Introduction
Businesses place great emphasis on their financial performance and the work of their individual departments. For example, a company can initiate a stock repurchase to influence its stock price and convey that it views its prospects positively. The same outcome can be achieved through regular dividend payments, and firms can sometimes choose between these options. Another suitable strategy is to calculate financial metrics and compare them with industry and competitor values. Thus, the essay analyzes the reasons for and consequences of buybacks and shows how a firm can use the working capital days metric.
Stock Repurchases
Organizations have several ways to influence their financial position and deliver specific messages about it to their shareholders. Introducing a buyback program is one of them, as Royal Dutch Shell’s case demonstrates. Narayanan (2018) states that the company strengthened its balance sheet and announced the initiative.
The business wanted to reduce its debt and increase the cost of its undervalued stock, which triggered a breakdown of support (Narayanan, 2018). Royal Dutch Shell was forced to take appropriate action to overcome its competitors in the market. The literature overview demonstrates that predictable dividend policies and stock repurchases provide companies and stockholders with essential benefits.
To begin with, one should comment on the importance of stable dividend policies. This approach implies that shareholders receive dividends on a scheduled basis, even though their amounts are not fixed (Western Governors University [WGU], 2021). This attitude is significant and results in various advantages for different market participants.
First, investors can calculate their future profits, and some of them appreciate this confidence and predictability (Western Governors University [WGU], 2021). Second, the company expresses a signal about its good financial health because organizations with relatively high revenue can only pay dividends. Finally, this approach can be considered a competitive advantage for companies because regular payouts can attract more investors. That is why many organizations prefer to use this type of dividend policy.
Royal Dutch Shell announced its stock buyback; it is rational to examine the reasons for this decision. Companies usually repurchase their own shares if they believe that the market undervalues them (Nyborg & Wang, 2021). This initiative demonstrates that the business is confident about its future, which in turn drives stock prices higher. Organizations can also refer to this strategy when consolidating ownership. When shares are repurchased, the number of voters and claims to capital typically falls (Nyborg & Wang, 2021).
Finally, a buyback helps a company make its financial statements more attractive to investors. A reduced stock level increases the firm’s earnings per share (EPS) ratio (Nyborg & Wang, 2021). This decision can help an organization raise more funds from both long- and short-term investors. Consequently, a few essential aspects explain why businesses should repurchase their shares.
The EPS ratio is not the only metric affected by a buyback; many others are affected as well. The Return on Equity (ROE) shows a positive relationship because a lower number of shares outstanding increases equity (Nyborg & Wang, 2021). This fact, in turn, improves the ROE, which benefits the stock’s market image. A similar logic applies to the Price-to-Earnings (P/E) ratio: fewer shares reduce the denominator. The outcome is predictable because the adjusted ratio brings more investors.
A similar case is found with the Book Value per Share. When equity is spread over fewer shares, the ratio will increase. However, the Dividend Yield is the only metric that witnesses a negative impact. A buyback requires essential funds, and an organization can find them by canceling dividend payouts. If this ratio falls, some income-oriented investors can decide to sell the company’s shares. Consequently, the decision to repurchase stock positively affects multiple ratios, even though it still has a slight negative impact.
Supply Chain Management
Apple is the chosen company to calculate and interpret the days of working capital (DWC) value. This metric is calculated using the following formula:
Working capital equals current assets minus current liabilities. Thus, Apple’s (2024) financial statements are accessed and analyzed to perform the following calculation.
The answer above demonstrates that it takes almost 30 days for Apple to convert its working capital into revenue.
Apple operates in the consumer electronics industry, and its leading competitors are Samsung and Xiaomi. It is reasonable to compare the DWC values for the three companies (Investing.com, n.d.a-b).
The results show that Apple impresses with a significantly higher DWC value, indicating that it manages its capital more efficiently than its rivals.
It is informative to compare this ratio with the industry average for several reasons. First, this step contributes to benchmarking performance evaluation by revealing how the business operates relative to its peers. Second, the comparison can help determine a company’s strengths and weaknesses and take appropriate steps, if necessary. Finally, this endeavor is informative, as it reveals the company’s market position based on the given metric.
An effective supply chain can significantly improve an organization’s performance and DWC metric. It is possible to optimize the existing inventory management system to reduce costs. In this case, the company will experience liabilities, thereby decreasing the DWC value (Huang et al., 2022).
Simultaneously, a well-organized supply chain typically increases order fulfillment volumes. This issue indicates that the organization can deliver more products while more customers are satisfied with the items and service (Huang et al., 2022). These positive processes will result in the firm receiving higher revenues. Since net sales represent the denominator in the formula, an increased value will surely contribute to a lower outcome (Huang et al., 2022. Consequently, businesses should invest significant time and effort in making their supply chains more effective to reduce DWC values and gain a competitive edge.
Conclusion
The comprehensive analysis of economic and financial concepts has created valuable knowledge. On the one hand, the Royal Dutch Shell case indicates that companies repurchase their shares to achieve various benefits. Multiple financial metrics show positive outcomes from this decision, but the Dividend Yield faces a significant drawback. It is necessary to balance these issues, as robust dividend policies are important for companies as well.
On the other hand, Apple was chosen to understand the DWC concept. These ratios were calculated for Apple, Samsung, and Xiaomi, and the findings showed that Apple significantly overcame its rivals. Finally, the essay notes that firms can improve their supply chain management to achieve better DWC metrics. There is a strong connection between efficient, practical supply chains and lower DWC ratios.
References
Apple. (2024). Consolidated financial statements.
Huang, C., Chan, F. T., & Chung, S. H. (2022). The impact of payment term extensions on the working capital management of an automotive supply chain. International Journal of Production Research, 60(24), 7360-7383.
Investing.com. (n.d.a). Samsung Electronics Co Ltd.
Investing.com. (n.d.b). Xiaomi Corp.
Narayanan, A. (2018). Royal Dutch Shell finally delivers big stock buyback, but shares break support. Investor’s Business Daily.
Nyborg, K. G., & Wang, Z. (2021). The effect of stock liquidity on cash holdings: The repurchase motive. Journal of Financial Economics, 142(2), 905-927.
Western Governors University. (2021). Company dividend policy basics.