Impact of Sarbanes-Oxley Act (SOX)

Impact of Sarbanes-Oxley Act (SOX)
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Benefits of going public
A small business or company can raise capital through selling securities by first registering the company with the SEC. This makes the company public. The decision of a company to go public may have several advantages or benefits. One of them is boosting the company’s brand, prestige and publicity. An IPO distributes shares to a wide investor base creating greater public awareness for the company’s products and services. The increased visibility offers a publicly traded company competitive advantage over privately held companies in the same industry and makes it easier to expand nationally and internationally (KPMG LLC, 2008). Another reason is that the company acquires more capital to acquire other businesses with the increased public company’s stock. Going public increases the company’s liquidity. It makes it substantially less expensive to make acquisitions and get into mergers (KPMG LLC, 2008). The other benefit is whereby the company may have a better opportunity to access more capital. This is because it presents a better opportunity to benefit from investment banking and funds that do not cover private companies. This is influenced by the fact that public companies are more transparent as obliged by the public reporting requirements that increase investor confidence (KPMG LLC, 2008).
The company could attain the same benefits through alternative means. For instance, it may attain greater visibility through a marketing strategy. The appropriate marketing strategy would focus on advertising the brand to the right market segment. An effective marketing strategy would also give it a competitive advantage over the other companies in the same industry (Ennew & Waite, 2010). To increase access to capital, the company could make sure that its debt to equity ratio remains at attractive levels (Troy, 2008). This is important as it ensures that lenders are comfortable with offering more funds to the company. The company is more likely to get funds when the company has more equity as it cushions the lender and it is an indicator that the lender would be repaid. In order to increase ease in entering into mergers and making acquisitions, the company could increase efficiency on its core competencies (Porter, 2008). This way the company would make more profits and be attractive to other companies interested in mergers. For acquisitions, the profit accrued as a result of increased efficiency in the core competencies would be invested in acquisitions.
Financial ratios
Financial ratio analysis is important as it presents financial results and indicators for improving performance. The investors or shareholders use the ratio analysis to compare results of companies with others in the industry. The ratio informs judgments concerning management effectiveness and mission impact. Return on Equity (ROE) assesses the performance of a business over time (Troy, 2008). It is assesses how sustainable the return on investment by shareholders is. The formula is net profit/average shareholder equity. ROE assesses the how profitable the company is relation to the funds invested. This company should have high profit in comparison to the equity. For instance, if the company is able to make a profit of $6 million with equity of $2 million, the ratio is 3:1. It indicates that it can lure the investor because the company is able to give the investor 3 times the amount invested. If the company is making losses, the company would not go public because it is hard to attract investors. The company has to make enough profits to compensate for the risk of investing in the business.
Another ratio is the Debt to equity ratio assesses how much of the company is geared or financed by debt (Troy, 2008). If the company is strongly geared by debt then investors are likely to be lured away. The formula is the total liabilities/ shareholders equity. For instance, when the liabilities are at $ 1 million and the shareholders equity is at $3million, the ratio is at 1: 3. This is because the company has invested more than the debt amount. This ratio would lure in more investors because the investors would have confidence in the company’s ability to service its debt without relying on capital attained from the IPO.
The current ratio is a liquidity ratio, which assesses the company’s ability to service its operational obligations as an indicator of financial health (Troy, 2008). The formula is current assets/ current liabilities. The shareholders may be more likely to purchase the company’s securities when the...