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Australian National Institute of Management and Commerce
75000+ Completed Assignments 1500+ PhD Experts 100+ Subjects we cater 100% Secure PaymentTFIN601
AU
Australian National Institute of Management and Commerce
The following report is the analysis of the company brickworks limited which is an Australian company involved the manufacturing of the construction raw materials. The report aims to analyse and provide the capital structure policy of the company along with the estimate of the various fundamentals and cost of capital of the company.
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| BRICKWORK LTD | ||||
| DETAILS | 2017 | 2018 | 2019 | 2020 | 2021 |
| TOTAL DEBT (A) | 752063 | 804059 | 925626 | 1428576 | 1546085 |
| TOTAL ASSETS (B) | 2719903 | 2875137 | 3092984 | 3831782 | 4025832 |
| DEBT RATIO (A/B) | 27.65% | 27.97% | 29.93% | 37.28% | 38.40% |
| DETAILS | 2017 | 2018 | 2019 | 2020 | 2021 |
| TOTAL EQUITY (A) | 1967840 | 2071078 | 2167358 | 2403206 | 2479747 |
| TOTAL ASSETS (B) | 2719903 | 2875137 | 3092984 | 3831782 | 4025832 |
| EQUITY RATIO (A/B) | 72.35% | 72.03% | 70.07% | 62.72% | 61.60% |
The capital structure of the company is an important consideration for a firm when leading to the valuation of the company (Uzliawati et al 2018). The company can be debt free, have optimal level of debt or excessive debt which can cause financial distress in the company. The company brickworks limited had a lower level of debts in the past in the year 2017 to be around 27.65% The level of debt of the company remained almost stable for 3 years until the year 2019. This was in line with the level of equity financing which was present in the company for those 3 years. Thus, on an average the company was invested or financed by 30% debt and 70% equity. However, in the year 2020 the level of debt in the company increased to around 37.28%, while the level of equity based on relative valuation reduced to 62.72% in monetary terms both the equity and the debt of the company increased. This is because the company had raised finances by issuing debt and also equity in the year 2020 and 2021 respectively. The company had plans for expansion and taking the advantage of the lower interest rates in the year 2020 due to the COVID 19 pandemic, the most feasible option for the company is to finance using debt. Thus, the level of debt of the company has increased significantly in the last two years to take the advantage of the lower interest rates. Also, since the stock markets have been at all-time lows the company refrained from issuing a lot of equity as it might affect the valuation of the company. Thus, as a strategic plan the issue of debt at a higher level and lower level of equity worked in the favour of the company as it overall helps in reducing the cost of capital for the company. Hence the lower cost of capital helps in increasing the overall value of the company and ultimately benefits the shareholders of the company.
| RATIO ANALYSIS | BRICKWORK LTD | ||||
| DETAILS | 2017 | 2018 | 2019 | 2020 | 2021 |
| DEBT EQUITY RATIO | |||||
| TOTAL DEBT (A) | 752063 | 804059 | 925626 | 1428576 | 1546085 |
| TOTAL EQUITY (B) | 1967840 | 2071078 | 2167358 | 2403206 | 2479747 |
| DEBT EQUITY RATIO (A/B) | 38.22% | 38.82% | 42.71% | 59.44% | 62.35% |
| INTEREST COVEREAGE RATIO | |||||
| EBIT (A) | 244147 | 229997 | 314475 | 415967 | 347363 |
| INTEREST EXPENSE (B) | 12436 | 14456 | 23883 | 26452 | 22095 |
| INTEREST COVEREAGE RATIO (A/B) | 19.63 | 15.91 | 13.17 | 15.73 | 15.72 |
Based on the above table and recent trend it has been noticed that debt equity ratio of Brickwork in 2017 was 38.22% and from 2017 it continuously increased and in 2021 it became 62.35% which indicates that company is financing its operation through borrowing and risk is also high in the company (Maulita and Tania 2018). Based on interest coverage ratio it has been noticed that ICR of Brickwork in 2017 was 19.63, in 2018 and 2019 it decreased and again in 2022 it increased, in 2021 ICR decreased and became 15.72 which indicates that company is not in position to meet its debt as low amount of profit is available with the company for meeting interest expense on debt (Setiany 2021). Therefore, it can be said that leverage is high in the company and risk is also high.
The pecking order theory highlights that the firm should use internal financing, followed by debt financing and ultimately equity financing (Allini et al 2018). As the company has entered into expansion phase in the last two years, the company has refinanced its expansion using the internal funds, followed by debt financing to benefit from the lower interest rates. Thus, the company is following its financing policy using the pecking order theory.
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| BRICKWORK LTD | ||||
| DETAILS | 2017 | 2018 | 2019 | 2020 | 2021 |
| TOTAL DEBT (A) | 752063 | 804059 | 925626 | 1428576 | 1546085 |
| TOTAL ASSETS (B) | 2719903 | 2875137 | 3092984 | 3831782 | 4025832 |
| DEBT RATIO (A/B) | 27.65% | 27.97% | 29.93% | 37.28% | 38.40% |
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| ORORA LTD | ||||
| DETAILS | 2017 | 2018 | 2019 | 2020 | 2021 |
| TOTAL DEBT (A) | 1816.4 | 1986.6 | 2273.7 | 1468 | 1556 |
| TOTAL ASSETS (B) | 3363.2 | 3617.1 | 3918.2 | 2498.2 | 2324.6 |
| DEBT RATIO (A/B) | 54.01% | 54.92% | 58.03% | 58.76% | 66.94% |
Leverage position of Brickworks ltd has been compared with its biggest competitor Orora ltd. Based on above table it has been seen that leverage position of Brickwork in 2017 was 27.65% and from 2018 it continuously increased and in 2021 it became 38.40% which indicates that leverage is high in the company (Brickworks ltd 2022) whereas leverage position of Orora ltd in 2017 was 54.01% from 2018 it continuously increased and in 2021 it became 66.94% which indicates that leverage is high in the company (Orora ltd 2022). Based on analysis it has been noticed that risk is high in both the company but as compared to Orora ltd leverage position of Brickworks is better.
Based on available information closing price of Brickworks ltd as on 4-Feb 2022 is AUD 22.72 (Brickworks ltd 2022).
The market capitalisation or the equity capitalisation of Brickworks ltd is calculated below as on 4- Feb 2022 is 151.78*22.72 = 3448.442 million
The shares of Brickworks ltd which are outstanding as on 4-Feb 2022 is 151.78 million
The most recent dividend of Brickworks ltd which was paid was on 2-Nov-2021 and is AUD 0.4 per share.
The beta of Brickworks ltd as per Yahoo finance on 4-Feb-2022 is 0.74.
The capital structure of the company has been changed in the past two years, to take benefit from the lower interest rates in the market. However due to the pandemic the company has a lower interest coverage ratio which can impact the payment of interest. The company is in the excessive debt situation which can impact the financials of the company. The stock price of the company is 22.72 with an outstanding number of shares to be 151.78 million. Hence on the whole the company should reduce the level of debt to reach the optimal capital structure.
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