in the company's activities thus its stock market share drops significantly or stagnates
A marginal investor is one who invest or trades at the least and sets prices if one of the stockholders is having a job in the firm there is a higher chance of having conflict of interest during his or her tenure at the job risk based on returns assume that the marginal and average investor is highly diversified as opposed to huge investors in terms of risks involved in market securities especially in financial markets
The firm should ascertain its current value from market value of the shares and debt it owes creditors i.e. long-term rates of issuance of bonds which are payable and non-recoverable to ascertain the current position of the firm and the long-term objective of the firm can be planned through strategic planning and management, steady realising the exchange rates of the firm since it is based on different nationalities to predict the future market value of their products
In terms of competitive advantage it has to compare its price per earnings and dividends payable to the investors especially to marginal investors in order to attract them to invest more in the company, measure the company's overall performance and micro performance in order to establish the previous return on stock and compare it with the expected rate of return by the company the stable growth rate as seen is fluctuating with time but it should be at per or a little less than economy the company is targeting which is realised through nominal or real valuation and the strength of the currency being used if the company is based on financial market not to exceed the risk-free rate in the trade
New targets and vision should be formulated without overstretching its resource through massaging book records to archive exaggerated revenue for the purpose of earnings creates budget shortage that results to excessive borrowings by the company such that its debts ratio surpasses the equity ratio thus investors are remunerated poorly due to the increased debts of the company thus marginal investors will tend to withdraw their shares thus its ratings in the public eyes will reduce.
Upholding transparency and accountability in the firm which the weak perfuming firm should focus on the maturing market situations of different states, the company should focus on whether the controlling mechanisms encourages accountability, effective ownership of the firm may reduce the agency problem or conflict with an insider ownership creates a healthy firm which ensures that ownership is separated from the executive
Employ strategists to run the firm better through realizing emerging new markets
There is a separation of power in Covanta holding corporation between the management and the owners; this is shown through the company financial reports, where by the company has a higher gross profit than industry averages but it ends up making a net loss. This shows that the management is not pursuing the owner's interest which is good returns on equity. It seems that owner has limited powers to monitor the management because the firm has been making loss consistently for three years and the owners ought to have influenced the decision making in the management to make sure that the management interest aligns with their interest.
The company has borrowed money through issuing of bonds in the stock market. It can be assumed that there is a conflict of interest between the lenders and equity investors when the company is using more borrowed funds to finance its operation hence the high cost of interest ends up making the equity investors have nothing to show at the end of a trading period.
The firm is listed in NYSE, and therefore the firm financial information is readily available to enable an investor to evaluate whether to invest in the company. It can be assumed that investors may refrain from investing in Covanta Corporation because of poor returns on equity.
The firm has multiple classes of share and this includes ordinary shares, preference shares, and debentures. the voting rights vary in different from one class to another where the ordinary shareholder has more voting right over other shareholders.
The company borrows money via the issue of bonds; the company uses borrowed money to pay the employees this means that the company was not able to generate enough revenue to meet its cost of operation. The company is faced with a risk of increase in cost of operation which leads to low return on equity
The company is also faced by a challenge of poor management where the management is not able to control or put measures in place to reduce the cost of operations or even used the borrowed fund with lower interest rates. The performance of the management is below the sector average. For example, the management was unable to generate a return on equity by reporting a loss while the peers managed to generate a positive return on equity. Also, the dividend payout is unstainable since the firm is highly leveraged. According to "Reuters" (2017), Covanta's total debt to equity ratio is 851.04 while the sector has an average of 91.57. In addition, the firm is operating below the S&P 500 and waste management firms.
The company is faced by a risk of government policies such as proposed tax policies that are uncertain where an increase in tax would lead to increase in the cost of operation hence making it difficult for the company to make profits.
In this company there is a low turnover of employees hence it shows that there are satisfied in working in the corporation despite the overall poor performance of the company compared to the industry. The company goes a long way to satisfy the employees it even pay them using borrowed money when they revenue generated cannot meet all the expenses
Covanta Corporation is a socially responsible company as it helps in utilization of waste materials to generate energy ensures that their clients have access to sustainable waste management
In conclusion, the corporation has a high potential of regaining profitability since their gross margin is higher than that of the industry and there is increasing demand for renewable energy. Therefore, the company should focus on reducing the cost of operation and avoid unnecessary expense. The company should also align the management interest with the owners such that the company can focus on regaining profit. The company should conduct an intensive audit that will go along way explain the reason why the company has better gross profit than the industry yet it has a net loss. finally, the management should put in place strategy that will enable the company to embrace and exploit the growing demand of renewable energy.
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