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International Game Technology (IGT)
The short term and long-term debt for International Game Technology as at 31st March 2014 stand at $ 1,426,400 and $ 1,760,500 respectively. The total liabilities for the company sum up to 3,186,900. This information is generated from the company quarterly report. The market value of equity of IGT is $ 3.98B and the outstanding share is $ 24M.
The debt ratio helps a company compare its total debt to total liability and equity. This ratio is used by the company to have the general notion as to the value of leverage being applied by a company. A lower value implies that the business is less reliable on borrowed funds. The less the ratio or leverage the business is applying, the stronger is the equity position of the company (Tamari, 1978). On the other hand, the bigger the ratio the higher the risk the business considered to have invested on. Debt to equity ratio is less the same as debt ratio. This is another gearing ratio that compares the business liabilities to its outstanding shareholders’ equity (Tamari, 1978). The same case with debt ratio, a lower value implies that the business is applying less borrowed fund and the better is its equity stand.
Therefore, in both case I consider these ratios too large for the IGT Company. It implies that the company is highly exposed to risk such as creditors’ lack of confidence with the company and increase in interest rates. IGT Company should consider paying off its debt. It can raise capital for paying debt by issuing more stock.
Among the three companies, IGT Company has the highest debt to equity ratio. The company may have opted for this approach in order to benefit from deductible interest tax and build the credit for the business. This approach will also ensure maintaining completely ownership of the company. The challenges with issuing large amount of stock means those shares outstanding of the company become more diluted and the current investors earn smaller ownership fraction with every extra share issued (Wiehle, 2005).
On the other hand, Multimedia Games Holdings has the lowest debt to equity ratio. It might have opted for this option in order to enables it investors raise capital without facing debt. This will allow the company owners to concentrate on making their outputs more profitable instead of paying back to lenders. Multimedia Games Holdings may have also opted for this approach to allow the company owners and investors to create a long-term association throughout the lifetime of the business. According to Wiehle (2005), the cash flow for the company will be utilized on investments instead of paying interest and outstanding debts. Moreover, this compare can be termed as a small company if you compare it with the other two companies; hence, it might have opted for this method for the fear that it will face liquidity issues and fail to pay its outstanding debts (Wiehle, 2005).
Tamari, M. (1978). Financial ratios: analysis and prediction. London: P. Elek.
Wiehle, U. (2005). 100 IFRS financial ratios (1. ed.). Wiesbaden: Cometis AG.