Example Analysis of Organisation Capital Structure

This analysis originally from my Financial Management II paper and for study purpose. Plagiarism is not allowed..thank you.

Analysis of QSR Brands Berhad Capital Structure

Capital structure is the combination of debt and equity to finance a company. It is usually measured as either ratios of debt to equity or ratio of debt to assets. To overview the financial strength of a company, there are four leverage ratios can be used; Debt ratio, Debt equity ratio, Equity multiplier and Interest coverage ratio. Generally, the most used by analysts are the Debt ratio and Debt equity. These two are popular measurements tools in evaluating a company’s capital structure.

Formula of Debt ratio = Total Liabilities / Total Assets, then multiplied by 100%

Debt equity ratio = Long term liabilities / Total shareholder’s equity

                                     

The Computation of Capital Structure of Firm

	Debt Ratio		Debt Equity Ratio
Formula	Total Liabilities	x  100%	Long term Liabilities	x 100%
	Total Assets		Total Shareholder Equity
Year
2005	214,928	x  100%	148,375	x  100%
	592,458		239,288
		= 36.27 %		= 62 %
2006	273,631	x  100%	200,011	x  100%
	699,511		244,253
		= 39.12 %		= 81.87 %
2007	325,255	x  100%	170,979	x  100%
	801,772		245,471
		= 40.56 %		= 69.65 %
2008	268,788	x  100%	178,717	x  100%
	903,097		286,383
		= 29.76 %		= 62.30 %
2009	759,387	x  100%	301,570	x  100%
	2,092,791		286,384
		= 36.29 %		= 105.30 %

Table 2.  The Computation of Ratios in Percentage for the Firm.

   

Year	2005	2006	2007	2008	2009
Debt ratio	36.27%	39.12%	40.56%	29.76%	36.29%
Debt Equity Ratio	62%	81.87%	69.65%	62.30%	105.30%

The Debt ratio of QSR Brands Berhad in year 2005 is 36.27%, 39.12% in 2006 and 40.56% in the year 2007, indicates a significant increase in debt ratio each year. The highest debt ratio is in year 2007 of 40.56%, shows the firm’s debt leverage increased at RM325 million of total liabilities over RM801 million of total assets. In 2008, the debt ratio was dropped tremendously at 29.76% and favoured to the firm, its shows the company’s debt leverage was dropped fairly and increased the capital equity. In year 2009, the debt ratio was increased to 36.29%  but still satisfactory for a big firm with total assets about RM2,092.7 million. The firm was increased in capital equity through its fund management, its shows that the firm’s capital management prefer for equity financing than debt financing.

            The Debt Equity ratio looks bigger in size with 62% in year 2005, 81.87% in year 2006, 69.65% in 2007, 62.30% in 2008 and 105.30% in year 2009. Besides, its higher ratios indicate its consistence of its capital structure based on debt financing. We can see a tremendous increase of almost double the ratio in 2005 of 62% to 105.30% in 2009. It shows that the total debt owned by the firm exceeds the equity shareholder’s. However, for a big corporation is not a risk of market plunge due to its big assets and shareholders confidence.

The evaluation of capital structure finds that the QSR Brands Berhad tends toward the debt financing instead of the equity financing. Main sources of debt financing are commercial banks, which are offers short term loans and long term loans. The liabilities of loans and borrowings for the firm were increased from RM173 million in 2008 to RM264 million in  2009.

This study finds that even though has increased in profitability, firm more tend toward debt financing thus confirming the finding of The Trade-off Theory of capital structure. This explained here, the firm with high income and safe with tangible assets are more likely to have high debt levels than a firm with risky or intangible assets.

As part of its overall prudent liquidity management, the firm maintains sufficient levels of cash or cash convertible investments to meet its working capital requirements. In addition, the firm strives to maintain available banking facilities of a reasonable level to its overall debt position. As far as possible, the firm raises committed funding from both capital markets and financial institutions and prudently balances its portfolio with some short-term funding so as to achieve overall cost effectiveness. The firm manages its debt maturity profile, operating cash flows and the availability of funding so as to ensure that all refinancing, repayment and funding needs are met.

            From the evaluation, the cash flow interest rate will be the risk that affect future flows of a financial instrument fluctuate because of changes in market interest rates. Fair value interest rate is also the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. As the firm has no significant interest-bearing financial assets, the firm’s income and operating cash flows are substantially independent of changes in market interest rates. The firm’s interest-bearing financial assets are mainly short-term in nature and have been mostly placed in fixed deposits or occasionally, in short-term commercial papers. The firm’s interest rate risk arises primarily from interest-bearing borrowings. Loans and borrowings at floating rates expose the firm to cash flow interest rate risk. Loans and borrowings obtained at fixed rates expose the firm to fair value interest rate risk. The firm manages its interest rate exposure by maintaining a mix of fixed and floating rate borrowings. In the previous year, the firm had interest rate swaps with a notional contract amount of RM5,717,000. The interest rate relating to the interest rate swaps as at 31 December 2008 had been fixed at 5.34% per annum until its maturity in May 2009. There is no interest rate swap facility outstanding as at 31 December 2009.

The foreign currency is another risk that arises from subsidiaries operating in foreign countries, which generate revenue and incur costs denominated in foreign currencies. The currency exposure is primarily Singapore Dollars. The firm is exposed to foreign currency risk on purchases that are denominated in a currency other than the respective functional currencies of the firm entities. The currencies giving rise to this risk are primarily US Dollars. In the previous year, the firm was also exposed to foreign currency risk arose from borrowings denominated in foreign currencies. The firm had currency swaps that were primarily used to hedge the foreign currency exposures on the borrowings. The currency exposures were primarily US Dollars and Singapore Dollars.

The firm credit risk is primarily attributable to trade receivables. The firm trades only with recognised and creditworthy third parties. It is the firm’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on ongoing basis and the firm’s exposure to bad debts is not significant. For transactions that are not denominated in the functional currency of the relevant operating unit, the firm does not offer credit terms without the specific approval of the Head of Credit Control. The credit risk of the firm’s other financial assets, which comprise cash and cash equivalents, marketable securities and noncurrent investments, arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these financial assets. As the firm’s transactions are substantially on cash basis, its credit risk is minimal.

            In year 2009, QSR Brands Berhad recorded revenue of RM2,760.3 Million, an increase of 418.1% over year 2008 of RM532.8 Million. This shows excellent achievements in increasing the group’s revenue, profit before tax registered at RM230.3 Million against RM97.7 Million in 2008. The group continued growth in revenue and profitability as a result from the strategic initiatives done like Pizza Hut has expanded its network with 26 new restaurants across Malaysia and Singapore, and QSR expanded its KFC network with 49 new restaurants in Malaysia, Singapore and Cambodia.

Good Luck For Your Assignment!