profitability

BBPW3203 FINANCIAL MANAGEMENT II

OUM BUSINESS SCHOOL

SEMESTER SEPTEMBER 2015

BBPW3203

FINANCIAL MANAGEMENT II

MATRICULATION NO : 730120055386001

IDENTITY CARD NO. : 730120055386

TELEPHONE NO. : 013-2214277

E-MAIL : [email protected]

LEARNING CENTRE : Bangi Learning Centre

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Contents

Table of Contents

Introduction of selected companies

PROTASCO BERHAD (“Protasco”) ................................................................................ 4-5

COCOALAND HOLDINGS BERHAD (“Cocoaland”) .................................................... 6-8

Capital Structure

Equity Financing and Debt Financing ................................................................................ 9

Ratios ................................................................................................................................ 10

Capital Structure Ratio of selected companies ............................................................. 11-12

Theoretical Considerations ................................................................................................ 13

Protasco & Cocoaland

Companies’ Capital Structure Ratios and Theories from Scholars ................................... 14

Capital Structure and Financial Performance

Differences and Relations ............................................................................................. 15-19

Summary ........................................................................................................................... 20

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Appendix

Protasco

Statement of Financial Position At 31 December 2013 ................................................ 21-22

Statement of Profit or Loss and Other Comprehensive Income for the Financial Year

Ended 31 December 2013 ................................................................................................. 23

Cocoaland

Consolidated Statement of Financial Position as at 31st december 2013 .......................... 24

Consolidated Statement of Comprehensive Income for the year ended

31st december 2013 .......................................................................................................... 25

References ......................................................................................................................... 26

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INTRODUCTION

The purpose of this paper is to analyse the capital structure of two public listed companies,

which comparisons are made from the respective audited consolidated financial report in year

of 2012 and 2013. Cocoaland Holdings Berhad and Protasco Berhad the companies listed

on the Main Board of the Kuala Lumpur Stock Exchange (KLSE) are used for the

aforementioned purposes.

PROTASCO BERHAD (“Protasco”)

The company was founded by Hasnur Rabiain bin Ismail and Chong Ket Pen in 1991 which

its headquarters was in Kajang, Selangor. Listed on the Main KLSE Board in 2003. Main

office located at 87, Jalan Kampung Pandan, 55100 Kuala Lumpur. It has more than 1,200

employees throughout Malaysia. Recorded RM480 Million of revenue in 2003 and recorded

as much as RM969.7Million in 2013. It operates in four segments: Construction Contracts,

Engineering and Consultancy Services, Training and Education and Trading.

Business Activities

Construction Contracts

- Experts in design, constructs, upgrade and maintenance of roads, bridges and building

services. Act as a developer and contractor for the “Perumahan Penjawat Awam 1Malaysia”

in Federal Territory of Putrajaya and few “Perumahan Mampu Milik 1Malaysia) projects.

Engineering and Consultancy Services

- Provides site investigations, soil testing, slope studies, geotechnical and structural forensic

engineering services. It offers consultations and solutions, materials certifications, product

listing, research and development.

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Training and Education

- Its Infrastructure University Kuala Lumpur (“IUKL”) offers quality training services and

range of educational programmes. IUKL collaborates with local and international universities

as well as the industrial partners, aiming to enhance the students’ learning experience.

Trading and Manufacturing

- Specialises and complements the maintenance, construction and property developments

segment. Focus on trading and distribution of products by reputable local and international

suppliers from pavement related materials to construction building materials, petroleum-based

products and few others.

VISION AND MISSION

Target to be a multi-billion dollar entity in term of market capitalisation for return on

investment; to be one of employees’ choices and performed beyond customers’ expectations.

To continuously contribute to infrastructure development and nation-building as well as to

become a leader in property development sector and deliver a superior value in both

residential and commercial market.

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Figure 1.2 Corporate Structure – Protasco Berhad

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COCOALAND HOLDINGS BERHAD (“Cocoaland”)

The Group was incorporated in 2000, listed on Second Board in 2005 and the Main Board a

year later under “Consumer” products. The registered office is located at LOT 6.08, 6th Floor,

Plaza First Nationwide, No. 161, Jalan Tun H.S.Lee, 50000 Kuala Lumpur. Hiring a total of

745 employees, the Group’s revenue recorded as high as RM 254.4Million in 2013, 14%

increased from preceding year.

Business Activities

It focuses on manufacturing and trading range of products. Chocolates, gummies, cookies,

beverages, pudding, jelly, snacks and cookies are to name a few. The brand name like Koko

Jelly and Lot100 are well known especially among children and the teenagers.

Vision and Mission

To expand the production lines thus to increase revenue in gummy in line with improvised

sales mix aiming for much higher recorded revenue in years to come. To be an international

market other than the existing in Asia. It will continuously be focusing on producing high

quality and healthy products as target to create better awareness of its brands and products.

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Figure 1.1 Corporate Structure - Cocoaland Holdings Berhad

CAPITAL STRUCTURE

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COCOALAND HOLDINGS

BHD

Cocoaland Ind. S.B

L.B. Food S.B

B Plus Q S.B

M.I.T.E. Food Ent.

S.B

Cocoaland Retail S.B

LOT 100 Food Co. Ltd & CCL F&B S.B

Main manufacturer, incorporated in 1990

Established in 1984, primary trading role, responsible in export market of the Group

Incorporated in 1985

Established in 1980, wholly-owned subsidiary of B Plus Q

Engaged in distributing, trading and marketing

Sales role of L.B Food and B Plus Q


– Equity Financing and Debt Financing

Capital structure is the proportion of the Debt and Equity composition. Debt which is usually

Bonds whilst Equity, usually stocks has different terms and rights bestowed on the owners

themselves. If equity increases, the protections to creditors increase and cost of carrying debts

will be lesser. Lenders such as bankers and trade creditors, evaluate customers’ positions

based on the capital structure. When a firm foresee expansions, the capital requirement will

consequently be high hence funds via equity or debt financing will soon be decided.

Equity Financing

It is the funds from respective shareholders that consists of contributed capital (initial

funds for an exchange for shares of stock or ownership) and retained earnings

(represents carried forward profits from years previously).It has no guaranteed rate of

return thus it is the basic risk capital of the company. Equity capital has uncertainty

returns but do have probability of returns far exceeded those of debt-holders.

Debt Financing

It refers to borrowed money that is at work in the business. The long-term bond is the

safest type because the firm allowed to having longer tenure to repay, while

continuing paying the interest expense. The returns are fixed and repayments are

guaranteed. The advantage of Debt Financing is the tax relief and higher Shareholders

Funds. The disadvantages are due to increased leverage in respect of higher and

accumulated debt ratio.

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– Ratios

Debt-Equity ratio = Total Liabilities

TotalShareholder s' Equity ×100

This ratio is the most important of all capital adequacy ratios as it focuses on the relationship

of debt liabilities as a component of a firm’s total capital base. Investors are relying on this

ratio to identify the level of company’s leverage which seen to be a true measure of the

riskiness level. It gives an indication of how much they have committed to the company

against to what the shareholders have. Lower percentage shows that a company is using less

leverage and has a stronger equity position.

Debt ratio = Total Liabilities

Total Assets×100

This ratio, on the other hand, indicated the percentage of assets financed by debt rather than

equity. It is used to determine the financial risk of the firm and measure the total assets

owned by the creditors. A ratio which are higher than 1 indicate considerable proportion of

assets being funded with debt but lower than 1 show that a bulk of assets funded by equity. If

not being able to serve the repayment, the investors will avoid from choosing the company.

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Ratio/Financial YearPROTASCO BERHAD

2012 2013Debt-Equity Ratio 298,805,000 ÷ 400,516,000 = 0.7461 = 75% 453,955,000 ÷ 425,992,000 = 106.56 = 107%

The ratio shows that the creditor of Protasco Berhad This indicate that Protasco’s owes RM1.07 to its debt holders

Total LiabilitiesTotal Equity x 100

provided 75 cents of company’s assets for every RM1 as compared to only RM1 by its shareholders. Being over-

assets provided by the shareholders (0.75:1.00). It shows leveraged will not attract lenders to extend further credit and

that the company did not rely much on its debt financing.

difficult to make new loans due to existing high financial risks.

Debt Ratio 298,805,000 ÷ 699,321,000 = 0.4273 = 43% 453,955,000 ÷ 879,947,000 = 0.5159 = 52%The creditors provided 43 cents of Protasco’s asset as The company’s assets was financed by its creditors with only

Total Liabilities

Total Assets x 100 compared to RM1 asset provided by the owner capital. 52 cents for each RM1of its every asset value. This is contradict

Like Debt-Equity ratio, the company is obviously rely on

to Debt-Equity ratio which total debt was been used to finance

its internal finance for the additional assets required for the year.

additional capital required as compared to its total net worth.

Figure 1.3 Protasco Berhad – Capital Structure Ratio (Year 2012 and 2013)

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Ratio/Financial Year COCOALAND HOLDINGS BERHAD2012 2013

Debt-Equity Ratio 41,161,128 ÷ 196,159,607 = 0.2098 = 21% 44,512,015 ÷ 207,563,655 = 0.2144 = 21%

The creditors provides 21 cents of assets for every RM1 Minor changes as compared to the preceding year. This assets provided by the shareholders (0.21:1.00). It indicates indicate shareholders' benefited from capital funded by the

Total Liabilities

Total Equity x 100 21% of total loan Group makes against its total available creditors by only 21 cents for two consecutive years by means capital contributed by the shareholders since the Group is of debt taken to finance its operation. This is considered as not in a capital intensive industry healthy BUT at the same time it suggest a conservative management who unwillingly to take risks.

Debt Ratio 41,161,128 ÷ 237,320,735 = 0.1734 = 17% 44,512,015 ÷ 252,075,670 = 0.1766 = 18%

Cocoaland ‘s assets were being financed by debt holders by Only 18 cents creditors’ contribution to the Group’s assets

Total Liabilities

Total Assets x 100 only 17 cents compared to RM1 of its net worth. This is lower

as compared to total funded by the Group’s total equity.

compared to RM1 of its net worth. This is slightly higher as

compared to the preceding year and still lower compared

to total Equity Financing

Figure 1.3 Cocoaland Holdings Berhad – Capital Structure Ratio (Year 2012 and 2013)

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Theoretical Considerations

There are three different theories developed to analyzed alternative capital structures. The

implementation by the management of companies has impact or not at all on its investors and

most importantly, the market value of each company.

TRADITIONALIST THEORIES (YES)

Trade off Theory

The exposure of the companies with various cost (bankruptcy and agency cost) and its

benefits (tax) associated with debt financing. The trade off between costs with its tax benefits

to ensure the debt is at its optimal level that maximises value of the firms. This theory

suggests that there is an impact on the companies’ market value.

Pecking Order Theory

This theory tells that the firms do not have a target amount of debt but the amount of debt

financing employed relies on the profitability of the firm itself. Funds from Retained earnings,

Debt Financing and Equity Financing were used instead. Hence, the firm will strategies its

finance through internal financing; adapt dividends pay-out ratio to opportunity of

investments. This theory also suggests that the impact of capital structure on companies’

market value does exist. Some firm prefers not to use equity due to impact on EPS and share

prices (since undervalued equity would lead to higher levered capital structure).

MODERNIST THEORY (NO)

Modigliani and Miller (M&M)

The value of debt and the equity of the firm depend on the value of assets of business. If debt

financing does not affect the value of the assets, it will not affect the combined value for debt

and equity issued against those assets, which known as Modigliani and Miller proposition.

Unlike the traditionalist theories, M & M concluded that in the perfect market the theory, the

decision on the capital structure is irrelevance. The firm’s value do not depends on the ability

of its assets to create value. M & M suggest that firm to take taxation into consideration and

proposed to employ as much debt as possible.

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PROTASCO AND COCOALAND

- Companies’ Capital Structure Ratios and Theories from Scholars

The pecking order theory is one of the most influential theories of corporate finance. Unlike

M & M, under this theory, the costs of accessing debt markets were high (higher interest rate).

In view of that fact, both companies expand business activities via access to equity market.

The firms preferred Equity Financing (equity funding), which those are in accordance with

the pecking order theory. The last alternative would be to issue new equity by which Protasco

did in 2013. However, its Debt ratio indicates that for every RM1.00 asset value of Protasco,

were contributed by its owner capital than only 52 cents from the external investors.

Contradict to Protasco, the Cocoaland seems to not really depend so much on its external

finance. The additional capital requirements were being funded mostly by its net worth rather

than from utilisation of its equity.

The ratios for both companies appear to be consistent with pecking order theory whereby

lower Debt ratio as compared to Debt-Equity ratio for both except for Protasco for the year of

2013.

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CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE

- Differences and Relations

Many firms are taking credit rating as an important tool of communication on capital structure

decisions. The preferences made by the management for investors via internal financing, debt

or equity.

As for Financial performance, it determines a firm’s ability to generate profits through the use

of its assets. It is critical to any firms’ success and adaptive to changes in its market and

industry. Common measures include liquidity, financial efficiency, solvency, profitability,

repayment capacity. The relationships that exist between these measures help to suggest the

type of action to take in order to make improvements in financial performance.

To evaluate the Financial Performance of both companies, the Return on Equity (ROE) and

Return on Assets (ROA) are used as index for firm profitability in this analysis:

ROE = Profit After TaxTotalShareholder s' Equity

× 100

ROE measures efficiency of the firm in generating income from its total equity. It is a useful tool to measure the profitability from the firm’s perspective since the stockholders considered as its real owner.

ROA = Profit After TaxTotal Assets

× 100

ROA measure effectiveness of the firm utilises its assets to generate profit.

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http://www.investopedia.com/terms/a/asset.asp

http://www.investopedia.com/terms/f/financialperformance.asp


Figure 1.4 Protasco Berhad – Financial Performance (Year 2012 and 2013)

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Ratio/Financial YearPROTASCO BERHAD

2012Return on Equity (ROE) 71,215,000

400,516,000×100 = 17.78% = 18% 73,029,000

425,992,000×

The ROE indicates that for every RM1 of its equity the An insignificant changes to its ROE as the company has only PAT

Total Equity×100 company has generated 18 cents of PAT for the year. generated 17 cents of PAT from every RM1 of its equity.

Or only 18% returns on all its equities. Rate of return on investment of the common stockholders

is only 17%

Return on Assets (ROA) 71,215,000

699,321,000× 100 = 10.18% = 10% 73,029,000

879,947,000×

PATTotal Assets

×100The ROA, on the other hand, able to generate 10 cents of The ROA was lower compared to the preceding year by which

PAT by utilising RM1 from its overall assets. 8% lower as the company was able to generate only 8 cents from every and

as compared to the returns from its equity. each RM1 of its net worth. And was 9% lower compared to its

rate of return from investment


Ratio/Financial YearCOCOALAND HOLDINGS BERHAD

2012 2013Return on Equity (ROE) 21,218,139

196,159,607×100 = 10.82% = 11% 22,050,182

207,563,655× 100 = 10.62% = 11%

Group’s efficiency to generate profit from its total equity is The ratio remains unchanged from the preceding year. The PA T

Total Equity×100 at 11% . For every RM1 of its equity the Group has proportion of its Profit After Tax over its total equity were

generated 11 cents of PAT. almost the same as compared to last year

Return on Assets (ROA) 21,218,139

237,320,735× 100 = 8.94% = 9% 22,050,182

252,075,670× 100 = 8.75% = 9%

PATTotal Assets

×100 Lower as compared to ROI ratio. For every RM1 of totalThe proportion of increase in PAT and Total Assets are almost

common assets, the Group were able to generate 9 cents of PAT.

the same Year-on-Year. Thus, the ratio remain unchanged.

Figure 1.5 Cocoaland Holdings Berhad – Financial Performance (Year 2012 and 2013)

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Capital Structures versus Financial Performances

2012 (%) 2013 (%)Debt-Equity 74.61 106.56

ROE 17.78 17.14

Debt-Asset 42.73 51.59ROA 10.18 8.30

2012 (%) 2013 (%)Debt-Equity 20.98 21.44

ROE 10.82 10.62

Debt-Asset 17.34 17.66ROA 8.94 8.75

Figure 1.6 Protasco Berhad and Cocoaland Holdings Berhad

~ Capital Structure and Financial Performance

The Capital Structure and the Financial Performance of both companies show an inverse

relationship for two consecutive financial years. Higher Debt-Equity/Debt ratio resulted to

lower ROE/ROA ratios respectively. In other words, the financial performances of both

companies were recorded lower as a result from higher capital structure made for the year.

18

COCOALAND

PROTASCO


However, both recorded higher Debt-Equity and ROE as compared to Debt ratio and ROA. Both

companies increased its total capital requirements via Equity Financing. It implies that the

capital structure have negatively affects its financial performance and in this case its rate of

return from investment and utilisation of assets.

If by introducing debts in its capital structure, it influenced the proportion of risks in investment

which give a direct impact on each of the company’s shareholders. Publicly Traded Firms’ such

as Cocoaland and Protasco’s common stock is the most utilised form of capital.

Nonetheless, investors should use both sets to get the complete picture of a company’s financial

position. This is also crucial for investors as it helps them to understand the impacts and

consequences on investment they made.

SUMMARY

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Generally, there are two forms of capital namely equity capital and debt capital which stands on

its own advantages and disadvantages respectively. The debt-equity ratio percentage provides a

much more dramatic perspective on a company's leverage position than the debt ratio percentage.

Capital structure ratios reveal these facts which analysts should pay attention to.

Both companies follow the pecking order theory, whereby the total common stock or internal

financing were chosen. The decision was driven by the fact that it is the easiest, less risky and

takes the least effort. Practically, firms may be concerned about their ability to access markets

and achieving fair pricing which these decisions often feed into their capital structure decisions.

Companies expansions will acquire additional capital in the form of debt and equity, by which of

course, each has cost attached to it. Should the firm being funded by too much debt, thus, higher

interest are to be made and also its obligation to serve debts. Incorrect capital structure will

jeopardised the firm positive position. However, when both are blended and employed perfectly,

will increase and magnify the rate of returns for their equity as well as assets.

A low level of debt and a healthy proportion of equity in a company's capital structure is an

indication of financial strength. Prudent use of leverage increases the financial resources which

avail for growth and expansion. How thriving this formula may seem, it does require a company

to adopt best decision with its various borrowing commitments.

APPENDIX

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Kennon,J. (2006). An Introduction to Capital Structure. [Online]. Available:

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http://www.protasco.com.my/

http://www.cocoaland.com/

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