Impact of Debts on Returns: Discussion Essay

Exclusively available on Available only on IvyPanda® Made by Human No AI

Background

The COVID-19 pandemic put a considerable strain on public finances, more so on government debt. Consequently, there is a negative effect on the fiscal sustainability of nations. Furthermore, individual businesses were affected by the stringent measures such as lockdown and travel bans. For most people, the only way to reestablish their enterprises was through borrowing bank loans. The selected topic for this post is the impact of debts on returns. The research article chosen was written by Colline (2022) with the title: The mediating effect of debt equity ratio on the effect of current ratio, return on equity and total asset turnover on price to book value.

Summary of Colline 2022 Article

The objective of the study was first to examine the consequence of liquidity, activity ratio, and profitability on capital structure and firm value. In addition, the researchers endeavored to find out the mediating role of capital structure. The study was informed by the drastic changes in stock market index following the COVID-19 pandemic (Colline, 2022). The first hypothesis guiding the study was that the current ratio has a positive impact on the price book value. The rationale was that firms have an increased ability to handle short-term liabilities when they have greater current ratio. The other hypothesis was that the return in equity ratio and total asset turnover has a positive effect on the price book value. In addition, the researchers assumed that the return on equity ratio and current ratio has a negative impact on the debt-equity ratio. Their last prediction was that the debt-equity ratio has a mediating effect on the current ratio on price-to-book value.

The independent variables for the study include return on equity (ROE), current ratio (CR), and total asset turnover. The price-to-book (PBV) is the dependent variable while the debt-equity ratio (DER) mediates the effect. Data was collected from the Indonesia stock exchange to get the interim financial reports of companies for the financial year 2020 to 2021. The researchers used Reviews 8 to carry out multiple regression analysis to analyze the relationship. Findings from the study show that return on equity, current ratio, and debt-equity ratio have a significant effect on PBV but the total asset turnover does not have any remarkable impact. From the findings, it is apparent that debt-equity ratio has no mediating effect on the current ratio and ROE or rice book value.

Personal Reactions and Reflections

The research is useful for analyzing the impact of financial crisis and the stock exchange price on finances of the individual companies. Noteworthy, the United States federal debt grew by 100% and the government opted for a zero lower bond economy (Bi et al., 2022). I learnt from the research that companies with high current ratios have greater liquidity and are therefore at minimal risk which enhances the firm value. Investors have more confidence on such companies with higher ROE as it shows the probability for a higher profitability. The implication is that investing in R & D firms which have a low exposure to government debt and pay less expected returns is a good financial decision. Higher ROE implies leads to more retained earnings because of the high profit that the company receives over time. In addition, the retained earnings can be utilized by the firm as a source of funds to minimize debts causing low DER.

From the study, I think a proper financial planning is important when planning to get a loan during times of financial crisis. It is important to understand that the assets that the company has may not be as useful as the real activities. Therefore, the focus should be capitalizing on strategies that increase ROE while minimizing the debt to ensure that the firm does not become bankrupt. It is better to reabsorb all the profit for reinvestment and improving on profitable activities while avoiding debt.

References

Bi, H., Shen, W., & Yang, S. S. (2022) Canadian Journal of Economics, 55(2), 865-903. Web.

Colline, F. (2022). The mediating effect of debt equity ratio on the effect of current ratio, return on equity and total asset turnover on price to book value. Journal of Finance and Banking, 26(1), 75-90. Web.

More related papers Related Essay Examples
Cite This paper
You're welcome to use this sample in your assignment. Be sure to cite it correctly

Reference

IvyPanda. (2023, November 23). Impact of Debts on Returns: Discussion. https://ivypanda.com/essays/impact-of-debts-on-returns-discussion/

Work Cited

"Impact of Debts on Returns: Discussion." IvyPanda, 23 Nov. 2023, ivypanda.com/essays/impact-of-debts-on-returns-discussion/.

References

IvyPanda. (2023) 'Impact of Debts on Returns: Discussion'. 23 November.

References

IvyPanda. 2023. "Impact of Debts on Returns: Discussion." November 23, 2023. https://ivypanda.com/essays/impact-of-debts-on-returns-discussion/.

1. IvyPanda. "Impact of Debts on Returns: Discussion." November 23, 2023. https://ivypanda.com/essays/impact-of-debts-on-returns-discussion/.


Bibliography


IvyPanda. "Impact of Debts on Returns: Discussion." November 23, 2023. https://ivypanda.com/essays/impact-of-debts-on-returns-discussion/.

If, for any reason, you believe that this content should not be published on our website, please request its removal.
Updated:
This academic paper example has been carefully picked, checked and refined by our editorial team.
No AI was involved: only quilified experts contributed.
You are free to use it for the following purposes:
  • To find inspiration for your paper and overcome writer’s block
  • As a source of information (ensure proper referencing)
  • As a template for you assignment
Privacy Settings

IvyPanda uses cookies and similar technologies to enhance your experience, enabling functionalities such as:

  • Basic site functions
  • Ensuring secure, safe transactions
  • Secure account login
  • Remembering account, browser, and regional preferences
  • Remembering privacy and security settings
  • Analyzing site traffic and usage
  • Personalized search, content, and recommendations
  • Displaying relevant, targeted ads on and off IvyPanda

Please refer to IvyPanda's Cookies Policy and Privacy Policy for detailed information.

Required Cookies & Technologies
Always active

Certain technologies we use are essential for critical functions such as security and site integrity, account authentication, security and privacy preferences, internal site usage and maintenance data, and ensuring the site operates correctly for browsing and transactions.

Site Customization

Cookies and similar technologies are used to enhance your experience by:

  • Remembering general and regional preferences
  • Personalizing content, search, recommendations, and offers

Some functions, such as personalized recommendations, account preferences, or localization, may not work correctly without these technologies. For more details, please refer to IvyPanda's Cookies Policy.

Personalized Advertising

To enable personalized advertising (such as interest-based ads), we may share your data with our marketing and advertising partners using cookies and other technologies. These partners may have their own information collected about you. Turning off the personalized advertising setting won't stop you from seeing IvyPanda ads, but it may make the ads you see less relevant or more repetitive.

Personalized advertising may be considered a "sale" or "sharing" of the information under California and other state privacy laws, and you may have the right to opt out. Turning off personalized advertising allows you to exercise your right to opt out. Learn more in IvyPanda's Cookies Policy and Privacy Policy.

1 / 1