Course Code: FIN301 Semester: Summer

Group name

‘Money Counters’

Topic: Investigating the impacts of capital structure and financial

performance of First Finance Ltd.

Group Representative / Leader Name: Anika Tabassum Mitul

ID # 1930660

Phone Number: 01770434096

Submitted By

Name ID contribution

1) Anika Tabassum Mitul 1930660 Return on Equity, Introduction,

Conclusion

2) MD. Mahim Azmain Fardin 1810968 Profit Margin, Company Overview

3) Wasiul Haque 1910008 Literature Review

4) Sadia Afrin 1830396 Debt to Equity, Capital Structure

5) Samiha Islam 1821402 Financial Leverage

6) Nabila Tabassum 1930102 Debt to Asset

 Acknowledgement
We would like to express our gratitude to Almighty Allah for providing us with the opportunity and stren
gth to complete the project and submit our report on time. We are very grateful to our respected mentor,
Mr. Anwar Zahid Sir, who provided us with a wonderful opportunity to work on this assignment that
allowed us to learn new things. We'd like to thank him for his assistance with the Assignment. Thanks
also for the suggestions and encouragement, which aided us in completing the report. We'd also like to
express our gratitude to our group members for their hard work and collaboration on this report. Their
dedication and hard work allowed this assignment to be completed on time.
 Letter of Transmittal

Mr. Anwar Zahid

Lecturer
School of Business
Independent University, Bangladesh
Bashundhara, Dhaka.
Subject: Submission of report on “Investigating the impacts of capital structure and financial
performance of First Finance Ltd.”
Sir,
With due respect, we humbly present our final report on “Investigating the impacts of capital structure
and financial performance of First Finance Limited” to you. This assignment was both interesting and
challenging for us. We used the knowledge we had received during the course to accomplish the
assignment. It was a true learning experience to complete this assignment.
We appreciate your thoughtful counsel, collaboration, patience, and suggestions on this assignment,
which will undoubtedly serve as a model for future projects.
We did our best to accomplish the work to the standard that you expected. We sincerely hope that the
assignment will meet your requirements. We sincerely hope you find this report to be informative and
detailed. We will be pleased to answer to any further questions after we have provided all of the
information. Finally, we would appreciate it if you could provide us with some constructive and valuable
advice on our project.

Yours Faithfully
Group: Money Counters
 Table of Contents
Introduction................................................................................................................................................................ 1
Literature Review.......................................................................................................................................................1
Company Overview....................................................................................................................................................3
Debt to Asset Ratio.....................................................................................................................................................4
Debt to Equity.............................................................................................................................................................5
Return on Equity.........................................................................................................................................................6
Degree of Financial Leverage.....................................................................................................................................7
Profit Margin..............................................................................................................................................................9
Conclusion................................................................................................................................................................10
References................................................................................................................................................................ 10
 Introduction
In this report, we have covered a lot of things keeping the First Finance limited company in mind. Here
we have learnt about the financial leverage and capital structure. We have done the industry analysis. We
have looked through the past research papers of scholars from different countries. We have also covered
the different impacts on different countries of the capital structure and financial leverage, the relationship
between capital structure and financial performance. We have looked through the authors views on the
literature view and their impact on the financial industry. We have also found out the degree of financial
leverage, debt to asset ratio debt to equity ratio, return on equity, profit margin for the years 2016 to 2019
of First finance limited to get an overall view on how the company is doing.

Literature Review
Capital Structure
Capital structure is the combination of debt and equity used to source funds for a firm. This is a study on
the effects of capital structure on the profitability of banks. In a fast-paced globalized world this study is
highly relevant. Managers should select capital structure which they feel will result in having the most
firm value because this capital structure will be most beneficial to the organization shareholders.
[ CITATION Ste19 \l 1033 ]

The theory of capital structure traces back to the original works of Modigliani & Miller (1958) which
claimed that the value of the firm is always the constant under different capital structures. In still other
words, no capital structure is any better or worse compared to other capital structure for the firm’s
stockholders.[ CITATION Ste19 \l 1033 ]
By their theory, profit is not affected through leverage since the use of debt or equity financing only
identifies the sources of funds available to a firm and it does not impact the value of a firm. However, this
theory was criticized for ignoring taxation and the assumption that markets will always be perfect.
[ CITATION Ste19 \l 1033 ] Capital structure of companies depends from one organization to another
depending on the industry it is in. It also depends from one geographical location to another.
Below we have analyzed the research papers of renowned researchers and tried to review their work of
capital structure in the banking industry of Sub-Saharan Africa, Jordan and Sri-Lanka.

Sub-Saharan Africa
[CITATION Ana17 \l 1033 ] examines capital structure and bank profitability in Sub-Saharan Africa. The
study has been done using 8 variables, the author tried to find the link between capital structure and
profitability.
The findings suggest that banks' capital structure has a negative impact on the profitability ratio. Which
suggests that banks in Sub-Saharan Africa will be more profitable by reducing their debt ratios and
resorting to equity financing to improve their profitability since higher debt ratios curtails their
profitability.

1
The negative impact of banks' capital structure on their profitability may be a result of higher bankruptcy
cost which exceeds the advantages of debt financing which is brought in the form of tax savings.
Government and policymakers should lower corporate tax rate since it reduces banks profitability. When
taxes are reduced and banks become more profitable, it provides them an environment which creates more
jobs and reduces the unemployment rate in Sub-Saharan Africa.

Jordan
[CITATION Taa13 \l 1033 ] scrutinized the impact of capital structure on performance of banks in Jordan.
The annual financial statements of 12 commercial banks listed on the Amman stock market were used for
this study which covers a period of 5 years from 2007-2011.
The outcome of the study shows that bank performance is to be significantly and positively related with
total debt.
It has been found that Total debt was significant in determining net profit. Debt/equity ratio states that
debt is 8.25 times more than equity capital. The debt/[ CITATION Aki08 \l 1033 ]equity ratio is safe up to 2. It
shows the fact that banks in Jordan are heavily relied on long-term loans in comparison to equity. The
mean value of debt to total funds ratio depicts that 89% of the total capital of listed banks Jordan is made
up of debt. This has focused on the fact that banks are strongly levered institutions.

Sri Lanka
[CITATION Nir12 \l 1033 ] studied the link between capital structure and profitability of 10 Sri Lankan banks
from 2002 to 2009. Ratios like Debt/Equity ratio, Debt/Total Funds, Net Profit, Return on Capital
Employed, Return on Equity and Net Interest Margin were taken into consideration.
Results pointed out that there is a negative link between capital structure and profitability.Furthermore,
the outcome suggests that around 89% of total assets in the banking industry of Sri Lanka are represented
by debt, supporting the fact that banks are highly levered institutions.

Financial Leverage
Financial leverage means the way firms finance their assets through the mixture of a company’s debt
(long-term and short-term), common equity, and preferred equity. [ CITATION Aki08 \l 1033 ]
Leverage, which is calculated using the formula Total debt/ total asset, can be beneficial or
disadvantageous for an organization. It is positive when debt costs are lower than earnings. It is negative
when earnings are less than cost of securing debt. Debt financing is a vital source of capital to support the
finite investment of stockholders. Additionally, it helps to meet the ideal level of return on equity.
Financial leverage enables a greater potential return for the investors which otherwise would have been
available, but the potential loss is also higher. Although theories like optimal financial leverage have been
researched before, there is still no formula which can determine the optimal financial leverage for an
organization. [ CITATION Tia07 \l 1033 ]). A financial leverage decision is designed in such a way that it
maximizes shareholders return and minimizes risk.

2
Below we have reviewed the research papers from renowned researchers related to financial leverage and
the firm’s performance. We have covered countries like Nepal, Nigeria, Ghana.

Nepal
[CITATION SKO21 \l 1033 ]carried out this research on secondary data of 20 commercial Nepalese banks. It
indicates that the more the debt to assets ratio, long-term debt ratio, debt to equity ratio, interest coverage
ratio, and liquidity ratio, more would be the profit of the banks.
Similarly, the debt-assets ratio, debt-equity ratio, interests coverage ratio, board size has positively
impacted the net profit margin. It depicts that higher the debt to assets ratio, debt to equity ratio, interest
coverage ratio, higher would be the net interest margin of the banks. The study also shows that in the
long-term the debt ratio is negatively related to net profit margin. It indicates that the lower the long-term
debt ratio, higher would be the net profit margin.

Nigeria
[CITATION Abu15 \l 1033 ] carried out this research on 23 deposit money banks in Nigeria. Based on the
major findings, the following conclusions were drawn: Nigerian deposit money banks are highly
leveraged financial institutions. This is supported by the calculated high debt- equity and debt ratios.
Banks in Nigeria used very less equity in their capital structure construction. Furthermore, Nigerian
deposit money banks are also generating very low return on equity for their stockholders.
It was also concluded that a significant negative relationship exists between debt- equity ratio and return
on equity, and no significant relationship between debt-asset ratio and ROE existed during the period of
study.
The author suggested that Nigerian banks should stop relying heavily on debts, as an increase in the debt
in the company’s capital structure increases the financial risk and bankruptcy probability.

Ghana
In this study[CITATION Bun21 \l 1033 ] analyzed data of eleven recapitalized banks covering the period from
2008-2017.Among the 11 banks four of them were domestic banks, while the rest of them were foreign.
In this study, [ CITATION Bun21 \l 1033 ]empirically examined the effect of leverage on banks’ profit growth
in Ghana while controlling the size of the bank. This paper took into account two key profitability ratio to
conduct the research. From the analysis, we found that leverage negatively and significantly affects banks'
profitability regardless of the profitability indicator chosen. On the other hand, Bank size had a positive
impact on both profitability measures. In essence, we conclude that while bank size is vital for banks’
profits, leverage hinders the profitability of banks in Ghana. Based on these findings, it was suggested that
banks should look for internal financing to finance their projects and operations given that leverage
hinders their profitability.

3
 Company Overview
The company First Finance Limited (FFL) was founded in 1993. First Finance Limited (FFL) is a pioneer
in the Bangladeshi financing industry. The headquarter of First Finance Ltd. is in Dhaka. On October 5,
1999, Bangladesh Bank granted the Company license to operate as a non-banking financial organization.
Later it became public limited company. The company currently offers lease finance, term loan financing,
real-estate and housing financing, and SME financing. First Finance Ltd. is constantly attempting to
diversify into various financial services with long-term potential. In the year 2001, FFL introduced
Housing and Short-Term Financing to its portfolio of services. First Finance Ltd. has promoted
transportation facilities, SME funding, and Bangladesh Bank Refinancing projects as part of its
diversification policy. First Finance Ltd. has been a major contributor to the development of alternate
term and capital asset financing for the private, commercial, and SME sectors. FFL's management has
recently placed a focus on SME finance, especially for women entrepreneurs, in order to contribute to the
country's economic development. [ CITATION Fir1 \l 1033 ]

Debt to Asset Ratio

Debt-to-Asset Ratio
94%
92%
92%
90%
90% 89%

88%

86%
85%
84%

82%

80%
2016 2017 2018 2019

The debt to asset ratio, also known as the total debt to total assets ratio, is a financial leverage ratio that
evaluates a company's financial leverage. The debt to asset ratio shows how much of the company's assets
are financed by liabilities (debts) rather than assets. This ratio may be used to measure a company's
growth as it buys assets over time. The debt to asset ratio may be used by investors to assess if a company
has sufficient finance to meet its debt obligations and whether it can pay returns on investments.
First Finance Limited's debt to asset ratio was .90 in 2019, indicating that the company's assets are funded
90 percent by creditors or a loan, while the owners contribute 10 percent of the company's asset expenses.
Higher DTA ratios typically signal that a company is in danger of loan default, significantly if interest
rates rise and then the overall graph reveals that the firm's DTA ratio has been growing year after year
since 2016, which is a poor indicator.
The above analysis shows that the company has high leverage and is alarming. [ CITATION Fin3 \l 1033 ]

4
 Debt to Equity

A balance statement is an important resource to evaluate company structure as it includes companies’

assets and liabilities which indicates the percentage of debt and equity in the total capital. Both debt and
equity help in financing a company but each have significant impacts on the company’s characteristics.
Equity is a piece of ownership and Debt is a piece of loan. Debt to Equity shows companies financial
leverage by analyzing total liabilities and shareholder equity.

We know when Debt to Equity is greater than 1 then the company is generating capital assets more from
debt than equity. Here debt to equity ratio of First Finance Limited is greater than 1 and the ratio is rising
till 2018. It means the company is becoming more highly leveraged by debt.
Though a company can generate funds by both debt and equity and debt may be less costly than equity in
most cases. But this increased ratio value may increase the financial risk of the company as it shows the
company’s inability to create cash surplus and stockholders might assume insolvency of the company and
may claim pay back.
So, First Finance should try to generate more funds from Equity and we can see their Debt-to-Equity ratio
reduced a bit in 2019. [ CITATION Fin3 \l 1033 ]

5
 Return on Equity

Return on equity
10% 5%
0%
1 2 3 4
-10%
-20%
-19%
-30%
-40%
-50%
-52%
-60%
-70%
-80% -75%

Return on equity is a metric that tells investors how well a firm/ company is managing the money that its
shareholders have invested. Return on Equity measures the profitability of investments made by owners
of their own capital or shareholders of the firm, and demonstrates how well corporations manage their
own money (net worth). A higher ROE gives us an idea that the profit margin is more. A growing ROE
indicates that a firm is generating more profits while using less capital.
It also demonstrates how well a corporation's management manages shareholder funds. A lesser return on
equity, on the other hand, may suggest that a firm is mismanaged and is reinvesting earnings in ineffective
assets. [ CITATION Mar21 \l 1033 ]Return on equity is found out by dividing the net income by the total
equity.
Here, in the organization First Finance we can see a decreasing rate on the return on equity. From 2017
onwards the rate decreases and goes negative. On 2016, the ROE of First finance was approximately 5%.
due to the negative net income, the ROE for 2017 came -19% and decreased from that year onwards. A
negative ROE is not a good sign for the company. The company's falling return on equity indicates that it
is becoming less effective at generating profits and increasing shareholder value. [ CITATION Mar20 \l
1033 ] Return on equity is negative when a firm makes a loss and hence has no or negative net income.

The ROE is consistently decreasing for the company First Finance limited, 2016 being 5%, 2017 -19%,
2018 -75% and 2019 being 52%. Among the four years, 2018 showed the maximum decreased rate, from
which we can get the idea that the company may be under a huge amount of financial loss.
The rate increased from the year 2018 to 2019, though the % still remains negative but it was doing better
than 2018, from which we can conclude that the company may be in the stage of recovering from the
losses that they had on 2017 and 2018 due to a negative Net income. Return on equity aids investors in
their investment decisions and may be used to compare companies to determine the one that will be better
for investment, by seeing the performance of the consecutive four years of the First Finance Limited, we
may conclude that no wise investors would want to invest in a company that is incurring such a huge loss
and is having a huge amount of negative net income. [ CITATION Fin3 \l 1033 ]

6
 Degree of Financial Leverage
What is Financial Leverage?
Financial leverage refers to the use of borrowing money to purchase more assets to conduct business
operations. A company can use borrowing funds in the lieu of using equity funds that can help the
company to ameliorate the company’s return on equity and earnings per share (EPS), presented that the
increase earnings is greater than the interest expense on the loans. With the help of financial leverage
when a firm borrows money (debt) to finance, they can expect that the profit that gains from the new
assets will surpass the cost of borrowing. Financial leverage exists mainly because of the presence of
fixed financing cost which is interest on the firm’s debt. When a company applies less equity than debt,
the higher will be the financial leverage ratio. Financial leverage is implemented to increase the return on
equity. Although an extensive number of financial leverage leads to the risk of failure, then it turns into
more difficult to return debt. So the main theme of financial leverage is when the proportion of debt to
assets increases, so too does the amount of financial leverage. In most cases, the supplier of the debt will
mark a limit on the quantity of risk it is prepared to take and specifies a limit on the extent of the leverage
it will permit. In the case of a cash flow loan, the general achievement of the company is used to back the
loan. Many firms applies financial leverage rather than obtaining more equity capital and it could
diminish the earnings per share of existing shareholders. Financial leverage is also called as trading on
equity which points out to the exercise of debt to obtain exceeding assets. The exercise of financial
leverage to limit a higher amount of assets by borrowing money will result in the returns on the owner's
cash investment to be enhanced. Therefore, the financial leverage is:
 A growth in the value of the assets will proceed in a greater profit on the owner's cash, when
the loan interest rate is fewer than the rate of growth in the asset's value.
 A reduction in the value of the assets will proceed in a greater fall on the owner's cash.
Financial leverage ratio assists in regulating the impact of debt on the gross profitability of the company –
increase in ratio refers to the fixed cost of operating the business are higher, on the contrary, decrease in
ratio refers to lower fixed cost investment in the business. Thus, financial leverage notifies how much a
business is based on the debt which the firm has emerged and how the company is conducting debt as a
portion of its financing strategy and its possession on borrowings. [ CITATION Cor \l 1033 ]

The interrelationship between Financial Leverage & Capital Structure:

Every firm requires capital to conduct its business. Most of the firms try to raise their capital by
issuing debt securities or by selling common stock. A company’s capital structure is comprised with the
number of debt and equity that has many limitations. Hence, corporate management must apply a
comprehensive and thoughtful process for setting up a firm’s target capital structure. The capital structure
indicates how a firm finances its activities and improvement by using various sources of funds. Fixed-
income securities and preferred stock are made of use in a firm’s capital structure in the proportion of
financial leverage. Financial leverage has value because of the interest tax target that is granted by the
U.S. corporate income tax law.

7
For the management of a firm the first process in the capital decision-making procedure is to decide how
much external capital requires to raise to conduct its business activities. This step is critical to the
procedure because the market environment may cut down the ability of the firm to issue debt securities or
common stock at a strong level or cost.
The top management of a firm plans to make proper capital structure policy as well as set up a
package that will require to be sold to investors. By maintaining this methodical procedure, firm’s
financing decision should be completed under its long-run strategic decision, and how it desires to grow
the firm over time.
The exercise of financial leverage differs considerably by industry and by the business sector.
Unfortunately, the unnecessary exercise of financial leverage by many companies in these sectors has
played a vital role in forcing a lot of them to file for bankrupt.
Financial leverage can be affected from the existence of fixed financial costs in a firm's flow of income.
Financial leverage raises anticipated return on equity as well as raises the risk faced by the shareholders.
Financial leverage influences financial risk thus influencing the total risk of the firm. Although capital
structure theories figure out long term debt as a representative for financial leverage but we measure
financial leverage ratio or “degree of financial leverage” (DFL) as the ratio of taxable income or earnings
before taxes (EBT) to earnings before interest and taxes (EBIT). [ CITATION Tro21 \l 1033 ]

Condition of Financial Leverage of First Finance Limited:

Since we have to calculate financial leverage ratio of First Finance ltd for 4 years (2016-19), so we find
out operating profit which is also known as earnings before interest and tax (EBIT) and interest expense.
Then we calculated earnings before tax also known as taxable income (EBT) and financial leverage ratio
respectively.

Financial Leverage ratio

0.40
Financial Leverage

0.20
0.00 0.15
2016 2017 2018 2019
(0.20) (0.29)
(0.41)
(0.40)
(0.60)
(0.80) (0.84)

(1.00)

Year

This column chart presents financial leverage of First Finance Limited from 2016 to 2019. In 2016,
financial leverage ratio was 0.15 times, which is good. However, the ratio falls negatively to -0.29 times

8
in 2017. In 2018, financial leverage ratio unexpectedly decreases which shows us negative figure and the
ratio is -0.84 times. This negative financial leverage may be happening when the assets earned with the
debts and preferred stock create a rate of return that is less than the rate of interest or dividend payable to
the suppliers of debts or preferred stock. Negative financial leverage is a kind of destruction for common
stockholders. Moreover, lastly, in 2019, the financial leverage ratio was negative and the ratio was -0.41
times as the chart is shown, which is not good as like previous two years. A firm must be attentive while
analyzing its financial leverage status because high leverage refers to high debts as well as granting
ownership may show to be risky for the firm and even turn in extensive loss and business failure.
[ CITATION Fin3 \l 1033 ]

Profit Margin

Profit Margin
600% 522%

400%

200%
22%
0%
Profit Margin 22% -307% 522% -550%
-200%

-400% -307%

-600% -550%
-800%
2016 2017 2018 2019

The Profit Margin Ratio shows what percentage of revenue remains after all business expenses have been
paid. The chart shows Profit Margin Ratio of First Finance Ltd. from 2016-2017.
In 2016, the profit margin ratio of First Finance Ltd. was 22%. Which means that the company made a
good portion of profit on its revenue in 2016. This also indicates that the company managed its expenses
well.
But in 2017, the profit margin ratio decreased excessively to -307% and the company made a huge loss.
The expenses of the company surpassed the company’s total revenue. It indicates that the company was
unable to control its huge expenses during the period. In 2017, the Debt to Asset ratio of the First Finance
Ltd. was 89%. Which means that 89% of the company’s asset were financed by debt. This put the
company at a huge risk. As a large portion of company’s capital structure was debt the company had to
pay a huge amount of interest on loans and borrowings as expenses and also the company weren’t able to
generate that much revenue to cover those expenses. And this caused the company a massive loss.
In 2018, the profit margin ratio of the company was 522% as both revenue and net income of the
company were negative. And the company made more loss during the period than previous year. As 92%

9
(Debt to Asset Ratio) of the capital structure is debt, First Finance Ltd. had to pay more interests on its
loans and borrowings that year. This made the company’s financial performance poor.
In 2019, the Profit Margin Ratio of the company drastically decreased to -550%. The company was still
unable to keep its expenses under control as the expenses kept rising excessively and the generated
revenues could not cover those expenses and this resulted in a massive loss. Though the Debt to Asset
ratio decreased to 90% the large portion of debt had a serious effect on the company's profit margin. As
the overall financial performance of First Finance Ltd. is very poor, the company is in a great financial
risk. This can lead the company to bankruptcy.
From 2017-2019 the debt was increasing excessively. On the other hand, the profit margin of the
company was decreasing drastically. We know that higher the debt in capital structure, higher the
financial leverage and higher the financial performance. But there is also risk too. So, based on the
analysis we can say that there is no strong evidence of “When the debt of a company is high or when a
company is highly leveraged, the financial performance is good.” [ CITATION Per \l 1033 ]

Conclusion
After doing all the necessary financial measurements like debt on equity, debt on asset, degree of financial
leverage, return on equity, and profit margin we can conclude that the company First Finance limited is
not doing so well in terms of profit. They have a consistent negative net income from the year 2017
onwards which resulted an increasing rate of debt to asset ratio and debt to equity ratio, a decreasing rate
of return on equity that the percentage becomes negative, a decreasing rate on financial leverage, and an
inconsistent rate of Profit margin. If the following information is to consider to find out if the company is
good to be invested, the information suggests that this not an ideal company for the investors to get profit.

References
(n.d.). Retrieved from First Finance Limited: https://www.first-finance.com.bd/

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https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-leverage/

A.Ross, S., Westerfield, R. W., Jaffee, J., & Jordan, B. D. (2019). Corporate FInance. McGrew Hill Publications.

Abubakar, A. (2015). Relationship between financial leverage and financial performance of deposit money banks
in Nigeria. International Journal of Economics, Commerce and Management, 759-778.

Adkins, T. (2021, April 30). Retrieved from Investopedia:

https://www.investopedia.com/articles/investing/111813/optimal-use-financial-leverage-corporate-
capital-structure.asp

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Anarfo, E. B., & Appiahene, E. (2017). The impact of capital structure on banks’ profitability in Africa. Journal of
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Bunyaminu, D. A., Yakubu, M. I., & Bashiru, D. S. (2021). THE EFFECT OF FINANCIAL LEVERAGE ON PROFITABILITY:
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Financial Highlights for 5 Years. (n.d.). Retrieved from First Finance Limited: https://www.first-
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Hanriks, M. (2020, January 14). Retrieved from Smart Asset: https://smartasset.com/investing/return-on-equity?

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Lalonde, M. C. (2021, June 23). Retrieved from Investing Answers:

https://investinganswers.com/dictionary/r/return-equity-roe?
fbclid=IwAR3bnhclGBcCG4MbGDwe3E9907qMeUL8ZcY2zYF1aOlyKtixAuktPPujqwI

Niresh, J. A. (2012). Capital structure and profitability in Srilankan banks. Global Journal of management and
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statements

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