Ownership Structure And Corporate Governance Firm Value

Snapshot of company

Discuss about the Ownership Structure Corporate Governance Firm Value.

Acrux Company is having a history of 20 years it was established in the year 1998. Acrux Company works in the industry of pharmaceutical and generates a major portion of its revenue by developing and commercializing of pharmaceuticals. This company is having code “ACR” on the Australian stock exchange. The company is having business in US, Australia, and Europe. Company’s market capitalization is of AUD 28.309 million and stock price of the organization on ASX is AUD 0.17 17 (Yahoo 2018).

Ownership of the organization holds by the persons who invest in the company with the expectations of profits and have right on the profits of the organization after paying all external obligations of the organization. In the company, such ownership is held by the shareholders of the company. On the other hand governance of the organization holds by the persons who manage the operating and other activities of the organization. In the company, such governance is held by the board of directors and key management persons of the organization (Lemmon & Lins 2003).

A person alone and with its associates, having voting power and control on the organization for 5% of total voting rights and control in the organization is known as a substantial shareholder (Clearstream 2011). In the  Acrux Company, on 31 August 2017, no person alone and with its associates, having voting power and control on the organization for 5% of total voting rights and control in the organization, hence no person of the organization is substantial shareholder of the organization. In addition to this, on 31 August 2017, no person alone and with its associates, having voting power and control on the organization for 20% of total voting rights and control in the organization.

In the organization, there are 7 directors, details regarding their position, qualification, and shareholding is asunder,

In the  Acrux Company, no person from governance holds substantial interest n company and no other substantial shareholder is mentioned by the organization. Hence it can be concluded that the company is not a family company and a genuine public company.

Liquidity ratios of the organization are an indicator of short-term asset management and short-term solvency of the organization. Current ratio and cash ratio denotes the number of times current assets and cash respectively maintained by the organization comparison of its short-term liabilities (Kimmel, Weygandt & Kieso 2009). In the present case, the company is increasing its. current ratio and cash ratio, which is a good short-term solvency sign. However, having such a higher liquidity ratio shows the vacant resources of the organization. Hence organization should put its vacant liquid resources in a productive profit-making activity.

Ownership governance structure

Long-term solvency ratios show the capital structure of the organization. It denotes the percentage of borrowings in the organization in comparison to the total assets and total equity contribution in the organization. The capital structure of the organization could be created by using equity or debt or both (Lemmon & Lins 2003).  However, each source of funding has different attributes hence enjoying all attributes organization should have all sources of funding. Acurx Limited is only using equity source of funding for the capital structure of the organization and having nil debt equity and debt to total assets ratios.

Asset management ratios of the organization show how assets of the organization are used by the company in sales generated by the way of total assets turnover ratio and fixed assets turnover ratio. In addition to this, it also measures how many times organization turns its inventory, debtors, and payables by the way of inventory turnover, receivable turnover, and payable turnover ratios respectively. Moreover, it calculates a number of days in which debtors of the organization ay their dues to the organization and number of days in which organization pays its due to creditors by the way of receivables and payables days (Weygandt, Kimmel & Kieso 2015).

 In the present case, the organization is generating lower sales from its assets from total assets and fixed assets. In addition to this turnover times of debtors and receivables is also declining. In turn receivables and payable days increasing. All such results are showing inefficient asset management by the organization in the year 2017.

Profitability ratios of the organization are a profit percentage measurement for the organization.  Increasing trend of this ratio must be there for getting a better performance scale. Net profit ratio and operating profit ratio of the organization denotes the percentage of sales which converted by the organization in net profits and operating income respectively. In addition to this, return on assets and return on equity ratios shows the return earned by the organization from assets and equity investment respectively (Weygandt et al. 2010).

In the present case all profitability ratios i.e. net profit ratio, operating profit ratio, return on equity and return on assets showing a declining percentage. Such declining percentage denotes the declining performance of the organization.

Market value ratios are the most important ratios for the person making an investment in the shares of the organization. Book value per share represents the per share value as per the financial records of the organization. Such value is increased with the increase in the accumulated profits of the organization. In the present case, such value is having declining trend which is not a good indicator.

Ownership structure

Earnings per share of the organization show the profits made by the organization for each share in the organization. This ratio is also having a declining trend in the organization. It is not a good indicator.

Source: (ASX 2018), (ASX 2018)

The focus of this report is towards the monthly share price of the Aurux limited company and ASX index movement during last two years. This report will make comment regarding the volatility of Aurux limited company’s stock price.

Findings and explanations

Charts and data regarding the stock price of the organization denote that company is having declining trend in its share price from last two years, however, market index is having an upward movement. In addition to this, it can also be seen that stock price and the index of the stock exchange showing a significant monthly movement.

Conclusion

Significant monthly movement in stock price shows that share price of the organization is volatile (Commonwealth Financial Network 2008). However, opposite trends of share price and the index denote that company is having a negative correlation with the market movements.

On the internet, there is no news regarding the merger, disinvestment and other significant matter related to the organization. Only the reports of the periodical profits were internet available resource regarding the organization which can influence the share price of the organization.

On 20 February 2018, company’s half years profit reports were put on the portal such reports shows a declining in the profits by 238%. Such news results in the decline in the share price of the organization (Intelligent investor 2018). On the same date, a half-yearly presentation was also given by the organization which also puts the negative impacts on the share price of the organization.

The beta of the stock refers is a measure of the stock’s volatility of the organization. The higher beta of the stock denotes that organization’s stock’s price is highly influenced by the market reactions. The positive beta of the stock denotes that stock price of the company’s share is having a positive correlation with the market index.

For example, if the company is having beta 2 then it denotes that when the market goes up by 1% then the stock price of the organization will go up by 2%. In the same way, if the company is having beta -2 then it denotes that when the market goes up by 1% then the stock price of the organization will decline by 2%.

Governance structure

In the present case beta of the Acrux company is 1.23 (Reuters 2018). It denotes that when the market goes up by 1% then the stock price of the organization will go up by 1.23% and when market decline by 1% then stock price of the organization will decline by 1.23%.

The required rate of return is the return rate which is expected by the shareholders of the organization against the beta risk borne by them. Higher the beta risk of the stock higher will be the required rate of return expectations of the organization. In the present case financial measures of the organization required to calculate required rate of return as per capital asset pricing model is as follows,

The required rate of return of the organization as per this model is 11.38% i.e. 4 %+( 6%*1.23).

Conservative investment refers to the investment which could provide the required rate of return to the shareholders of the organization against the beta risk is boned by the shareholders of the organization. In the present case required a rate of return is 11.38%, if the actual return is equal to or higher than 11.38% then such investment is conservative otherwise not.

Weighted average cost of capital of the organization is a measure of total cost borne by the organization from the funding of capital from various sources (Fernandez 2015).  Under the calculation of this measure following steps need to be accomplished by the organization

1. Calculation of after-tax cost of capital for each source of finance
2. Calculation of weight for each source of finance on the basis of funding from that source
3. Application of cost of capital for each source of finance to the respective weight
4. Sum of all applied the weighted cost of capital

In the present case, the organization is having only equity source of capital funding hence weight of this source will be 100% and weighted average cost of capital of the organization will be equal to the cost of equity. In the present case cost of equity of the organization is 11.38% hence weighted average cost of capital of the organization also becomes 11.38%

Investment projects are evaluated by the management of the organization by using various capital budgeting techniques. Under these techniques future expected cash flows of the organization’s prospective investment projects is calculated for concluding the decision of accepting and rejecting the project. Such present value calculation of the organization’s prospective investment is made on the basis of the weighted average cost of capital of the organization. Higher weighted average cost of capital of the organization results in the lower present value of the cash flows. Such lower present value of cash flows makes a prospective investment inefficient to accept.

Fundamental ratios and interpretation

Hence higher weighted average cost of capital of the project may result in losing a profitable project due to higher expectations of the organization to meet costs. Hence organizations should try to maintain the lower weighted average cost of capital so that management of the organization would not lose prospective investment projects having lower profit expectations.

Debt ratios denote the percentage of borrowings in the organization in comparison to the total assets and total equity contribution in the organization. The capital structure of the organization could be created by using equity or debt or both (Lemmon & Lins 2003).  However, each source of funding has different attributes hence enjoying all attributes organization should have all sources of funding. Acurx Limited is only using equity source of funding for the capital structure of the organization. Additionally, the company is not showing any changes in the borrowings during the last two years. Changes in the equity are only because of retained earnings, no other changes like share buyback of share issue are shown by the company

In the year 2017 company’s dividend is declined in addition to this company’s return in the year 2017 was also negative. However, in 2016, the company paid 77% of dividend as a return to shareholders. Hence it can be concluded that organization is having a dividend policy to pay a dividend from the profits of the current year.

Mr. Investor

Dear sir

Subject: recommendation regarding the investment in Acrux Limited

The analysis regarding the various financial and nonfinancial aspects of the company shows following results,

1. Declining profitability
2. Inefficient asset management
3. The higher cost of capital
4. Higher beta
5. Lower return for the shareholders
6. Lower dividends

Hence it is advised to you that you should make an investment in any other ASX listed company in place of Acrux Limited.

Yours truly

Investment adviser

References

ASX 2018, ACR Charting, viewed 1 May 2018, <https://www.asx.com.au/prices/charting/?code=ACR&compareCode=&chartType=LINE&priceMovingAverage1=&priceMovingAverage2=&volumeIndicator=BAR&volumeMovingAverage=&timeframe=monthly>.

ASX 2018, End of Month Values, viewed 1 May 2018, <https://www.asx.com.au/about/historical-market-statistics.htm>.

Clearstream 2011, Disclosure Requirements – Australia, viewed 1 May 2018, <https://www.clearstream.com/clearstream-en/products-and-services/market-coverage/asia-pacific/australia/disclosure-requirements—australia/7380>.

Commonwealth Financial Network 2008, What’s Stock Market Volatility?, viewed 1 May 2018, <https://www.commonwealth.com/RepSiteContent/stock_volatility.htm>.

Fernandez, P 2015, ‘WACC: definition, misconceptions and errors’.

Intelligent investor 2018, Appendix 4D and half yearly report to 31 december 2017, viewed 1 May 2018, <https://www.intelligentinvestor.com.au/company/acrux-ACR-13779/announcements>.

Kimmel, PD, Weygandt, JJ & Kieso, DE 2009, Financial accounting: Tools for business decision making, 5th edn, John Wiley & Sons.

Lemmon, ML & Lins, KV 2003, ‘Ownership structure, corporate governance, and firm value: Evidence from the East Asian financial crisis’, The journal of finance , vol 58, no. 4, pp. 1445-1468.

Reuters 2018, Acrux Ltd (ACR.AX), viewed 1 May 2018, <https://in.reuters.com/finance/stocks/overview/ACR.AX>.

Weygandt, J, Kimmel, P & Kieso, D 2015, Financial & managerial accounting, John Wiley & Sons.

Weygandt, J, Kimmel, P, KIESO, D & Elias, R 2010, ‘Accounting principles’, Issues in Accounting Education, vol 25, no. 1, pp. 179-180.

Yahoo 2018, Acrux Limited (ACR.AX), viewed 1 May 2018, <https://nz.finance.yahoo.com/quote/ACR.AX/>.

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