Capital Structure And Liquidity Analysis Essay

Question:

Discuss about the Capital Structure and Liquidity Analysis.

Answer:

Introduction

This study aims to identify and analyze the liquidity positions and profitability of the two popular telecommunication companies in Malaysia. These companies are – Axiata Group Berhad and Maxis. Both of these companies are listed under Bursa Malaysia. The study provides a systematic flow of discussion and analysis. After identifying the liquidity and profitability of the two companies separately based on the financial ratios, the study performs a comparison between the performances of the two companies.

Brief overview of the companies:

Axiata Group started its business in 1992. The mission of the company is providing better connectivity through innovative technology and within the affordable price range (Axiata.com, 2017). The vision statement of the company states that it wants to be the best telecommunication service provider in Asia. Currently, the company deals with three products or services – mobile network, digital internet and network infrastructure (Axiata.com, 2017).

Maxis incorporated its business in 1987 and initially it was named as Maxis Software. It is one of the most popular telecommunication companies in Malaysia as well as overall market in Asia (Maxis.my, 2017). The company deals with several products like, SimCity Series, Spore, The Sims series, and Darkspore. The mission statement states that Maxis aims to remain the best integrated telecommunication service provider in the nation (Maxis.my, 2017). On the other side, the vision of the company is bringing the future to its customers in a simple, enriching and personalized manner through high quality and innovative technology (Maxis.my, 2017).

Explanation on liquidity and profitability ratios

Liquidity and profitability are the best indicators of the financial performances of the companies. Liquidity shows the capacity of a company paying its short-term debts by utilizing its short-term assets (Dongare, Deshpande & Muley, 2016). Maintaining the liquidity at a standard level is very important for every company because the decisions investors and other stakeholders highly depend on it. If the investors find low liquidity of a company, then they do not want to invest their money or fund in that company because there remains liquidity risk. The liquidity of a company can be identified by calculating two ratios like, current ratio and quick ratio (Meena & Dhar, 2016). At the same time, the net working capital also indicates the liquidity of the company. The formulas for calculating these ratios and net working capital are shown below:

Each of the above mentioned liquidity ratio is very useful for the companies. The current ratio, quick ratio and net working capital indicate the financial strength of the company in short-run. Considering the two ratios the management and the other stakeholders can easily understand the level of liquidity risk of a particular company (Sarkar, 2016). If the ratios are high, then it is considered that the liquidity risk is low and if the ratios are low, then the liquidity risk is high. At the same time, the current ratio of a company also indicates the efficiency of the company selling its products, which means, the current ratio indicates the efficiency of the company converting its inventories in to cash (Panigrahi & Sharma, 2016). Apart from these, the current and quick ratios also show the efficient of management satisfying the creditors of the company.

Profitability is another major indicator of the financial performance standard of a company. The profitability of a company can be measured by identifying or calculating different ratios like, gross profit ratio, net profit ratio, return on assets, return on equity and earnings per share (Halim, 2016). The formulas of these profitability ratios are shown below:

The profitability ratios are also very useful for the companies while measuring their financial performances. Identifying return on assets, the management and other stakeholders can understand how much the company is efficient utilizing its assets for earning the revenue (Baba & Abdul-Manaf, 2016). At the same time, the gross margin and net margin indicate the profit earning capacity of the company in a particular financial year. The earnings per share of the company are very important factor for the ordinary shareholders because it shows the earnings of the shareholders from their investment in the equity of the company (Dolewikou, Sumekar & Setiadi, 2016). Therefore, the profitability must be identified for each company to identify its performance standard.

Computation and interpretation of the liquidity and profitability ratios of Axiata Group Berhad

In the above it has been identified liquidity and profitability ratios are the indicators of the financial performance of a company. Therefore, in order to identify the performance standard of Axiata Group Berhad, here, the liquidity and profitability ratios of the company are calculated. The liquidity and profitability ratios of Axiata Group Berhad are shown below:

Liquidity ratios:

2015

2014

2013

Current ratio

0.78919307

0.78761005

1.14910624

Quick ratio

0.776772863

0.780077797

1.14129556

Net working capital

-2,632,921

-2,242,624

1,198,950

(Source: Axiata.com, 2017)

In the above table, the liquidity ratios of Axiata Group Berhad for 2013, 2014 and 2015 can be seen clearly. As per the liquidity ratios mentioned above, it can be said that liquidity position of the company has declined from 2013 to 2015. In the financial year 2013, the current ratio of the company was 1.15: 1 (approx), which declined to 0.78: 1 (approx) in 2015 (Axiata.com, 2017). However, it is also true that the current ratios of the company in these three years were not up to the industry standard. As per the industry standard, the current ratio of a company must be 2: 1 in the financial year. In none of these three years, Axiata Group Berhad has maintained the current ratio at 2: 1 level (Axiata.com, 2017). Similarly, the quick ratios of the company in 2014 and 2015 were also much lower than the required industry standard.


As per the industry standard, the quick ratio of the company must be 1: 1, but in case of Axiata Group Berhad, the quick ratios were 1.14: 1 in 2013; 0.78: 1 in 2014 and 0.77: 1 in 2015 (Axiata.com, 2017). On the other side, if the net working capital of the company is considered for the analysis, then it can be said that the liquidity position of the company was in danger during 2014 and 2015 (Srinivasan, 2016). In 2014 and 2015, the net working capital was negative, which means, the current liabilities of the company were more than the current assets. Analyzing the liquidity ratios of Axiata Group Berhad for the three financial years, it can be said that the liquidity position of the company is not good. Moreover, it also indicates that if this situation is not improved, then the company may face more problems in the near future (Brierley, 2016).

Profitability :

2015

2014

2013

Gross margin

20.63342094

18.49927989

22.2935031

Net margin

13.25759199

12.52907728

14.9071945

Return on Assets

4.69734358

4.772105249

6.29597791

Return on equity

10.24736724

10.39292108

12.8096165

EPS

29.5

27.6

29.9

(Source: Axiata.com, 2017)

As per the above table, the profitability of Axiata Group Berhad has decreased in 2015 in comparison to 2013. The gross as well as net margin of the company has decreased, which means, the earnings of the company have also decreased. Decrease in the gross profit and net profit ratios indicate that the expense level of the company increased (Goldmann, 2017). This means, the company was not able to control its expense level properly. At the same time, the above table is also showing that the return on assets of the company has also decreased in 2015. Moreover, the decrease in the return on assets has happened continuously, which means, the capacity of the company to use its assets effectively has decreased gradually (Singh, Kumar & Colombage, 2017).

The same thing happened with return on equity of the company. The return on equity has also declined gradually from 2013 to 2014. However, the EPS of the company has fluctuated during these three financial years. In the year 2013, the EPS of the company was $29.9, which decreased to $27.6 in 2014 and again increased to $29.5 in 2015 (Axiata.com, 2017). This means, there was clear fluctuation in the EPS of the company. Therefore, by analyzing the overall profitability ratios of Axiata Group Berhad, it can be said that the management of the company requires improving its profitability position immediately. If the company fails to do this, then, in future, the company may lose the trust of the stakeholders, which will ultimately reduce the scope for the company attracting more investment (Damar, Farouk & Winarto, 2016).

Computation and interpretation of the liquidity and profitability ratios of Maxis

Like Axiata Group Berhad, the liquidity and profitability situations of Maxis can be measured by identifying its liquidity and profitability ratios of the company. The liquidity and profitability ratios of Maxis are shown in the below tables:

Liquidity ratios:

2013

2014

2015

Current ratio

0.50599272

0.61629839

0.57594295

Quick ratio

0.48675106

0.61332462

0.57323591

Net working capital

-1,808,286

-1,605,119

-2,075,138

(Source: Maxis.my, 2017)

The above table is indicating the liquidity position of Maxis during 2013, 2014 and 2015. All of the three liquidity ratios of the company during these three years were fluctuating and at the same time, it is also true that the liquidity ratios of the company have increased a bit in 2015 (Maxis.my, 2017). As per the above table, it can be said that the liquidity position of the company was very weak in these three financial years. The current ratios of the company were very low, although the ratio has increased from 2013 to 2015 (Maxis.my, 2017). However, the percentage of the current ratio that has increased from 2013 to 2015 was not so high. In these three years, the current ratio of the company was in between 0.50: 1 to 0.61: 1, which means the company has not achieved the industry standard. The same thing can be noticed in case of quick ratios also. The quick ratios of the company have increased, but the level of the quick ratios of the company in these three years was much lower than the industry standard (Maxis.my, 2017). At the same time, the net working capital of the company was negative in all of these three financial years. Therefore, from the overall analysis of the liquidity position of Maxis, it can be said that the company was in danger (Vintil? & Alexandra Nenu, 2016). The ability of the company paying its short term liabilities by its current assets was very low, which can de-motivate the investors and other stakeholders of the company. Hence, improving the current liquidity position of the company is very important for Maxis.

Profitability :

2013

2014

2015

Gross margin

65.9938981

67.7300548

68.2841364

Net margin

19.5086616

20.5617642

20.3136582

Return on Assets

10.2267596

9.52435856

9.20250757

Return on equity

29.4550307

36.4058427

41.3951991

EPS

23.53

22.88

23.16

(Source: Maxis.my, 2017)

As per the above table, the profitability of the company has been improved during 2013 to 2015. The gross profit ratio and net profit ratio of the company have gradually increased from 2013 to 2015 (Maxis.my, 2017). This means, the ability of the company to enhance its profit level has been improved in 2015. The return on equity of the company has also increased and in 2015, the return on equity was much high. However, the return on assets of the company has disappointed the company. The return on assets has declined, which indicates that the company’s capacity of using its assets effectively has decreased (Dafi.ase.ro, 2017). This is not a good sign for the future of the company. However, as the overall profitability ratio has increased, it can be stated that the company will be able to enhance the percentage of return on assets. As the company has also maintained the EPS, it can be said that the shareholders of the company were satisfied in these years. However, the company requires maintaining its profitability standard in the coming future because the level of competition in the market is increasing day-by-day (Damar, Farouk & Winarto, 2016). The company must try to maintain the low cost level and enhance the efficiency standard of each employee.

Comparing the financial performances of Axiata and Maxis based on liquidity and profitability ratios

In the above discussion and analysis, the financial performances of Axiata Group Berhad and Maxis have been identified. If the comparison is made between the financial performances of these two companies in the same sector, then it can be said that the liquidity position of Axiata Group Berhad was better than the liquidity position of Maxis. This is because if the above tables of the liquidity ratios of the two companies are considered, then it can be identified that the current ratios and quick ratios of Axiata Group Berhad were much higher than the current and quick ratios of Maxis. This indicates that the Axiata Group Berhad is more capable of paying out its current liabilities by using its current assets (Vintil? & Alexandra Nenu, 2016). However, there is a similarity between the liquidity positions of the two companies and that is the liquidity of both the companies is much lower than the industry standard.

As mentioned above, the industry standard for the current ratio of a company is 2: 1 and the industry standard for the quick ratio of a company is 1: 1. However, none of the two companies achieved the industry standard during the time span of 2013 to 2015. The dissimilarity between the liquidity positions of these two companies is that in case of Axiata Group Berhad, the liquidity position (Considering only the current ratio and quick ratio) of the company has declined, but in case of Maxis, the liquidity position in improved. On the other side, if the net working capitals of the companies are considered, then it can be said that the Axiata Group Berhad has improved its net working capital, but Maxis’s net working capital position has declined.

If the comparison is made based on the profitability ratios of the two companies, then it can be said that the performance of Maxis was better than the performance of Axiata Group Berhad. In case of Axiata Group Berhad, the gross and net margins of the company were much low. Moreover, the gross margin and net margin of the company was in declining trend, whereas in case of Maxis, the gross profit ratio and the net profit ratio of the company were improved and these were in increasing trend. Therefore, it can be said that the major difference between the profitability of the two companies was in the trend of the gross margin and net margin.

Similarly, there was also difference between the return on equity of the two companies. In case of Axiata Group Berhad, the return on equity has declined from 2013 to 2015, but in case of Maxis, the return on equity has increased. However, there are also some similarities and those are – the return on assets in both the companies has declined during 2013 to 2015. At the same time, the EPS of the companies increased from 2013 to 2015 in both of the companies.

Therefore, from the above comparison between the liquidity as well as profitability positions of the two companies in Malaysian Telecommunication industry, it can be said that in case of liquidity, the Axiata Group Berhad has performed well than Maxis; but in case of profitability, Maxis has performed well than Axiata Group Berhad. However, it is true and the liquidity positions of both of the two companies are in danger. The low standard of liquidity may be the major barrier for the business development of the company in future (Srinivasan, 2016). Due to the low liquidity and negative net working capital, the companies may face the risk of bankruptcy. Along with that, the company will also miss the opportunities for future growth, which will be he huge loss for both the companies (Guimaraes & Nossa, 2010).

There are few factors that have affected the liquidity positions of these two companies and that are – i) high interest rates in the market. Due to the high rates of interests, the current liability of the companies has increased, which caused low liquidity ratios and negative net working capital (Goldmann, 2017). ii) The low monetary value of the assets has also influenced the liquidity positions of the two companies. Due to the low monetary value of the assets, the capacity of the company to pay its current liabilities by its current assets has declined (Sarkar, 2016).


The companies can improve the scenario or the liquidities positions by increasing the current assets proportion. At the same time, the companies have to control its cost level in order to maintain the profitability (Brierley, 2016). In order to control the overall costs, the companies can reduce their overhead costs. At the same time, the management of the companies can also identify the assets, which are unproductive and can remove those assets from the business operations (Guimaraes & Nossa, 2010). On the other side, the companies also require enhancing the efficiency level of their employees, so that they can utilize the assets and the equity properly and can increase the overall earnings of the companies.

This study has indicated that Axiata Group Berhad and Maxis are the most popular companies in the telecommunication industry in Malaysia. The businesses of the two companies are also expanded in the other countries in Asia. In the study, it has been identified that the liquidity positions of these two companies during 2013 to 2015 were at low standard. However, the liquidity of Axiata Group Berhad was better than Maxis. In case of profitability, the Maxis has performed well than that of Axiata Group Berhad. The main influencers of the low liquidity of the companies are – high interest rates and low monetary value of the current assets of the companies. However, the companies can improve their performances by controlling the cost level and increasing the current assets.

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