A Research on Capital Structures of Firms in Different Industries

Wealth Maximizers

Introduction

In our research, we have used three firms in different industries: banking, healthcare, and
wholesale/retail trade FMCG. The objectives of this study are to understand the capital
structures used by the three firms and further discover the reasons behind the firms’ use of
these capital structures concerning the nature of their businesses and industry.

Data

Balance Sheet
as of Dec 31, 2021
Wholesale/Retail
Banking Healthcare
Trade - FMCG

METRO BACOLOD RT MONTANA

UNIONBANK HOSPITAL AND MEDICAL DISTRIBUTORS
CENTER CORPORATION

In Bn In Mn In Mn
Assets
Current Assets
Cash 8.9 41.2
19.6
Other Current Assets 175.2 95.5
151.0
Total Current Assets 184.1 136.7
170.6
Non-Current Assets 647.1 714.2
50.2
Total Assets 831.2 850.9
220.8

Liabilities
Current Liabilities 570.5 203.3
21.9
Non-Current Liabilities 148.4 472.1 -
Total Liabilities 718.9 675.4
21.9

Stockholder’s Equity
Common stock 12.2 150.0 100.0
Additional paid-in capital 14.2 - -
Retained Earnings - -
98.9
 Stock dividend distributable 3.1 - -
Surplus free 82.1 - -
Surplus reserves 2.8 - -
Other - 2.1 - 39.3 -
Total Stockholder’s Equity 112.3 175.5
198.9
Total Liabilities and Stockholder’s
831.2 850.9
Equity 220.8

Table 1 – Comparison of 2021 Balance Sheet of the Three Firms

Wholesale/Retail
Banking Healthcare
Trade - FMCG
METRO
RT MONTANA
BACOLOD
Ratio UNIONBANK DISTRIBUTORS
HOSPITAL AND
CORPORATION
MEDICAL CENTER
Debt-to-equity Ratio 6.40 3.85 0.11
Debt-Ratio 0.86 0.79 0.10
Long-Term Debt-to-Total Asset
0.18 0.55 0.00
Ratio
Short-Term Debt-to-Total Asset
0.69 0.24 0.10
Ratio
Long-Term Debt-to-Non-Current
0.23 0.66 0.00
Asset Ratio
Short-Term Debt-to-Current Asset
3.10 1.49 0.13
Ratio
Equity Multiplier 7.40 4.85 1.11

Table 2 – Comparison of Some Ratios of the Three Firms Using the 2021 Balance Sheet
 Analysis

Using the data from Tables 1 and 2, the following summarizes the differences between the
three firms in terms of their capital structures:

Wholesale/Retail Trade -
Banking Healthcare
FMGC

METRO BACOLOD RT MONTANA

UNIONBANK HOSPITAL AND MEDICAL DISTRIBUTORS
CENTER CORPORATION

Heavy reliant on debt – Heavy reliant on debt –

Debt Reliance Debt is too big against
Equity
Type of Debt More on Short-Term Debts
Long Term Debts are far
Long-Term Debt
smaller than Non-Current
Behavior
Assets
Short Term Debt Short-Term Debts are way
Behavior bigger than Current Assets
Assets are too significant
Asset against
against Equity - uses less
Equity
Equity
For long-term assets
Capital
(Loans, Trading, and
Requirements
Investment Securities)
Debt is too big against
Equity
More on Long-Term Debts
Long-Term Debts are
almost in proportion with
the Non-Current Assets
Short-Term Debts are
almost in proportion to
Current Assets
Assets are too significant
against Equity - uses less
Equity
For long-term assets
(Property and Equipment)
Not reliant on debt
Not reliant on debt
Not reliant on debt
Not reliant on debt
Assets are in proportion
to Equity – Fully reliant
on Equity
For AR and Inventory
(Current Assets)

Table 3 – Comparison of Capital Structure of the Three Firms

It makes more sense why banks like UnionBank leverage more on debt, being a cheaper
source of capital than Equity. The data shows how UnionBank relies heavily on short-term
debts, which consist of deposit liabilities. Banks typically give lower interest rates on deposits,
generally at a rate not higher than 2% per annum. UnionBank offers an interest rate of 0.10%
on their savings account and up to 1.25% per annum on their time deposit products. New
digital banks nowadays in the country are giving even up to 6%-10% interest rate on deposits
as they want to attract depositors. However, in the case of UnionBank, it is an established
bank that doesn’t need to give higher interest rates to attract deposit investors. Instead, they
focus on areas where they could attract high-volume depositors by providing cash
management solutions. In terms of capital requirements, though they prefer short-term
debts, they must finance their long-term investments. These include their core lending
businesses and investment securities, where most of their income comes from. UnionBank
loan products are charged at a significantly higher rate than the cost of deposit liabilities
ranging from 8% to 42% per annum, depending on the product. For UnionBank, the equity
multiplier of more than 7x tells how the bank is not dependent on capital from the owners.
Debt constitutes 86% of all the assets, while short-term debts are more than 3x their liquid
assets. Given this, banks are cautious in managing their liquidity risk as a slight wrong move
can trigger customers to withdraw all their money, giving the bank problems in terms of
liquidity.

Hospitals like Metro Bacolod Hospital and Medical Center are also highly dependent on debt.
However, compared with big banks like UnionBank, the option to avail of long-term
obligations gives them more advantage to the lower cost of debt. Long-term obligations make
sense for hospitals as their requirements to fund their investments are more on non-current
assets, particularly for their properties and equipment. Because of this, it is noticeable that
their long-term obligations are proportionate to their long-term assets, which is the same
observation as their short-term obligations, which are almost proportional to their current
assets.

Firms in wholesale and retail trade could have different capital structures depending on their
strategies. In the case of RT Montana Distributors, a distributor of Unilever products in
CamSur, which distributes fast-moving consumer goods, doesn’t rely almost on debt but
owner’s equity. In terms of capital requirements, analyzing the balance sheet would tell that
accounts receivables and inventory are where financing is essential for this company. What is
more interesting about this company is that they don’t even have any long-term obligations.
The company’s balance sheet for the last three years could tell a story that there has been no
significant long-term investment happening in a long time, for example, for additional bigger
warehouses or more trucks, reason why there have been no long-term liabilities. In this sense,
the company has been focusing its capital structure on financing regular operations, giving
them steady income in the last three years.

Conclusion

Each firm could have a different capital structure, which can be affected by the industry they
belong to and the company’s overall strategy. Banks would depend more on debt, particularly
short-term liabilities where the cost of funds is lower, to finance long-term investments that
give higher returns as it aligns with the needs of their customers. Hospitals would focus more
on investing in their facilities to operate, which would need long-term debts. Wholesale and
retail traders of fast-moving consumer goods concentrate their investment on financing
inventory and managing receivables. Depending on the company’s strategy, they would
require long-term debts to fund expansions. Since goods sold are fast-moving, either they
have established short-term credit terms with their suppliers and finance purely the rest of
the requirements with the owner’s equity.
Appendix