The main purpose of this assignment is to critically examine the financial statement of a company and then comment on the financial statements concerning specifically the capital structure, asset financing policy and distribution policies of the company. The company selected for this assignment is Boral limited which is situated in Australia.
Boral limited is a multinational company which is engaged in the business of manufacturing and suppling building and construction materials. The company has its headquarters in North Sydney, Australia and it was founded in 1946. The company also has extensive operations in other countries like USA and some parts of Asia (Boral.com.au. 2017). The company has more than 15000 workers working across 700 operational sites all over the world. The company has achieved sales of approximately $ 4.39 billion as per the estimates of 2017.
The capital structure of a company refers to the different mixes of capital which is used by the company in order to finance different activities and day to day business of the company. In other words, it refers to the which sources of capital the business is using and in which proportion (Coleman and Robb 2012). Ideally business prefer the use of equity capital which is acquired from different kind of shares and debt capital which is acquired by the business from the issue of debentures and bonds. The key thing out here is to strike a balance between the equity capital and debt capital which is calculated by the use of debt equity ratio. As per the financial report of Boral ltd the capital structure of the company is closely associated with the risks which the company faces. The capital structure of the company is a way by which the management of the company manages and controls the risks associated with the capital structure of the company (Ardalan 2017). The capital structure of Boral limited consist of both debt and equity capital. The decision of the capital structure of the company lies with the directors of the company who will be deciding how much amount of capital is to be raised from equity sources and what amount is to be raised from the debt sources. The management of the company reviews the capital structure and dividend policy of the company in order to enhance the shareholders value of the company. In order to determine the capital structure of the company, debt equity ratio is the most suitable ratio which reveals vital information about the capital structure of the company (Heikal, Khaddafi and Ummah 2014).
As per the financial statement of Boral ltd for the year 2017, shows that the company has loans and borrowings which is shown in the financial statements of the company. The loans and borrowings of the company is recognized at fair value minus the transaction cost which is associated with the loan (Brusov, Filatova and Orekhova 2013). The loans and borrowings of the company are stated at amortised cost and any difference between the amortised costs and redemption value is recognized in the statement of income over the period of the borrowings at effective interest rate basis (Fan, Titman and Twite 2012). The loans and borrowings of the company consists of unsecured loans, finance lease liabilities which forms part of the current liabilities of the company and the non-current liabilities, which includes long term unsecured loans and long term leases. The total debt capital which is used by the business is $ 2571.1 million which is much more than what the figure was in 2016 which was $ 1345.2 million.
The equity capital which the company uses as per the financial report of the company. The company has equity capital which is shown in the financial statement of the company for the year 2017 is $ 4265.1 million which has increased significantly from the previous year figure of $ 2246.2 million. The equity as shown in the balance sheet consist of issued capital, reserves and retained earnings (Robb and Robinson 2014). The issued capital of the company consists of ordinary shares of the company issued and are fully paid. The company has issued 93,750,000 shares in order to raise more capital on a pro-rata basis. The amount of capital which is raised from the issue of shares is around $ 2018.9 million.
|
Column1 |
Column2 |
Column3 |
Column4 |
|
Particulars |
2017 |
2016 |
|
|
Non-Current Liabilities (A) |
$ 2,267.70 |
$ 1,110.20 |
|
|
Equity (B) |
$ 5,229.70 |
$ 3,211.60 |
|
|
Debt to Equity Ratio (A/B) |
0.433619519 |
0.345684394 |
Figure 1: (Chart Showing Debt Equity Ratio)
Source: (Boral.com.au. 2017)
The debt equity ratio of the company as shown above is 0.4336 for the year 2017 which may be due to the fact that both the debt amount and the equity amount used in the company has increased from the previous year figure. The debt equity ratio clearly shows that the amount of debt has increased form the last year ratio which signifies that the level of debt which is used by the company has increased. As per the financial statement of Boral ltd, both equity capital and debt capital of the company has increased from figures of 2016. However the debt capital is used comparatively more than the equity capital as per the analysis of the debt equity ratio.
As per the weighted average cost of capital theory as the weighted average cost of capital decreases the market value of assets is raised and thus it shows that there exists an optimal capital structure. The capital structure of the company can also be measured by the gearing ratios as shown in the financial statement of Bowral Limited.
Figure 2: (Chart showing Debt and Gearing ratio)
Source: (Boral.com.au. 2017)
The above chart clearly depicts the different gearing ratio of the company which shows the relation of debt capital used by the company with the equity capital used by the company. The capital structure of the company consists of both equity and debt capital of the company.
The analysis of the capital structure of the company reveals that the company has increased the proportion of debt in the capital structure mix of the company. The objective of the company from the analysis of the capital structure of the company shows that the company is trying to manage risks by reducing the level of equity shares in the capital structure as compared to the debt capital which is used by the company. The management of Boral ltd need to analyze the trend in capital structure which the company has followed in the past. The company can also use the method of benchmarking and follow the capital structure of its competitors in order to ensure that the company can get an optimum capital structure.
Asset financing refers to the use of current assets which can be used to take a loan from the banks. In other words, the assets of the company can be used as a source of finance for the company. The assets which are used in the for asset financing are account receivable, inventory and short term investments (Finnerty 2013). The assets are used by the company as securities on the basis of which loans are acquired by the company.
As per the analysis of the annual report of Bowral ltd, the company has a wide range of options for the purpose of asset financing for the business. The balance sheet of the company consists of the following items which are receivables, inventories, short term investments of the company. The company can use these sources as a security to sanction a loan from banks which can be used by the company to fulfill the goals of the company. Boral Limited has been raising funds through bank overdraft, bills of the commercial banks and has also the options of using asset financing.
The company has two alternative sources of financing which is issue of debentures or bonds or acquiring a loan from a bank. These two ways by which the company can get loans from a bank are direct application for a loan and asset-based financing (Michalski 2013). Under asset-based financing the company has the options to keep the assets as securities with the banks or other financial institutions on the basis of which the loan amount is sanctioned. On the other hand, application for direct loans, the company directly applies for the loan from bank and if the amount is for a significant figure a collateral security is required. Thus it can be stated that with asset based financing policy has the chance of getting more loan amount than the normal loan application.
As per the analysis of the financial statements of Bowral ltd, the company at present is not applying asset financing policies for financing short term loans requirement of the company. The company is currently using short term loans and financial leases which are of short term amount in order to meet the financial requirements of the company (Toloo and Kresta 2014). However the company is using securities like equity shares and retained earnings in order to raise capital of the company. The company can use asset financing as the method is capable of acquiring a huge amount of capital for the business on the basis of securities. Therefore the asset financing policy of the company is quite useful for the company in case the company require a large amount of capital.
The distribution policy of the company or the dividend policy of the company is another important and essential aspects of decision making for the company. There are a number of models which are present which can be adopted by the company for the purpose of the dividend distribution policies. Many of the investors are only attracted by the amount or rate of dividend which the company offers to its shareholders (Hashemijoo, Mahdavi-Ardekani and Younesi 2012). A company which is not paying appropriate rate of dividend, will not be able attract potential investors for investing in the shares of the company. Therefore, it is important for Boral Ltd to develop an accurate and effective distribution policy which can attract shareholders to invest in the securities of the company. As per the balance sheet of the company, it has retained earnings which is a part of the profit which was earned by the company in prior periods. Boral ltd can use these retained earnings to distribute the same as dividends to the shareholders of the company. The dividend paid by Boral ltd for the year 2017 is $ 226.2 million which is much more than the previous year figure (Tran and Nguyen 2014). This shows that the company has a strong dividend policy and it also reveals that the company is developing as the dividend amount paid to the investors of the company is higher than previous year figure. The final dividends of the company for the financial year 2017 is 12 per cent per share and the dividend will be 50% franked. Boral limited has implemented direct credit as the preferred method for the payment of cash dividends, effective for interim dividend paid on 5 April 2012. As per the notes to accounts of the company the dividend per shares of the company for the year 2017 is 24.0c.
|
Ratio of dividend to earning |
||
|
Particulars |
2017 |
2016 |
|
Earnings per share |
$ 33.7 |
$ 35.8 |
|
Dividend Per share |
$ 24.0 |
$ 22.5 |
|
% of earning distributed as dividend |
82% |
62.85% |
Figure 3: (Chart showing dividends to earning)
Source: (Boral.com.au. 2017)
The chart above shows that earning per shares of the company’s earning per shares has decreased from $ 35.8 per share in 2016 and $ 33.7 per shares. The dividend to earnings ratio is shown at 82% in 2017 which is much more than the ratio in 2016. This shows that the Bowral ltd has a strong dividend policy which allows the company to distribute more dividends to the investors of the company in the year. 2017. There has also been an increase in the dividend per shares from 2016 which was 22.5c and this has increased to 24.0c in 2017. Thus it can be said that the company has a decent dividend policy as per the analysis of the financial statement of the company.
The dividend policy of any company can be classified into various categories like residual dividend policy, constant dividend policy and stable dividend policy. Most of the companies follow the stable dividend policy for payment of dividend of the company. In this policy the company announce dividends as per the expectations of the shareholders of the company. The company follows a stable dividend and such dividend is also sufficient to satisfy the investors of the company. The constant dividend policy states that the company will be paying a certain fixed rate of dividend to the shareholders of the company. In such a policy the dividends of the company is directly proportional to the earnings of the company. In most of the cases the company follows a fixed percentage of dividends depending on the earnings of the company (Zhang 2014). As per the dividend policy of Boral ltd, the company follows constant dividend growth model which is clear from the dividend per shares and dividend payout ratio of the company which has increased from 2016. Besides this the company’s revenue has increased from the previous year figure and thus the dividend has also increased from the previous year figure. This clearly shows that the company follows constant dividend growth model.
The company follow constant growth model for paying the dividends to the investors of the company. The dividend policy of the company, Boral ltd has a strong dividend policy which allows the company to distribute more dividends to the investors of the company in the year. 2017. There has also been an increase in the dividend per shares from 2016 which was 22.5c and this has increased to 24.0c in 2017. The company can make use of the retained earnings which the company has in the balance sheet, to distribute among the shareholders as dividends of the company (Serrasqueiro and Nunes 2012). The retained earnings of the company is a part of the profit from prior periods.
Conclusion
Thus from the analysis of the financial statements of Boral limited it can be said that the company has a strong capital structure which has more debt capital in the capital structure mix and lesser amount of equity capital. The company does not uses asset financing techniques for raising capital which can be used by the business. The distribution policy of the company is shown to be strong as the company is following constant dividend growth model. The company needs to improve the financing policies of the company and should apply asset financing strategies to raise finance for the company.
Reference
Ardalan, K., 2017. Capital structure theory: reconsidered. Research in International Business and Finance, 39, pp.696-710.
Boral.com.au. (2017). [online] Available at: https://www.boral.com.au/Images/common/pdfs/annual-reports/Boral-Annual-Report-2016.pdf [Accessed 13 Feb. 2017].
Brusov, P.N., Filatova, T.V. and Orekhova, N.P., 2013. Absence of an optimal capital structure in the famous tradeoff theory!. Journal of Reviews on Global Economics, 2, pp.94-116.
Coleman, S. and Robb, A., 2012. Capital structure theory and new technology firms: is there a match?. Management Research Review, 35(2), pp.106-120.
Fan, J.P., Titman, S. and Twite, G., 2012. An international comparison of capital structure and debt maturity choices. Journal of Financial and quantitative Analysis, 47(1), pp.23-56.
Finnerty, J.D., 2013. Project financing: Asset-based financial engineering. John Wiley & Sons.
Hashemijoo, M., Mahdavi-Ardekani, A. and Younesi, N., 2012. The impact of dividend policy on share price volatility in the Malaysian stock market.
Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.
Li, S., Zhuang, A. and Shapiro, D., 2014. Dividend Payout Policy and Institutional Investors Ownership: Theory and Empirical Evidence. Working Paper, Belk College of Business.
Michalski, G., 2013. Planning optimal from the firm value creation perspective levels of operating cash investments. arXiv preprint arXiv:1301.3824.
Rampini, A.A. and Viswanathan, S., 2013. Collateral and capital structure. Journal of Financial Economics, 109(2), pp.466-492.
Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.
Serrasqueiro, Z. and Nunes, P.M., 2012. Is age a determinant of SMEs’ financing decisions? Empirical evidence using panel data models. Entrepreneurship Theory and Practice, 36(4), pp.627-654.
Toloo, M. and Kresta, A., 2014. Finding the best asset financing alternative: A DEA–WEO approach. Measurement, 55, pp.288-294.
Toloo, M. and Kresta, A., 2014. Finding the best asset financing alternative: A DEA–WEO approach. Measurement, 55, pp.288-294.
Tran, Q.T. and Nguyen, T.T.H., 2014. Dividend policy behavior in emerging stock markets: Evidence from Vietnamese stock market. International Journal of Financial Research, 5(4), p.85.
Zhang, Z., 2014. On a risk model with randomized dividend-decision times. Journal of Industrial & Management Optimization, 10(4), pp.1041-1058.
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