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Assess the Business and Financial Risks of Ust. What Do You Think About Ust’s Capital Structure? What Are the Benefits of Debt in Ust’s Case?

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Assess the business and financial risks of UST. What do you think about UST’s capital structure? What are the benefits of debt in UST’s case?

Even though UST is one of the most successful companies, not only in its sector, but in the whole corporate world of America, it confronts a few business and financial risks.

Regarding the latent risks of UST’s business side, it is concerning the fact of the continuous increase of small competitors, attempting to enter to this industry by providing products in lower prices. Moreover, the rising frequency of smoking bans, the link between cigarettes and cancer as well as the weakness of smokeless tobacco to be proved as a product which is not responsible for designative diseases constitute alarming issues for the smoking producers, increasing the likelihood of industry’s erosion. Certainly, the non-diversifiable business of UST and the underperforming investment pursuits, demonstrating erroneous decision-making and low management skills. Two factors that are raising concerns with respect to the future performance of the company. Furthermore, UST’s operations are threatened by advertising restrictions, thwarting the promotion of its products to new and current customers. Despite the new regulations and legislations imposed in tobacco industry, the litigations for UST decreased substantially, giving it the potential to pay 100 to 200 million USD in lieu of sharing with its competitors the unaffordable amount 206 billion USD. However, this does not mean that the sector will not be subject to such problems in future. Also, the non-international presence and the resignation of two key executives show an ominous view of the business. Last but not least, the firm’s lack of adaptation in the price-value segment led to a lower premium share (77.2%) in 1998, indicating the delayed reaction of UST in alterations occurred in tobacco industry. To sum up, UST remains the leader of this market and its overall business risk is relatively low yet, but there is a vague distant future.

Apparently, given the financial data of the company, UST’ financial risk is much lower in comparison with its business risk. This is affirmed mainly by the constant increase of sales, earnings and cash flows of the corporation over the last 10 years. In fact, the company achieved to earn the award of the most profitable firm from Forbes in 1997 and 1998. Indeed, UST had 92.1% return on capital in 5-year basis. Moreover, the firm managed to pass a stringent test in terms of ROE, ROA and Gross Margin, showing its prevalence in the US market and outperforming competitors on those data. Similarly, UST overperformed the most companies in its category in the US stock market and accomplished to have exceptional growth rate and ratios relative to comparable firms. In particular, EBITDA, EBIT and net margin are much higher than the median of the other tobacco companies. Also, total debt to book capitalization is only 17.6% compared to peers’ median of almost 66% and earnings forecast is in favor of the firm. Taking everything into account, the financial position of the company is very strong, and it is difficult to say that risks arise from firm’s financial management. Nevertheless, the creation of a diminished cash inflow, due to the inroad of new enterprises, is an imminent threat for the company’s future.



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