Analysis of Debt Ratio and Dividend Announcements of Ainsworth Game Technology Limited

This report analyses the debt ratio and dividend announcements of Ainsworth Game Technology Limited. It includes calculation of various debt ratios, analysis of ratios with industry average and competitors, optimal capital structure, and impact of dividend announcements on stock price.

Running head: DIVIDEND ANNOUNCEMENTS
Dividend Announcements
Name of the Student:
Name of the University:
Author Note:

1DIVIDEND ANNOUNCEMENTS
Executive Summary:
A company raises debt to finance its operations as it is one of the sources of finance after
ploughing back of profits. However, the effect which the raising of debt has on the financials
of a company is a major concern for the investors. The analysis of the level of debt is equally
important for other stakeholders of the company. Corporate announcements is one of the
major events which affect the stock price of the company. This is because the investors
perceive information about the company based on these announcements as they are lacking
full transparent information about the company. All these effects and analysis is evaluated by
taking the Ainsworth Game Technology Company. Also the Company Breville Limited is
taken as the comparable company for our analysis.

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Table of Contents
Introduction:...............................................................................................................................4
Discussion:.................................................................................................................................4
Calculation of various Debt Ratio:.........................................................................................4
Analysis of the ratio with Industry Average:.........................................................................5
Analysis of fundamentals with Competitors:.........................................................................7
Optimal Capital Structure:.....................................................................................................8
Dividend Announcement:......................................................................................................9
Optimal Capital Structure and Hypothesis:..........................................................................12
Conclusion:..............................................................................................................................13
References and Bibliographies:................................................................................................14

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Introduction:
Analysis of the company financials is a fundamental important activity for an
investor. The level of debt in the financials of the company is an important factor for an
investor. It indicates the risk which the investor is exposed to by investing in the company.
The impact of dividend announcement on the price of the stock of the company is an
important analysis for an investor. Thus the Company Ainsworth Game Technology Limited
a part of the GICS consumer discretionary sector is taken for the purpose of the analysis. The
comparable company taken for the purpose of our analysis is the Breville Group Limited. A
number of ratio are analysed to understand the fundamentals and economic health of the
company.
Discussion:
Calculation of various Debt Ratio:
The long term debt ratio for the company Ainsworth Game Technology Limited is
taken from the balance sheet of the company and compared with Total assets, total equity and
EBIT of the company (Suhanto and Damayanti 2019).

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Figure 1: Inputs for the Calculation
Source: By the Author
Thus by using the inputs derived from the Balance sheet and the income statement of
the company is used to derive the following results.
Figure 2: Various Ratio of the Company
Source: By the Author
By using the inputs of the company the various ratio were derived for a period of five
years.
Analysis of the ratio with Industry Average:
A company is compared to its industry to analyse how it is performing in relation to
its peer company. Thus the industry average is calculated by taking ten comparable firms in
the industry and taking their average. Thus the industry average which is calculated is given
below in the figures (Campbell, Galpin and Johnson 2016).

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Figure 3: Comparison
Source: By the Author
On comparing debt to total asset ratio of the company with its industry highlights
facts about the fundamentals of the company. It shows what amount of assets of the company
is financed from debt.
Thus the company had a favourable ratio in the year 2014 as it was very low from the
industry average. However over the years, this ratio has been on the increasing trend and also
the average of the industry is also in the increasing trend. However the ratio is still below the
industry average and is good but it is expected in the long term the ratio is going to meet the
industry average (Lewis and Tan 2016).
Figure 4: Comparison
Source: By the Author
This ratio shows the level of debt in a company in relation to equity. The higher the
ratio the more the company is at the risk of bankruptcy. However the industry has an
increasing trend of this ratio implying the majority of the firms are taking debt for financing
of their projects. Also the company under analysis has an increasing trend of this ratio

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implying the company is also leveraging its business activities over the years. However the
ratio is far lower than the industry average. Thus the firm is taking leverage and has policy to
maintain it at the same level (Qi, Roth and Wald 2017).
Thus on analysing these two ratio it is found that the company under analysis is taking
leverage to finance its operations. Also the company in the industry are also taking leverage
thus the activity of our company is according to the industry mandate.
Analysis of fundamentals with Competitors:
A direct competitor to our company is not available with a smaller size in total assets,
thus the Breville Group is taken as a comparable firm. The company is in the manufacturing
of consumer appliances, thus falls in the consumer discretionary sector. The company has
total assets less than the company for our analysis (Jin, Ji and Gu 2016).
2014 2015 2016 2017 2018
0.0000%
2.0000%
4.0000%
6.0000%
8.0000%
10.0000%
12.0000%
14.0000%
16.0000%
18.0000%
Long term Debt to Asset Rati o
Ainsworth Game Technology Breville
Figure 5: Debt to Asset Ratio
Source: By the Author
As seen in the graph Ainsworth game technology had a lower of this ratio in the
period 2014 and 2015. However, the company has then started using leverage in its operation

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and has increased the leverage substantially. The comparable company has a U-shaped
leverage curve as the leverage which was high reduced and again is rising. Thus the company
of our analysis has an increasing leverage trend while the comparable company has a stable
leverage trend as it is seen in the graph.
2014 2015 2016 2017 2018
0.0000%
5.0000%
10.0000%
15.0000%
20.0000%
25.0000%
0.0493%
3.2978%
21.4393%
19.0058% 18.9338%
11.1619%
9.4069%
4.2121%
13.8058%
16.0023%
Long term equity to asset rati o
Ainsworth Game Technology Breville
Figure 6: Equity to Asset Ratio
Source: By the Author
As it is evident from the graph the ratio is initially higher for the comparable company
and the company for our analysis has a very low ratio. However this ratio began to rise as the
company started to take more debt. The comparable company has still a U- shaped curve
which is evident from the graph. However the company of our analysis has maintained a
stable ratio while the comparable company has an increasing trend of this ratio after the fall
in the year 2016.
Optimal Capital Structure:
The optimal capital structure is the structure which a company has when the cost of
capital is the least. Thus it is a ratio of debt and equity which generates the highest benefit in

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terms of cost of capital. This is derived from the tax advantage of debt which is the maximum
at the optimal level. Thus a company should maintain the optimum level of its capital
structure. However, this is not possible in the real world, thus the capital structure of the
company oscillates around the optimal capital structure (DeAngelo and Stulz 2015).
The company as evident from the rising debt to equity ratio indicates that it is trying
to reach its optimal capital structure. Thus this level would create value for both the debt
holders and the equity stake holders of the company (Antill and Grenadier 2017).
Dividend Announcement:
The impact of announcement of dividend has an effect on the stock price is evident by
this analysis of the dividend announcement of our company Ainsworth Game Technology
Limited.
Figure 7: Stock Return
Source: By the Author
The stock price of the company was trading positive before the day of announcement
at around 1.386%. However, the effect on stock price was negative on the day of
announcement is because there was a reduction in dividend from the previous financial year.

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The last dividend was at 5 cents per share, but the current dividend was 1.5 cents. Thus the
market took the news negatively and it fell post the announcement of dividend (Doe–Bansah
2016).
Figure 8: Stock Return
Source: By the Author
Thus the two day return of the stock is negative as the announcement of the reduction
of dividend was taken as a negative news by the investors of the company. Thus the fall in
stock return is evident of the fact announcement of dividend is an important news for the
stock market (Kedia, Starks and Wang 2016).
Figure 9: Index Return
Source: By the Author

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The index was also trading lower at the time of the announcement of the dividend
however, the fall in the index was less than the fall in the stock of the company.
Figure 10: Market Return
Source: By the Author
The index was trading at a negative value on the day of announcement, thus the
reduction in the dividend of a company which has maintained its dividend at a constant level
indicates that the investor in the entire market had lost faith when the company reduced its
dividend (Linder 2016).
Figure 11: Excess Return
Source: By the Author
Thus any investor who had invested their money in both the stock and the market
would generate this return. As it is evident above that the stock and the market have a

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positive correlation at the time of announcement of dividend. Thus the losses due to fall in
the stock is reduced by the returns on the market.
Optimal Capital Structure and Hypothesis:
The optimal capital structure is an important analytical point when the firm is the
most valuable to the creditors, shareholders and other stakeholders in the company. The
maintenance of this capital structure is important for a company as it reduces the overall cost
to the company and the return retained by the company is at a higher level. This is because of
less coupon payments and dividends are increased at a decreasing rate by the company.
However, the level of this capital structure is different for different company. This is because
the cost of equity and the cost of debt are different for every company. Thus the focal point of
optimal capital structure varies in all the company even if they belong to the same industry.
Thus optimal capital structure is an important factor for a company.
The reduction in the price of the stock due to the reduction of dividend highlights the
signalling hypothesis, where the market perceives information of a company by its
announcement. Since investors lack transparent information, they take these signals of the
company and analyse the future of the company. Thus reduction in dividend highlights that
the company is losing its business and lacks the capability to maintain its profitability
(Bhargava 2018). Also another signal perceived by the investors is that the company has
reduced its dividend to retain profits, but the managers might use the excess cash flow and
invest in negative NPV projects. Thus, it highlights the lack in confidence of the investors in
the management (Smith and Pennathur 2019). The fall in the stock price after the
announcement of reduction in dividend highlights the clientele effect. The investors preferred
the policy of the company to receive the dividend, however the reduction triggered the public
reaction of negativity and thus the stock price fell (Hameed and Xie 2019).

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The example of this is the fall in the stock of Microsoft when the company announced
dividend for the first time. The market took the signal of lack of opportunity for Microsoft
thus the signalling and the clientele hypothesis (Xu 2018).
Conclusion:
The above report is concluded with the understanding of the debt and its impact on
the profitability of the company. Although the company of our analysis has all its leverage
ratio less than the industry average, it is slowly reaching towards its industry average in the
long run. Also the company had its leverage ratio less than its competitor in 2014 and 2015, it
has increased its ratio from 2016 onwards. The comparable firm although maintaining its
ratio at a stable level. The announcement of dividend is a crucial event as it has a positive
impact or a negative impact on the stock price of a company. This due to various effects or
hypothesis like the signalling, clientele or the free cash flow. The optimal capital structure
and maintaining it is also important for a company as it maximizes the value of the firm.

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References and Bibliographies:
Antill, S. and Grenadier, S.R., 2017. Optimal capital structure and bankruptcy choice:
Dynamic bargaining vs liquidation.
Bhargava, S., 2018. Theory of Signalling Dividends: An Economic Analysis. Available at
SSRN 3233042.
Campbell, T.C., Galpin, N. and Johnson, S.A., 2016. Optimal inside debt compensation and
the value of equity and debt. Journal of Financial Economics, 119(2), pp.336-352.
DeAngelo, H. and Stulz, R.M., 2015. Liquid-claim production, risk management, and bank
capital structure: Why high leverage is optimal for banks. Journal of Financial
Economics, 116(2), pp.219-236.
Doe–Bansah, G.D., 2016. The effect of dividend announcement on share prices: A study on
the Ghana stock exchange (Doctoral dissertation).
Hameed, A. and Xie, J., 2019. Preference for dividends and return comovement. Journal of
Financial Economics, 132(1), pp.103-125.
Jin, J., Ji, P. and Gu, R., 2016. Identifying comparative customer requirements from product
online reviews for competitor analysis. Engineering Applications of Artificial
Intelligence, 49, pp.61-73.
Kedia, S., Starks, L. and Wang, X., 2016. Institutional investors and hedge fund activism.
Working paper.
Lewis, C.M. and Tan, Y., 2016. Debt-equity choices, R&D investment and market
timing. Journal of financial economics, 119(3), pp.599-610.

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Linder, D., 2016. Reputational risk of banks: a study on the effects of regulatory sanctions for
major european banks (Doctoral dissertation, Instituto Superior de Economia e Gestão).
Qi, Y., Roth, L. and Wald, J., 2017. Creditor protection laws, debt financing, and corporate
investment over the business cycle. Journal of International Business Studies, 48(4), pp.477-
497.
Smith, D.D. and Pennathur, A.K., 2019. Signaling Versus Free Cash Flow Theory: What
Does Earnings Management Reveal About Dividend Initiation?. Journal of Accounting,
Auditing & Finance, 34(2), pp.284-308.
Suhanto, A. and Damayanti, S.M., 2019. UNSTABLE GROWTH COMPANY VS. ITS
BENCHMARK FIRM: IS IT FINANCIALLY HEALTHY? A CASE STUDY USING
FINANCIAL PERFORMANCE ANALYSIS. International Journal of Accounting, 4(20),
pp.74-85.
Xu, D., 2018. Dividend payout and working capital: evidence from the London Stock
Exchange (Doctoral dissertation, Lincoln University).