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Pearson Publishing’s Capital Structure and Finance Report


Introduction

The current business world could be considered an extremely competitive environment because of numerous rivals and conditions under which they function. Drastic alterations in strategies used by companies to acquire a competitive advantage and remain efficient precondition significant shifts in the market (Shiller, 2003). Moreover, diverse factors that impact the global economy require appropriate responses to reorganize companies and introduce new patterns according to which their capitals are structured. At the same time, there are numerous alterations in the major sources of income and investments which agents explore to create the basis for the further rise (Summers, 2014). Finally, recent financial crises and oscillations in currencies ratios impacted the market considerably and contributed to the elaboration of new approaches which will take into account all these factors and ensure a companys ability to face all challenges the modern environment presents (Hussey, 2001). It introduces a particular instability to the business sphere and might become a critical problem for investors and shareholders. In this regard, the majority of leading companies functioning is analyzed by numerous financial agencies that try to monitor the most important indicators to preserve the stability of the stock exchange and avoid processes that might result in new crises (Malkiel, 2003). That is why the necessity of the analysis of this sort becomes evident.

Background

The given report is the comprehensive investigation of Pearson Publishing, its capital structure, financial decisions, short and long-term perspectives, shareholders participation, financing, etc. It consists of the introductory part that justifies the choice of the company, the body which delves into its main financial aspects, and a conclusion summarizing the findings. As stated above, the necessity of the suggested analysis comes from the last Pearsons successes in the market and the significant empowerment of its position.

Justification of the Choice

Nevertheless, the choice of the primary object of the research is preconditioned by several factors. First, the market segment occupied by Pearson demonstrates stable growth (Levangie & Norkin, 2011). Despite all predictions related to the publishing industry, it remains competitive, and companies that are functioning in the given sphere have significant incomes. As for Pearson, it is a leading publisher that preconditions the further evolution of this market segment and has numerous opportunities for further growth. Moreover, being one of the companies included in the FTSE 100 list, it remains attractive for numerous investors that might consider placing their capitals and investing in the company an appropriate way to improve their position (FTSE, 2017). Additionally, the choice could also be explained by the unusual character of Pearson, as despite the majority of other companies that function in traditional spheres, this one remains different. Regarding these facts, the analysis of the company is an excellent way to understand the essential factors that impact the modern business environment and its alterations.

Current Vision

At the moment, Pearson is focused on maintaining its leading position in the sphere by cultivating its competitive advantage and looking for new ways of investing. There are also attempts to become a simpler and more focused business for shareholders to realize all benefits of their participation. The company already reports a 10% reduction in the cost base (Pearson, 2016). Furthermore, it starts to create global platforms for finance, marketing, e-commerce, and other crucial spheres to satisfy the existing need for such resources and acquire additional income. CEOs are interested in fostering relations with investors and principal shareholders to ensure that capital is allocated in an appropriate way for all involved actors to monitor financial alterations (Pearson, 2016). According to the companys annual report, its key performance indicators increase significantly. In 2016, its sales increased by 2% and comprised of £4,552m (Pearson, 2016). At the same time, the adjusted operating profit decreased by £635m (Pearson, 2016). For this reason, the companys primary goal is to support its further evolution by engaging new investors and spreading its business across other countries.

Main Indicators

Therefore, the companys leading financial indicators could be considered positive. According to the FTSE 100 index, Pearson managed to achieve a significant decrease in shareholder return from -54,4% to -15,6% (Pearson, 2016). It is an evident success as the company continues its evolution. Furthermore, dividends per share also increased and are 52p (“Managing your shares,” n.d.). Moreover, Pearson states that in 2017, dividends will experience a further rise due to the increased product investment (Pearson, 2016). The companys net debt rose to £1,092m (Pearson, 2016). Additionally, the interest charge is expected to be about £74m (Pearson, 2016). The given indicators justify the choice of the company as the aim of the research as they demonstrate the positive alteration in its structure and the tendency towards further growth. Moreover, these indicators also prove efficient capital management and investment strategy that helps the company to maintain enhanced performance results and continue its evolution.

Shareholders and Shares

Analysing Pearsons capital structure, the shareholders role should also be mentioned. The current share price is 682.00, and it could bring 18p interim and 34p final dividends (“Managing your shares,” n.d.). If compare with other companies included in the FTSE 100 list, the average price is rather high (FTSE, 2017). It demonstrates that the firm remains successful in this aspect as its focus on fostering relations with shareholders contributes to the improved outcomes. In general, the company remains committed to returning to growth and providing its shareholders with appropriate returns (Pearson, 2016). It means that a new wave of investments could be expected. For Pearson, shareholders participation remains one of the main sources of income that guarantee its further growth and preservation of leading positions. Furthermore, the given aspect of the companys functioning remains an essential factor that creates the basis for its future rise and evolution. Its capital structure depends on the way shares are distributed between main actors and returns that they acquire due to the companys further rise.

Capital Structure

Revolving around Pearsons capital structure, several aspects become essential. Current liabilities, equity, stock capital, revenues, debts, and other factors become crucial for its analysis (Miller, 1988). At the moment, the company demonstrates a stable growth preconditioned by increased demand for its products. It also means that its capital structure experiences significant changes. First of all, the correlation between debt and equity is positive. Regarding the fact that debt is one of the leading ways Pearson could raise its capital, it tries to issue debt because of the tax advantages (Pearson, 2016). Therefore, the company gradually retains ownership and becomes a significant factor that can impact the sphere. Pearson has high-interest rates, which means that the company can enhance its equity by increasing its earnings and creating the basis for the increased incomes in 2017 (Pearson, 2016). This fact is essential if to analyze the current position and perspectives related to its enforcement.

Liabilities

As for Pearsons long-term liabilities, which are considered a part of the capital structure, these could be regarded as advanced. As the company states in its annual report, in 2017 a significant increase in income should be expected (Pearson, 2016). It means that Pearson will be able to improve its balance sheet and ensure shareholders that all obligations will be paid. Moreover, the increase in incomes means that the current portion of the long-term debt could also be improved. Pearsons current liabilities could also be paid, and there is no risk of bankruptcy (Pearson, 2016). Therefore, analyzing the companys performance, the tendency towards the increase in the number of investments could also be noted. It signalizes that the further growth of its capital will be observed during the next following years. These positive tendencies contribute to the increased attention given by financial agencies to Pearson and numerous perspectives for further evolution.

Currency

Another critical factor related to the state of the companys capital is currency. The fact is that it is not risky because devaluation is likely (Adler & Dumas, 1984). Additionally, a weak currency could be even more dangerous to the company. Therefore, it could be used to denominate the firms debt or contribute to its further empowerment. Assessing the currency risk, several factors should be provided. First, Pearson uses pounds sterling as the main currency to give reports and operate in the UK. However, considering the international character of the company, it also has to use the U.S. dollar as its target market includes the areas where this currency is used. For this reason dollar movements and increases in its LIBOR precondition the alterations of the interest charge, incomes, debt (Pearson, 2016). The strengthening of the dollar relative to sterling also contributes to the significant costs restructuring as the company had to respond to the new demands and altered conditions of the market (Fama & French, 2004). However, despite all these alterations, Pearsons net debt/ EBITDA ratio remains solid at 1.4 x (Pearson, 2016). It means that the oscillations of currency remain important for the company; however, they do not promote the pernicious effect on its outcomes.

Strengths

The facts mentioned above and financial statements contribute to a better understanding of the nature of this business and its strong and weak aspects. First of all, using shareholders as the main investors to support the further companys development, Pearson attains improved cooperation and participation (Khaleel, n.d.b). Actors which have particular shares become interested in the companys further rise and should contribute to its evolution to be provided with payments. Furthermore, the firm tries to attract global investors by emphasizing its outstanding perspectives for evolution. Pearson has attempted to enter the new market and already demonstrates good perspectives and capitalization. In the future, the company could overcome the rivalry and become even the most potent publisher that preconditions the evolution of the segment. In this regard, the positive forecast related to the companys long and short-term perspectives should be considered another of Pearsons strengths. Finally, the primary showings related to financial performance and income are satisfactory. It shows that the current development strategy chosen by the company remains efficient regarding the competitive environment and barriers Pearson faces in its development. It could be considered another companys strength.

Weaknesses

As for the weaknesses, several factors should be mentioned. First, the company failed to see the accelerated level of disruption taking place in the US market. For this reason, an 18% decline in revenues was observed (Pearson, 2016). It happened due to the drawbacks in forecasting strategies explored by Pearson. Moreover, this also demonstrates the companys dependence on the U.S. market as one of the biggest outlets the firm uses to acquire extra incomes (Khaleel, n.d.a). The processes peculiar to the American business environment affect Pearson and precondition the appearance of different tendencies which might hurt its main showings within the company (Reuters, 2017). This drawback should be eliminated using a more efficient planning strategy and introducing measures to regulate the U.S. market.

Investors

Therefore, like any growing company, Pearson is continuously looking for new investors to support its evolution and accelerate its spread. First, several governmental investors are interested in the organizations evolution because of its positive impact on the sphere of education. Therefore, Pearson enjoys a wider array of stakeholders than just traditional investors, and it means that the company acquires significant sums from agents that are interested in its further evolution and understand the long-term character of their investments. Therefore, the firm has a specific shareholder outreach program that engages about 600 institutional and private investors at 300 institutions in Australia, Canada, Dubai, China, Europe, the UK, the USA, etc. (Pearson, 2016). For this reason, there are numerous opportunities for the further development of the company.

Long-Term Financing Decisions

Nevertheless, the majority of the companys decisions are focused on the creation of long-term value, growth, and competitiveness. In light of this, the majority of its financing decisions are made with the primary purpose to support these intentions and turn into practice the bigger part of financial incentives (“Governance,” n.d.). However, there is a certain limit on the amount of equity the company can use in its long-term planning. In ten years, no more than 10% of Pearsons equity will be issued by the companys share plans (“Pearson PLC,” n.d). The given limit is introduced to avoid crucial alterations in the financial sphere and preserve stability (Ittelson, 2009). Moreover, it also helps to monitor the current state of shares and forecast its further evolution.

Risks

Finally, it is also crucial to assess risks related to Pearsons functioning and its further development. At the moment, it is included in the FTSE 100 list as the company that demonstrates stable and high results. For this reason, it is attractive for investors, which introduces numerous opportunities for further rise. However, several stressors might result in a significant decrease in the company’s income. First, the instability of the U.S. market impacts companys shares and undermines its financial indicators (Purmessur & Boodhoo, 2009). Second, the company might experience risks that come from third parties. For this reason, managing these risks is a key element of the enterprise risk management framework.

Conclusion

Altogether, at the moment Pearson is a promising company characterized by stable financial showings. Moreover, it has outstanding opportunities for future development. The organizations strategy that is focused on the preservation of shareholders interest and attraction of new investors turns out to be efficient and supports Pearsons growth. Despite several risks, the forecast for the future is positive.

References

Adler, M., & Dumas, B. (1984). Exposure to currency risk: Definition and measurement. Financial Management, 13(2), 41-50.

Fama, E., & French, K. (2004). The capital asset pricing model: Theory and evidence. Journal of Economic Perspective, 18(3), 25-46.

FTSE. (2017). Company report. Pearson. Web.

(n.d.). Web.

Hussey, D. (2001). Company analysis: Determining strategic capability. Hoboken, NJ: Wiley.

Ittelson, T. (2009). Financial statements: A step-by-step guide to understanding and creating financial reports. Wayne, NJ: Career Press.

Khaleel, F. (n.d.a). Financial management. Dividend policy and signalling theory. Edinburgh Napier University, Edinburgh.

Khaleel, F. (n.d.b). Financial management. Managing currency risk. Edinburgh Napier University, Edinburgh.

Levangie, P., & Norkin, C. (2011). Joint structure and function: A comprehensive analysis. Philadelphia, PA: F.A. Davis Company.

Malkiel, B. (2003). The efficient market hypothesis and its critics. The Journal of Economic Perspectives, 17(1), 59-82.

Managing your shares. (n.d.). Web.

Miller, M. (1988). The Modigliani-Miller propositions after thirty years. The Journal of Economic Perspectives, 2(4), 99-120.

Pearson. (2016). Web.

(n.d.). Web.

Purmessur, D., & Boodhoo, R. (2009). Signalling power of dividend on firms’ future profits. International Interdisciplinary Journal, 1-9.

Reuters. (2017). Reuters. Web.

Shiller, R. (2003). From efficient markets theory to behavioral finance. The Journal of Economic Perspectives, 17(1), 83-104.

Summers, N. (2014). Bloomberg. Web.

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