Finance Management Assignment 2022

Compare the financial report for BJAUTO and DRB-HICOM. Follow the rubric requirement.

Running head: FINANCE
Financial Management II
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction..................................................................................................................................2
Relevant Ratios for capital structure analysis..............................................................................3
Ratio analysis of Bermaz Auto Berhad........................................................................................6
Comparative analysis...................................................................................................................8
Conclusion...................................................................................................................................9
References..................................................................................................................................10

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Introduction
The primary purpose of the report is to conduct a thorough analysis of the capital
structure of two companies operating in Malaysia. After analysing the capital structure of both
the companies, a comparative analysis is conducted on both the companies. The companies
selected for this purpose are DRB-HICOM and Bermaz Auto Berhad.
DRB-HICOM is renowned as one of the largest and most diverse conglomerates in
Malaysia. The main businesses of the entity are conducted in the Automotive, Services and
Properties sector. It is a result of the merger between Heavy Industries Corporation of Malaysia
Berhad (HICOM) and Diversified Resources Berhad (DRB) in 2000 (DRB-HICOM, 2020).
. As per the company’s reports, there are around 70 operating companies within the group with a
total employee strength of 56000. The company is well-known across Malaysia for its Properties
business. The most popular brand of the entity is Glenmarie. This brand has become synonymous
with luxury and quality in relation to residential, commercial and hospitality projects nationwide.
Another popular aspect is the Proton City, a township spread across 4000 acres across Malaysia.
Bermaz Auto Berhad is another Malaysian entity which commenced its operations in
2008 after the merger between Bermaz and Mazda Motor Corporation. The core businesses of
the entity include the distribution and retailing of Mazda vehicles and the provision of after sale
services related to the same. Apart from these, the business also includes the distribution of
vehicles through third party branches in Philippines (Bermaz Auto Berhad, 2020). As a part of
conducting the business smoothly, the business is also involved in the local assembly of Mazda
Vehicles through the use of local and imported Mazda-supplied parts. Apart from these, the
entity is also involved in the overseas distribution of vehicles assembled in Malaysia.

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Relevant Ratios for capital structure analysis
Capital structure ratios of DRB- HICOM
Particulars Formula 2014 2015 2016 2017 2018
Total Debt 71270
63
69097
31
68647
45
62937
75
57851
12
Total Equity 73114
83
75705
86
85024
43
10138
515
10285
872
Debt-Equity Ratio Total Debt/Total Equity 0.974
777
0.912
708
0.807
385
0.620
779
0.562
433
Total Debt 71270
63
69097
31
68647
45
62937
75
57851
12
Total Assets 39753
022
42359
422
42041
503
43847
849
43195
433
Debt to Total Assets
Ratio
Total Debt/Total Assets
Ratio
0.179
284
0.163
121
0.163
285
0.143
537
0.133
929
Earnings per share 0.239
1
0.155
3
-
0.513
5
-0.235 0.257
8
Dividend per share 0.6 0.6 0.2 0.1 0.3
Dividend Coverage Earnings per 0.398 0.258 - -2.35 0.86

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Ratio share/Dividend per share 5 833 2.567
5
Profit Before Tax 80174
1
50221
1
-
82213
0
-
22218
4
41513
0
Interest Expense 36858
5
39205
4
37735
9
35924
9
33634
3
Earnings before
Interest and Tax
PBT + Interest 11703
26
89426
5
-
44477
1
13706
5
75147
3
Interest Coverage
Ratio
EBIT/Interest Expense 3.175
186
2.280
974
-
1.178
64
0.381
532
2.234
246
The relevant capital structure ratios that have been computed in the given situation are the
Debt-Equity ratio, Debt-to-Total assets ratio, Dividend Coverage ratio and Interest Coverage
ratio (Ghasemi & Ab Razak, 2016).The Debt-Equity ratio measures the financial leverage of a
company. A firm is said to be highly levered when debt is the main source of finance for a
company. This ratio is important because it is a measure of how stable a company is and is an
indicator of its ability to raise additional capital on its own to grow. The problem with having an
increased debt is that it tends to put the company at a greater risk than the internally generated
funds (Anuar & Chin, 2016).However, debt also helps a company to quickly fund its growth in

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the short term. In case of DRB-HCOM, it is evident that the entity was highly levered in 2014
with a ratio as high as 0.97. However, the company has succeeded in reducing its debt as a part
of the capital to 0.56 by 2018. Hence, the company’s risk of going bankrupt has come down
significantly over the past five years. The company has a less risky capital structure in the
present day than it had previously.
The debt to assets ratio is a measure of the total debt that the company has invested when
compared to the total assets owned by it. The main purpose of analysing this ratio is to
understand the amount of assets of a company which were financed by the creditors. While
having a large number of assets is an indicator of a healthy company performance, it cannot be
the case if it is financed by huge amount of debts. In case of DRB-HICOM, the total debt to
assets ratio of the company has always been as low as 10 percent. This is a good sign as the
company can use the debt and assets as a part of the business and not for purchasing new assets.
This is also an indicator of better operational performance on behalf of the company.
The dividend coverage ratio is a measure of the number of times that a company can pay
dividends to its shareholders. A dividend coverage ratio of greater than one suggests that the
company is able to generate enough earnings during the course of a year to pay dividends to the
shareholders at least once (Fitri, Hosen & Muhari, 2016).A DCR of more than two is an indicator
of an extremely efficient performance by the company. A consistently low levels of DCR is a
cause for concern amongst the shareholders because it suggests that the company will not be able
to pay the dividends in the future. In DRB-HICOM’s situation, the company has generated
consistently low levels of DCR. In 2016, the DCR of the company was at its lowest at -2.5. In
2018, this improved to 0.86, but indicates that the company is unable to generate sufficient

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profits to pay the amounts to its shareholders in the current year. However, this ratio is not
considered as a great indicator of the future risk faced by a company.
The Interest coverage ratio is the measure of a company’s ability to handle the financial
burdens faced by it. It suggests how well a company is able to pay the interest on the debt taken
by it before the payment of taxes (Werne, 2015). As the amount paid on debt is used as a cover
against the taxes paid by the entity, it can be used to reduce the tax burden of the entity.
However, this ratio should also be greater than one to indicate that a company is performing well
in terms of meeting its obligations. In case of DRB-HICOM, the interest coverage ratio has gone
down on a consistent basis from 2014 to 2016. It went up by 0.38 in 2017 and went as high as
2.34 in 2018.
The capital structure analysis of the entity suggests that the company was highly risk
taking in 2014. However, this risk has come down in the recent years and the amount of debt
employed by the entity as a part of its business also came down by a significant margin.
Similarly, the net profit earned by the entity in 2016 and 2017 was also negative. These suggest
that the entity needs to maintain a better profitability for the benefit of the people investing in it.
Ratio analysis of Bermaz Auto Berhad
Particulars Formula 2014 2015 2016 2017 2018
Total Debt 2598
03
2470
16
3858
77
4632
85
3272
35
Total Equity 3543
94
4925
34
5630
14
4923
97
5245
04

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Debt-Equity Ratio Total Debt/Total Equity 0.733
09
0.501
52
0.685
38
0.940
88
0.623
89
Total Debt 2598
03
2470
16
3858
77
4632
85
3272
35
Total Assets 6141
97
7395
50
9488
91
9556
82
8517
39
Debt to Total Assets
Ratio
Total Debt/Total Assets
Ratio
0.423 0.334
01
0.406
66
0.484
77
0.384
2
Earnings per share 0.122
9
0.187
4
0.173
2
0.102
5
0.121
2
Dividend per share 0.855 0.185 0.129 0.121 0.175
Dividend Coverage
Ratio
Earnings per
share/Dividend per share
0.14 1.01 1.34 0.85 0.69
Profit Before Tax 1797
75
2989
71
2782
57
1751
58
1970
67
Interest Expense 1087 - - 2965 5640
Earnings before
Interest and Tax
PBT + Interest 1808
62
2989
71
2782
57
1781
23
2027
07
Interest Coverage
Ratio
EBIT/Interest Expense 166.3
86
NA NA 60.07
52
35.94
1

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The debt-equity ratio of Bermaz Auto Limited suggests that the entity’s debt-equity ratio
has been fluctuating over the years. It was as high as 0.94088 in 2017 and came down to 0.62389
in 2018. This suggests that the entity is looking to become more stable in terms of its operations.
The total debt to assets ratio of the entity also suggests that the entity is not employing the debt
funds for the purchase of assets. The dividend cover of this entity is also not very high and the
highest ratio in the past five years is 1.34. This indicates that the entity has not levied its focus
sufficiently on the payment of dividends from the earnings made by it in a given financial year.
The interest coverage ratio of the expense in the years 2016 and 2017 was very high as it did not
implement any debt funds on which interest had to be paid as a part of the expenses. However,
the debt funds and interest expenditure by the company have grown in recent years. This
suggests that the entity is looking to quickly expand its business in the short run.
Comparative analysis
In this case, the analysis was conducted between DRB-HICOM and Bermaz Auto Berhad
to compare and contrast the capital structure of both the entities over a period of 5 years. The
analysis suggests that both the entities have a similar structure in terms of employing debt as a
part of the business. The debt-equity ratio of both the entities in 2018 was lower than 0.65. The
debt to asset ratio of DRB-HICOM, however was more than that of Bermaz Auto Berhad in the
year 2018. This means that the assets generated by DRB are more dependent on the availability
of debt funds to be utilised in the business. The Dividend coverage ratio of Bermaz is much
better than that of DRB, which has failed to generate sufficient funds as a part of the distribution
to the shareholders. This also means that the operational stability of DRB is lower. The people
investing in both these entities are also unable to generate sufficient funds necessary to provide
returns to the shareholders. The interest coverage ratio of Bermaz Auto is better than that of

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DRB due to the lack of additional external funds used by the entity. However, in recent years, it
is quite evident that DRB is looking to stabilise itself as a business while Bermaz is looking to
expand its business as a part of its expansion activities.
Conclusion
On the basis of the above discussion, it can be suggested that the capital structure is an
important indicator of the risk profile and future prospects of a business entity. The ratios used to
analyse the same were the debt-equity ratio, debt to total assets ratio, dividend coverage ratio and
the interest coverage ratios of the entity. An analysis of the profiles of the entities suggests that
both of them do not employ huge debts in relation to the equity employed by them as a part of
the business. Similarly, the interest coverage of the entities differs significantly because of the
differences in the external debt funds employed by the company. While Bermaz is looking to
fund its short term growth by employing more debts, DRB is looking to stabilise itself by
reducing the dependence on the excess external funds used by it as a part of the business.

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References
Annual Reports – DRB-HICOM Berhad. (2020). Drb-hicom.com. Retrieved 29 February 2020,
from https://www.drb-hicom.com/investors/annual-report/
Anuar, H., & Chin, O. (2016). The development of debt to equity ratio in capital structure model:
A case of micro franchising. Procedia Economics and Finance, 35, 274-280.
Fitri, R. R., Hosen, M. N., & Muhari, S. (2016). Analysis of factors that impact dividend payout
ratio on listed companies at Jakarta islamic index. International Journal of Academic
Research in Accounting, Finance and Management Sciences, 6(2), 87-97.
Ghasemi, M., & Ab Razak, N. H. (2016). The impact of liquidity on the capital structure:
Evidence from Malaysia. International journal of economics and finance, 8(10), 130-139.
Malaysia, N. (2020). Bermaz Auto Berhad. Bauto.com.my. Retrieved 29 February 2020, from
https://www.bauto.com.my/investor-relations.php?p=annual_reports
Werne, J. (2015). An Optimization Of The Liquidity Coverage Ratio.