Factors Affecting Capital Structure of Listed Companies

The Factors that affects the capital structure of the
Listed Companies
There are many factors that affect the capital structure of the companies but I have
selected some factors that I will consider throughout my analysis. I have chooses
one listed transportation company Aramex.
Corporate Tax:
Under a classical tax system, the tax deductibility of interest makes debt financing
valuable; that is, the cost of capital decreases as the proportion of debt in the
capital structure increases. The optimal structure then would be to have virtually
no equity at all.
The corporation tax is tax which is calculated on the profits after deducting all the
operating and finance cost. There is some corporation tax that is basically tax of its
subsidiaries. The overall effect of the corporation tax on capital structure is that if
borrowings are more then there are more tax savings on interest expense.
Personal Tax:
Here the companies I have chosen there is no any personal tax on it.
Tax benefits from debt:
If there is more borrowings then there would be more interest that
companies will pay and the increase in interest expense results decrease in profits
which ultimate decrease the taxation. So, in the case of Aramex the debt to equity
ratio is calculated is 2 : 98 on average of six years that seems Aramex dont rely on
its debt . The overall of impact of debt to equity ratio before crisis and after crisis
remains stable. The borrowings will affect the capital structure in case of tax savings
and also it will affect the liquidity and profitability of the companies.
Financial Flexibility:
The impact of capital structure on the profitability and liquidity
matters a lot. If the Debt is more than equity there will be more interest that the
companies will pay and ultimate there will be tax savings. Likewise if there is more
debt there will be more interest expense ultimate result less profits that worsens the
profitability of the companies. In the case of the Aramex during 2007 to 2009 before
crisis the return on capital employed was on average 12% that substantially falls to
3% in 2010. That is because they heavily rely on short term borrowings which
results more current liabilities. The current ratio before crisis in 2008 was 6.31: 1
which deteriorates after crisis and goes down to 1.867 in 2012. The same reason
behind it the Aramex rely on its short term borrowings and its current assets
decreases as the passage of time due to crisis. This is due to the increase in current
assets and decrease in liabilities. The receivables days also increased during 2009
to 2102 that affects its liquidity.
Asset Structure:
The primary objective for profit-making companies is often defined as "increasing owner value."
Companies achieve this objective by earning profits, which increase owner value in two ways: as
dividends and/or as retained earnings (which increase owners equity). It is also said that assets are "what
the company has to work with," or what it uses, to earn profits. Put another way, companies use assets
to achieve business objectives. Understandably, then, assets and the company's asset's structure are
central in two basic and important kinds of questions facing managers and owners throughout a
company's life:
How can the company maximize returns on its asset base?

How should assets be acquired: That is, how much of the asset base should be acquired through
equity funding and how much through debt funding?
So the asset structure in Aramex is 80% on average before crisis which decreases to the 63% due to the
crisis. This is due to decrease in current assets that ultimate decrease its liquidity.
Growth:
The amount of increase that a specific variable has gained within a specific period
and context. For investors, this typically represents the compounded annualized
rate of growth of a company's revenues, earnings, dividends and even macro
concepts - such as the economy as a whole. We can measure the growth in
companies by many ways but the most common method we used is Gordons
growth model. The growth affects the dividends policies that ultimate affects the
cost of capital. In the case of Aramex the growth rate we have found is on average
11% that indicates a good growth of the Aramex.
Profitability:
The impact of capital structure on the profitability and liquidity
matters a lot. If the Debt is more than equity there will be more interest that the
companies will pay and ultimate there will be tax savings. Likewise if there is more
debt there will be more interest expense ultimate result less profits that worsens the
profitability of the companies. In the case of the Aramex during 2007 to 2009 before
crisis the return on capital employed was on average 12% that substantially falls to
3% in 2010. That is because they heavily rely on short term borrowings which
results more current liabilities. The profit margin ratio was 10% on average before
crisis which decreases to 8%.
Conclusion:
The overall effect of crisis on Aramex results worsens its liquidity, profitability and
more reliance on short term borrowings. The major effect was in 2010 when its
ROCE substantially decreases from 13 % to 2 %. Likewise its profit margin also
decreases 10% to 8%. The liquidity is also badly affected in the year of crisis that is
2009. The overall conclusion is that due to the crisis Aramex more rely on its short
term borrowing that is the worst case.
Aramex
2007
2008
W
1
Debt to equity
Debt/ Debt +Equity
2 : 98
2.2 : 97.8
Total Debt
14,707,000
13,056,000
27,763,00
0
15,767,000
11,698,000
27,465,00
0
Equity
1,100,000
,000
1,210,000
,000
Debt
interest bearing debts
Current portion of Debt
W
2
Growth
G= RR* AR
Retention rate = DPS/EPS -1 *100
Accounting Rate of return= Profit/Share capital +
Retained Earnings
W
3
1)
2.0462131
7
0.1818181
82
0.1125417
24
11.107273
25
0.9098360
66
0.1220799
4
Profitability Ratios
Return on capital employed
ROCE= profit before interest and tax/ Capital employed
Capital employed
Total assets - current liabilities
Current liabilities
BOD
Loans and borrowings
other Current Liabilities
11.327149
08
10.659345
26
136529500
0
172043400
0
20191000
13056000
144200000
14300000
11698000
201265000
Trade & other payables

Total Current Liabilities
Profits before tax
Interest
Profits before interest and tax
2)
113175000
12487300
0
150517000
4132000
15464900
0
179945000
3442000
18338700
0
Net Margin Ratio

Profit/Sales *100
Profits
Sales
W
4
132093000
30954000
0
Liquidity Ratios
Current Ratio
Current Assets /Current Liabilities
Current Assets
Bank and cash balances
Trade Receivables
other receivables
Total Current Assets
Current Liabilities
BOD
Receivable Days
Trade receivables/credit Sales*365
Trade receivables
Sales
Payables Days
Trade Payables/Cost of sales*365
Trade Payables
Cost of Sales
7.9087873
8.1430647
67
%
02
%
141076000
169372000
178378800
207995400
0
0
2.11: 1
6.31 :1
238856000
319152000
95985000
65399300
0
343827000
346270000
98009000
78810600
0
20191000
13056000
144200000
132093000
30954000
0
14300000
11698000
201265000
113175000
12487300
0
65
319152000
17837880
00
61
346270000
20799540
00
51
13209300
0
94813200
0
40
113175000
10419710
00
W
5
Asset Structure
Current Assets / Fixed Assets
Current Aseets
Trade Recievales
other recievables
Fixed Assets
Other tangible assets
AFS assets
Other non current Assets
Deferred Tax Assets
Property Plant & Equipment
Investment in associate
investment in joint Ventures
Intangible assets
Goodwill
Total Fixed Assets
W
6
74.546467
51
238856000
319152000
95985000
65399300
0
343827000
346270000
98009000
78810600
0
3493000
17040000
1496000
2428000
192986000
2776000
3301000
4350000
964000
240367000
803399000
10223380
00
805443000
10572010
00
Growth
Growth
G= RR* AR
Retained Earnings
W
7
63.970330
75
2.0462131
7
0.1818181
82
0.1125417
24
11.107273
25
0.9098360
66
0.1220799
4
Profitability
Capital employed
Current liabilities
BOD
11.32
10.659345
26
136529500
0
172043400
0
20191000
13056000
144200000
14300000
11698000
201265000

Profits before tax
Interest
Net Margin Ratio

Profit/Sales *100
Profits
Aramex
132093000
30954000
0
113175000
12487300
0
150517000
4132000
15464900
0
179945000
3442000
18338700
0
7.9087873
8.1430647
67
%
02
%
141076000
169372000
178378800
207995400
0
0
2009
2010
W
1
Debt to equity
1.03 :
98.97
1.09 :98.9
Total Debt
6,463,000
7,482,000
13,945,00
0
6,503,000
6,715,000
13,218,00
0
Equity
1,331,000
,000
1,464,100
,000
Debt/ Debt +Equity

Debt
W
2
Growth
G= RR* AR
Retained Earnings
11.655990
45
0.8768115
94
0.1329360
89
11.815120
95
0.8935251
8
0.1322304
2
3
1)

Capital employed
Current liabilities
BOD
Profits before tax
Interest
2)
2.9692901
73
169091600
0
827396400
0
8951000
7482000
232438000
118435000
36730600
0
6863000
6715000
263400000
129148000
40612600
0
218163000
1830000
21999300
0
244512000
1166000
24567800
0
Net Margin Ratio

Profit/Sales *100
Profits
Sales
W
4
13.010285
55
Liquidity Ratios
Current Ratio
Current Assets
Trade Receivables
other receivables
Current Liabilities
BOD
Receivable Days
10.545362
10.378725
93
%
82
%
206772000
229577000
196078600
221199600
0
0
2.553 : 1
2.60 : 1
501862000
349060000
86995000
93791700
0
554739000
404028000
97699000
10564660
00
8951000
7482000
232438000
118435000
36730600
0
6863000
6715000
263400000
129148000
40612600
0
Trade receivables/credit Sales*365

Trade receivables
Sales
Payables Days
Trade Payables
Cost of Sales
W
5

Fixed Assets
AFS assets
Deferred Tax Assets
Intangible assets
Goodwill
Total Fixed Assets
51
11843500
0
85274500
0
46
129148000
10218300
00
83.719790
59
85.892103
36
501862000
349060000
86995000
93791700
0
554739000
404028000
97699000
10564660
00
5730000
4965000
18000
1476000
246917000
0
3988000
39000
2530000
332144000
7772000
19165000
8927000
863199000
12299920
00
853427000
11203050
00
Growth
Growth
G= RR* AR
Retained Earnings
W
7
67
404028000
22119960
00
Asset Structure
Current Assets
Trade Recievales
other recievables
W
6
65
349060000
19607860
00
Profitability
11.655990
45
0.8768115
94
0.1329360
89
11.815120
95
0.8935251
8
0.1322304
2
ROCE= profit before interest and tax/ Captial employed
Capital employed
Current liabilities
BOD
Profits before tax
Interest
Net Margin Ratio

Profit/Sales *100
Profits
Aramex
13.010285
55
2.9692901
73
169091600
0
827396400
0
8951000
7482000
232438000
118435000
36730600
0
6863000
6715000
263400000
129148000
40612600
0
218163000
1830000
21999300
0
244512000
1166000
24567800
0
10.545362
10.378725
93
%
82
%
206772000
229577000
196078600
221199600
0
0
2011
2012
W
1
Debt to equity
1.45 :
98.55
1.8 : 98.18
9,637,000
12,366,000
12,001,000
15,704,000
Total Debt
21,638,00
0
28,070,00
0
Debt/ Debt +Equity

Debt
Equity
1,464,100
,000
W
2
Growth
G= RR* AR
Retained Earnings
W
3
1)

Current liabilities
BOD
Profits before tax
Interest
10.432176
02 %
0.8862275
45
0.1177144
19
12.979902
36 %
13.998305
36 %
198769600
0
215148900
0
19445000
12001000
310417000
163222000
50508500
0
11329000
15704000
380451000
156193000
56367700
0
259757000
1756000
25800100
0
298330000
2842000
30117200
0
Net Margin Ratio

Profit/Sales *100
Profits
Sales
W
4
12.458555
04 %
0.9326388
89
0.1335839
11
Capital employed
2)
1,464,100
,000
Liquidity Ratios
Current Ratio
Current Assets
Trade Receivables
9.3920539
8.7432609
52 %
02 %
241958000
271512000
257619900
310538600
0
0
1.94 :1
1.867 : 1
314011000
499671000
333673000
583467000
other recievables
Current Liabilities
BOD
Recievable Days
Trade recievables/credit Sales*365
Trade recievables
Sales
Payables Days
Trade Payables
Cost of Sales
W
5
169048000
98273000
0
135363000
10525030
00
19445000
12001000
310417000
163222000
50508500
0
11329000
15704000
380451000
156193000
56367700
0
71
69
58346700
0
31053860
00
499671000
25761990
00
49
16322200
0
12212610
00
40
156193000
14410000
00
66.414407
3
63.302244
65
314011000
499671000
169048000
98273000
0
333673000
583467000
135363000
10525030
00
Asset Structure
Current Assets
Trade Recievales
other recievables
Fixed Assets
AFS assets
Deffered Tax Assets
Intengible assets
Goodwill
Total Fixed Assets
0
2219000
72000
2555000
445360000
1271000
18108000
0
101010900
0
14796940
00
0
9205000
2824000
569876000
936000
53764000
26906000
999152000
16626630
00
W
6
Growth
Growth
G= RR* AR
Retained Earnings
W
7
12.458555
04
0.9326388
89
0.1335839
11
10.432176
%
02
0.8862275
45
0.1177144
19
12.979902
36
13.998305
%
36
198769600
0
215148900
0
19445000
12001000
310417000
163222000
50508500
0
11329000
15704000
380451000
156193000
56367700
0
259757000
1756000
25800100
0
298330000
2842000
30117200
0
Profitability
Capital employed
Current liabilities
BOD
Profits before tax
Interest
Net Margin Ratio

Profit/Sales *100
Profits
9.3920539
8.7432609
52
%
02
%
241958000
271512000
257619900
310538600
0
0

Factors Affecting Capital Structure of Listed Companies

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Factors Affecting Capital Structure of Listed Companies

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The Factors that affects the capital structure of the

How can the company maximize returns on its asset base?

Trade & other payables

Net Margin Ratio

Trade & other payables

Net Margin Ratio

Debt/ Debt +Equity

Return on capital employed

Net Margin Ratio

Trade receivables/credit Sales*365

Total Current Assets

Net Margin Ratio

interest bearing debts

Current portion of Debt

Debt/ Debt +Equity

Total assets - current liabilities

Net Margin Ratio

Net Margin Ratio

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