Stock Repurchases and Supply Chain Management

Stock Repurchases and Supply Chain Management

Stock Repurchases

 The article “Royal Dutch Shell Finally Delivers Big Stock Buyback, but Shares Break Support” by Aparna Narayanan discusses the effect of stock buybacks on Royal Dutch Shell’s financial performance. According to the author, when a business buys its shares on the open market, it does a stock repurchase, sometimes referred to as a share buyback. This article emphasizes how stock repurchases could help improve critical financial measures, but it also raises questions about how Royal Dutch Shell’s shares have been performing lately.

Importance of Stable Dividend Policies

According to the article, stable dividend policies are essential for investors to be drawn in and stay invested. Dividends are payments paid in cash from a company’s profits to its shareholders. Companies can show that they are financially sound and committed to giving shareholders a return on their investment by keeping a consistent dividend policy. This stability encourages investor confidence since it offers a steady source of income and shows that the business can produce profits constantly. Investors seeking income, such as pensioners who depend on monthly dividend payments for their living expenditures, are drawn to stable dividend policies (Narayanan, 2018).

Reasons behind Stock Repurchases

 Companies buy back their shares for a variety of reasons. First, stock repurchases can give shareholders their extra money back. Repurchasing its shares can be an effective strategy for a firm to disperse extra cash and raise shareholder value when it has acquired surplus cash or when there are no compelling investment possibilities (Narayanan, 2018). Second, stock repurchases can be used as an anti-takeover defense strategy. The corporation can raise its ownership concentration and make it harder for outside parties to acquire a controlling stake by reducing the number of outstanding shares. The final approach is to use stock repurchases to counteract the dilution of employee stock options or other equity-based incentive schemes. Companies might lessen the possible impact of diluting existing owners by repurchasing shares (Narayanan, 2018).

Impact on Financial Metrics

 Plans for buying back stock shares and the following results can have particular effects on specific financial indicators. Earnings-per-share (EPS) is one statistic that is impacted. The total number of outstanding shares reduces when a firm buys back its shares. Because there are fewer shares outstanding, fewer shares share the earnings, which raises EPS. Investors may see the company’s profits more appealing due to this increase in EPS (Narayanan, 2018).

The return on equity (ROE) ratio is another one that is impacted by stock repurchases. A company’s profitability of its shareholders’ equity is gauged by its ROE. The equity base is decreased by share repurchases, which may increase ROE by lowering the number of outstanding shares. It is crucial to remember that stock repurchases do not always increase a company’s fundamental profitability. To evaluate the company’s underlying financial health, investors must examine other aspects that impact ROE.

Stock repurchases can also impact the price-to-earnings (P/E) ratio. The P/E ratio is a valuation measure that contrasts a firm’s share price with its earnings per share. When a firm buys back its claims, it lowers the total number of shares that are still outstanding, which may raise the stock price. A more excellent P/E ratio may result from this increase in stock price and the expected increase in EPS. A higher P/E ratio reflects optimistic market sentiment because investors are willing to pay more for the company’s earnings.

Conclusion

Key financial statistics, including EPS, ROE, and P/E ratio, might benefit from stock repurchases. Companies can boost earnings per share, potentially increase return on equity, and raise the price-to-earnings ratio by reducing the number of outstanding shares. These outcomes may draw in investors and increase shareholder value. However, investors must evaluate a company’s fundamental financial health and the effect of stock repurchases. Additional actual variables and the broader market environment should be considered to make wise investing selections.

Supply Chain Management

 Any business’ success depends on how much liquidity it has. Businesses must regularly assess their liquidity and capacity to cover their everyday expenses. As a result, a company’s supply chain uses working capital during the day to maximize performance and profits. As a result, supply chains’ effectiveness and performance are increased and improved to better meet client expectations.

Day Working Capital

 Day working capital analyses how complicated business processes are when working capital is converted to revenue. It serves as a gauge of financial health because a higher working capital level corresponds to a lower income conversion rate (Filbeck & Krueger, 2021). It consequently impacts how healthy operations use high-day working capital. The reverse would show a higher degree of effectiveness and profitability.

The preferred business is Walmart. It is a sizable retail company that works under many laws. Strategic planning and the use of current resources both depend on the working capital calculation.

DWC= (Average Working Capital × 365)/Sales Revenue Working Capital is equal to current assets less current liabilities

Wal-Mart’s current assets total $60.24 billion, and its current liability total $64.62 billion. Its net income or revenue is $8.2 billion.

Thus, $60.24- $64.62= -$4.38 billion

DWC for Wal-Mart = (-$4.38* 365)/$8.02 = -$199 billion

Wal-Mart’s DWC is negative, which implies that its current liabilities are more significant than its existing assets. As such, Wal-Mart has difficulties paying short-term financial obligations and successfully managing working capital. Maintaining financial stability and liquidity requires careful attention to improve the company’s working capital position (Bhattacharya, 2021).

Comparison to Competitors

 Wal-Mart and Costco have negative working capital, meaning their current liabilities exceed their existing assets, as seen by their respective DWCs of -199.3 days and -120.1 days, respectively. However, Wal-Mart’s DWC value is lower than Costco’s, indicating that it has a more significant proportion of current liabilities or fewer assets than its rival.

Importance of Comparing Ratio to Industry Average

The DWC ratio of Wal-Mart should be compared to the industry standard because it serves as a guideline for assessing the company’s performance. The sector average reflects the expected version of businesses operating in the same industry (Bhattacharya, 2021). Walmart may have strengths or difficulties managing its working capital if its DWC ratio is significantly higher or lower than the industry average. This comparison reveals any potential strengths or weaknesses that Wal-Mart might have over its rivals.

Role of a Well-Managed Supply Chain

 Working capital management is greatly aided by a well-managed supply chain, which can also significantly affect a company’s DWC ratio. The following is how DWC comes into play with supply chain management:

Inventory Management

Having the appropriate amount of inventory available at the proper moment is made possible by effective supply chain management. A business can decrease excess stock, prevent stockouts, and enhance cash flow by optimizing inventory levels. As a result, there is less demand for extra working capital locked up in inventory, directly influencing the DWC formula’s numerator.

Supplier Relationships

 Keeping good ties with suppliers is crucial for negotiating fair payment conditions. A business can prolong payment periods by managing its supplier relationships well without harming those relationships or the efficiency of its supply chain (Ganesan, 2023). As a result, the DWC formula’s accounts payable component grows, decreasing the requirement for sudden cash outflows.

Efficiency in Order Fulfillment

 Effective order fulfillment procedures shorten lead times, cut expenses associated with order processing, and raise customer satisfaction. A properly managed supply chain guarantees quick and precise product delivery, reducing the time needed to turn revenues into cash. This increased the DWC formula’s accounts receivable component.

In summary, an organization like Wal-Mart can improve the use of its working capital by incorporating these supply chain management techniques. It is all made possible by better cash flow management, more liquidity, lower financing costs, and superior financial performance.

References

 Bhattacharya, H. (2021). Working capital management: Strategies and techniques. PHI Learning Pvt. Ltd.. https://books.google.com/books? hl=en&lr=&id=jBw7EAAAQBAJ&oi=fnd&pg=PP1&dq=Day+Working+Capital&o ts=LiVsgROx-l&sig=fkr0cc07MtrNSYwyd87u7Rli45A

Filbeck, G., & Krueger, T. M. (2021). An analysis of working capital management results across industries. American journal of business. https://www.emerald.com/insight/content/doi/10.1108/19355181200500007/full/htm l

Ganesan, V. (2023). An analysis of working capital management efficiency in the telecommunication equipment industry. Rivier academic journal, 3(2), 1-10. https://www2.rivier.edu/journal/ROAJ-Fall-2007/J119-Ganesan.pdf

Narayanan, A. (2018, July 26). Royal Dutch Shell Finally Delivers Big Stock Buyback, But Shares Break Support. Investors Business Daily. https://www.investors.com/news/royal-dutch-shell-stock-buyback-conocophillips-earnings/

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Part 1: Stock Repurchases

In the short article “Royal Dutch Shell Finally Delivers Big Stock Buyback, but Shares Break Support” by Aparna Narayanan (see below), stock repurchases may affect critical financial ratios favorably.

Narayanan, A. (2018, July 26). Royal Dutch Shell finally delivers big stock buyback, but shares break support. Investors Business Daily. https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=131003207&site=ehost-live&scope=site

After reading the article, write what addresses the prompts below.

• Include an introduction that summarizes the article.
• Analyze the importance of stable dividend policies.
• Determine reasons behind stock repurchases.
• Analyze how stock repurchase plans and returns specifically affect individual financial metrics.

Part 2: Supply Chain Management

Select a company of your choice and calculate the most current days of working capital (DWC) available. Review page 656 in the textbook, and watch the short video segment “Working Capital,” which is one of the required unit resources in this unit. In addition to your calculations, include the information below.

• How does this company’s ratio compare to those of its competitors?
• Why is comparing this ratio to the industry average important?
• Explain how a well-managed supply chain can come into play here.

You may use the company’s webpage.