Short term and long term debts of company
With the increasing changes of financial analysis and effective business functioning, it is considered that financial analysis tools should be used to evaluate the viability of company’s financial performance. This report has shown why effective capital structure is required to maintain in the business to make effective business functioning.
it is diversified industrial company that is indulged in providing operating automotive leather and property. This company has been running international business.
Scaffer Corp Ltd Company has stable short term debt in both years of AUD $ 15 million in 2016 and 2017. It shows that company has moved to raise its finance from equity capital and long term debt (Scaffer Corp Ltd 2016).
Particular |
2016 |
2017 |
Industrial average debt |
AUD in Million |
AUD in Million |
AUD in Million |
|
Short term debts |
15 |
15 |
18 |
45 |
40 |
46 |
IN addition to this, long term debt of Scaffer Corp Ltd was 45 which decreased to 40. However, the industrial average long term debt is AUD $ 46 million which is far more as compared to Scaffer Corp Ltd long term debt. This has shown that company has maintained very low level of financial leverage in business. This reduces the financial leverage and risk associated with it (Scaffer Corp Ltd 2016).
The debt structure of Scaffer Corp Ltd is stable in short term long in 2017 and its long term debt has gone down by AUD$ 5 million in 2017. In addition to this, industry average total debts of company is 64 which is comparatively very high as compared to the debt structure of Scaffer Corp Ltd. The equity capital of company was 131 in 2016 which decreased to 129. However, the equity capital of industry average is 113 which show that company has maintained higher equity capital which will surely increase the overall cost of capital (Scaffer Corp Ltd 2016).
Particular |
2016 |
2017 |
industry average capital structure |
$”000 |
$”000 |
||
Total debts |
60 |
55 |
64 |
Equity share capital |
71 |
74 |
68 |
Total capital |
131 |
129 |
113 |
On the other hand, the industry debt to equity structure is around 113. It has been reflected AUD $ 113 million is the average industrial capital. It has been shown that company should increase its overall capital (Scaffer Corp Ltd 2016).
Scaffer Corp Ltd has managed effective capital structure as compared to its industry debt to capital. It has been evaluated that Scaffer Corp Ltd has maintained stable short term debt. But industrial short term debt is AUD $ 64 million which is 400% time more as compared to data shown by Scaffer Corp Ltd. Long term debts of Scaffer Corp Ltd was 45 which decreased by AUD $ 5 million in 2017. In addition to this, company has maintained AUD $ 18 million less long term debt as compared to its industry average debt.
Particular |
2016 |
2017 |
Industrial average debt |
$”000 |
$”000 |
$”000 |
|
Short term debts |
15 |
15 |
64 |
Long term debts |
45 |
40 |
68 |
(Bloomberg, 2017).
Computation of cost of debt is 5%
Computation of cost of debt |
Amount |
Interest payment |
3 |
Long term debt and short term debt |
60 |
Tax payment |
30% |
Cost of debt |
5% |
(Scaffer Corp Ltd 2016).
Cost of equity – It is the amount of cost which is given by company to its shareholders for using their money in business.
Computation of cost of equity of company |
|
CAPM method |
|
RF |
1.58 |
RM |
-3% |
Beta |
0.19 |
Cost of equity |
127% |
(Bloomberg, 2017).
Evaluate and discuss your company’s revenue, earnings, EPS, dividends and growth Expectations.
It is considered that company has increased its revenue by AUD $ 3 million as compared to its last year data. In addition to this, net profit of company has been stable since last year. In addition to this, company has paid AUD $ 5 million dividend in both years that reflects that company has been creating value for its shareholders investment (Bloomberg, 2017).
Particular (AUD in million) |
2016 |
2017 |
Revenue |
208 |
210 |
Earning |
6 |
6 |
EPS |
0.42 |
0.41 |
Dividend |
5 |
5 |
Consistency of debt structure of company
(Bloomberg, 2017).
After evaluating all the data, it could be inferred that as compared to last 10 years, company has increased its overall revenue by 100%. It has been observed that company will increase the overall revenue by 100% in 2024.
Growth Expectation |
Amount of revenue based on trend |
2014 |
253 |
2015 |
242 |
2016 |
245 |
2017 |
258 |
2018 |
279 |
2019 |
275.8 |
2020 |
282.6 |
2021 |
295.3733333 |
2022 |
304.4133333 |
2023 |
313.4533333 |
2024 |
322.4933333 |
Computation of PE ratio |
|
EPS of the company |
0.41 |
MPS of Company |
16.4 |
PE ratio |
40 |
In this industry PE ratio has been taken into consideration to identify the expected market price of the share of company (Bloomberg, 2017).
PE Multiple Valuation |
|
PE ratio of Competitor |
70 |
EPS of the company |
0.41 |
MPS of Company |
28.7 |
Computation of PE ratio of company
Computation of PE ratio |
|
EPS of the company |
0.41 |
MPS of Company |
40.5975966 |
PE ratio |
99.0185283 |
(Yahoo, 2017).
It is evaluated that market price of company is 99.01 which is very high as compared to its market rate (Bloomberg, 2017).
Computation of market price of company through PE ratio
Computation of Market price of the share |
Amount |
D1 |
5 |
Ke |
12% |
G |
0 |
Market price of the share |
40.5975966 |
This market price has been computed by using dividend growth model
Dividend growth model-D1/KE-G
There are several data and information such as dividend amount, share price index of company and increased value of the assets of company. However, determining the growth rate of company is also depends upon the payment made to shareholders on average basis.
Particular |
Weights |
Cost |
Weighted cost of capital |
Debt |
43% |
4.8% |
2.0% |
Equity |
57% |
12.3% |
7.1% |
WACC |
9.1% |
The tax rate of company is the determined cash outflow which could be reduced by the cost of debt in business. Therefore, the benefits used by company by paying interest expenses are reduced from the cost of overall debt due to its deductible tax expenses (Yahoo, 2017).
Cost of debt is charged on the profit and if not paid within the given time manner by company then may lead to liquidation or winding of company. It is evaluated that interest of debt is mandatory to pay by company to its holders and its rate of interest fixed is less as compared to dividend given by company to its shareholders. In addition to this, higher debt amount may increase the financial leverage. Therefore, cost of debt should be set less as compared to cost of equity due to its various other benefits to holders (Yahoo, 2017).
This could be based on the bifurcation of the current liabilities. If current liabilities are consisted of the short term debts only then its cost of current liabilities should be included in the cost of overall capital. In addition to this, in other case for other current liabilities it should not be included.
Pros |
Cons |
It reduces the overall cost of capital of company. Current liabilities provide money to business indirectly and save its opportunity cost. |
The actual cost cannot be determined. Only short term debts cost is undertaken for its cost of capital calculation. |
It reflects the exact amount of cost of capital based on its proportionate funding in different parts of business (Ondraczek, Komendantova and Patt, 2015).
This is applied in investment making decision by assigning the particular weight to the amount of capital engaged in the business. For instance, 20% in equity 30% in debt 10% in preferences share.
Company has used its WACC method in its investment decision. Company has two projects one is to invest in its own business to expand its business activities and another one is to indulge in strategic alliance with other partners. The above give image reflects the use of WACC method.
Particular |
2016 |
2017 |
Industrial average debt |
$”000 |
$”000 |
||
Total debts |
60 |
55 |
64 |
Equity share capital |
71 |
74 |
68 |
Total capital |
131 |
129 |
132 |
It is evaluated that Scaffer Corp Ltd has maintained effective debt to capital structure. However, as compared to its industry average, company has maintained low level of financial leverage in its business.
Identifying the optimum capital structure in particular company is mist. It depends upon the several factors and each and every organization has its different level of optimum capital structure. It is depended upon various factors such as risk, return, turnover, and investment in fixed assets of business. However, 30:70 is the ideal capital structure. The market conditions of company are sluggish therefore, in order to maintain effective financial leverage company should have 30 debts to 70 equity in company.
In this part of the report, it is analyzed that company has managed increasing overall all revenue since last five years. This company has reduced its overall cost of capital by maintain effective capital structure. The share price of company has also increased by average 35% since last five years in market. This has shown that company has increased its overall business effectiveness. Nonetheless, company has operated its business more efficiently than its market competitors.
After identifying the various factors and sluggish market condition, it is observed that company has provided best quality of services to its clients. In addition to this, company has established harmonization in its IFRS rules and Australian GAAP standards while reporting its financial statements with the authority.
The main uniqueness of company is to provide effective quality of services and Airline related products to its clients. Company has charged its overall cost of products and services at very low cost. Company has created core competency in product differentiation and cost leadership.
Conclusion
There are several factors which have been analyzed in this report. It is observed that this company has faced drastic loss due to sluggish market condition. However, if company could maintain effective capital structure then it could maintain low level of cost of capital and effective business functioning.
References
Bloomberg, 2017 retrieved on 16th October, 2017 from www.bloomberg.com.au
Bloomberg, 2017, government security retrieved on 16th October, 2017 https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia
Ondraczek, J., Komendantova, N. and Patt, A., 2015. WACC the dog: The effect of financing costs on the levelized cost of solar PV power. Renewable Energy, 75, pp.888-898.
Scaffer Corp Ltd 2016, annual report, retrieved on 16th October, 2017 from https://www.schaffer.com.au/shareholders-investors/annual-half-yearly-reports/
Yahoo finance, 2017 retrieved on 16th October, 2017 from https://in.finance.yahoo.com/