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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
Loans and borrowings
other Current Liabilities
Trade & other payables
Total Current Liabilities
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
Bank and cash balances
Trade Recievales
other recievables
Total Current Assets
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
Retention rate = DPS/EPS -1 *100
Accounting Rate of return= Profit/Share capital +
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
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

11.32

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

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
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

Profitability Ratios

11.655990
45
0.8768115
94
0.1329360
89

11.815120
95
0.8935251
8
0.1322304
2

3
1)

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
Trade & other payables
Total Current Liabilities
Profits before tax
Interest
Profits before interest and tax

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 /Current Liabilities
Current Assets
Bank and cash balances
Trade Receivables
other receivables
Total Current Assets
Current Liabilities
BOD
Loans and borrowings
other Current Liabilities
Trade & other payables
Total Current Liabilities
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*365
Trade Payables
Cost of Sales
W
5

Total Current Assets


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

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
Retention rate = DPS/EPS -1 *100
Accounting Rate of return= Profit/Share capital +
Retained Earnings

W
7

67
404028000
22119960
00

Asset Structure
Current Assets / Fixed Assets
Current Assets
Bank and cash balances
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

Profitability Ratios
Return on capital employed
ROCE= profit before interest and tax/ Captial employed
Capital employed
Total assets - current liabilities
Current liabilities
BOD
Loans and borrowings
other Current Liabilities
Trade & other payables
Total Current Liabilities
Profits before tax
Interest
Profits before interest and tax

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

interest bearing debts

9,637,000

12,366,000

Current portion of Debt

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
Retention rate = DPS/EPS -1 *100
Accounting Rate of return= Profit/Share capital +
Retained Earnings

W
3
1)

Total assets - current liabilities


Current liabilities
BOD
Loans and borrowings
other Current Liabilities
Trade & other payables
Total Current Liabilities
Profits before tax
Interest
Profits before interest and tax

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

Profitability Ratios
Return on capital employed
ROCE= profit before interest and tax/ Capital employed
Capital employed

2)

1,464,100
,000

Liquidity Ratios
Current Ratio
Current Assets /Current Liabilities
Current Assets
Bank and cash balances
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
Total Current Assets
Current Liabilities
BOD
Loans and borrowings
other Current Liabilities
Trade & other payables
Total Current Liabilities
Recievable Days
Trade recievables/credit Sales*365
Trade recievables
Sales
Payables Days
Trade Payables/Cost of sales*365
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 / Fixed Assets
Current Assets
Bank and cash balances
Trade Recievales
other recievables
Total Current Assets
Fixed Assets
Other tangible assets
AFS assets
Other non current Assets
Deffered Tax Assets
Property Plant & Equipment
Investment in associate
investment in joint Ventures
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
Retention rate = DPS/EPS -1 *100
Accounting Rate of return= Profit/Share capital +
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
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
Trade & other payables
Total Current Liabilities
Profits before tax
Interest
Profits before interest and tax

Net Margin Ratio


Profit/Sales *100
Profits

9.3920539
8.7432609
52
%
02
%
241958000
271512000
257619900
310538600
0
0