Financial Analysis Management: PDF

Financial Analysis
Management

Table of Contents
ASSIGNMENT 1.............................................................................................................................1
INTRODUCTION...........................................................................................................................1
1. BACKGROUND AND POSITION OF THE COMPANY IN THE INDUSTRY.....................1
2. FIVE YEAR COMPARATIVE FINANCIAL PERFORMANCE ANALYSIS USING
RATIOS...........................................................................................................................................2
3. ANALYSIS OF FINANCIAL STRENGTH OF THE COMPANIES........................................9
4. PROBLEMS OR LIMITATIONS OF RATIO ANALYSIS AND ASSUMPTIONS..............11
CONCLUSION..............................................................................................................................12
ASSIGNMENT 2...........................................................................................................................12
INTRODUCTION.........................................................................................................................12
2.1 REVIEW OF 4 ALTERNATIVE METHODS OF LONG TERM FINANCE.......................13
1. External sources of long term funds......................................................................................13
2. External Equity funds and debt funds...................................................................................13
3 The ways in which an organisation may raise external equity funds.....................................14
4. The ways in which an organisation may raise debt funds.....................................................15
5. External factors to be considered in raising debt or equity funding factors..........................15
2.2 RECOMMENDATION ON WHICH FINANCE METHOD TO USE..................................16
2.3 LINK BETWEEN FINANCING AND INVESTMENT DECISION ....................................18
1. Impacts of financing on cost of capital.................................................................................18
2. Use of WACC in investment appraisal.................................................................................18
3. Link between debt finance, WACC and NPV......................................................................19
4. Recommendation...................................................................................................................19
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20
APPENDIX....................................................................................................................................23

ASSIGNMENT 1
INTRODUCTION
Financial analysis can be defined as the process of evaluating and assessing different
aspects of a company. These are projects, budgets, financial performance etc. It is mainly used to
figure out that an organisation is in a good condition or not and also guides to evaluate
performance of the business. There are various types of analysis that are used by enterprises
these are vertical, horizontal, growth, leverage, profitability, efficiency etc. Strategic decisions
regarding investment are formed with the help of it (Aba, Badar and Hayden, 2016). Purpose of
this project report is to understand the business environment of Petronas Gas BHD which is also
known as Petroliam nasional Berhad (National Petroleum Limited) and its market position.
Another purpose is to conduct a competitive analysis of financial performance of Petronas Gas
and Sapura Energy. The detailed investigation of both the companies is done to make buying
decision of shares.
In this project report a comparative financial performance analysis is going to be
conducted for two different organisations with the help of different ratios. A summary of this
assessment, justification regarding buying decision, problems or limitations of ratio analysis and
assumptions that are made by a investor to form the decision.
1. BACKGROUND AND POSITION OF THE COMPANY IN THE
INDUSTRY
Petronas Gas Bhd is a Malaysian oil and gas organisation which was founded in year
1974 and owned by the legal authorities of Malaysia. It has ranked among world's top 500 largest
corporations. The company has also ranked as the world's 12th most profitable entity and in Asia
it is on the first number. Its headquarter is in Kuala Lumpur, Malaysia. Currently Petronas is
executing its business all around the world but mainly in its home country. The products and
services that are offered by it are petroleum, natural gas, petrochemicals, filling station and
shipping. Currently more than 51000 employees are working in the enterprise that are providing
services worldwide and strength of workforce within the nation is more than 2100. There are
various subsidiaries of the organisation these are KLCC property holdings, Petronas Gas,
Daganagan, Chemicals, Port, Misc etc. It was incorporated in year 1983 and listed on market of
Bursa Malaysia Securities Berhad in year 1995 (Background of Petronas Gas Bhd, 2019).
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Position of the company is very good in its industry because it is the most profitable
organisation in whole Asia As compare to its competitor which is Sapura Energy. Petronas Gas
has high sustainability as it focuses on different key aspects such as shareholder's value, national
resources use, climate change, biodiversity, health, safety and environment, product stewardship
and societal needs that helps it to be on the top of its industry. Standard of corporate governance
of the company is also very high because the board members has achieved higher ratings for its
professionalism and business ethics wit the help of its operational activities. According to BMCC
oil and gas sector in Malaysia contributes almost 20% in its GDP and it has been forecasted that
the industry will grow with the rate of 5% annually.
2. FIVE YEAR COMPARATIVE FINANCIAL PERFORMANCE
ANALYSIS USING RATIOS
Ratio analysis: It is a process in which different types of financial information is used to
analyse performance of a company. Overall profitability, liquidity, efficiency etc. can be
determined with the help of ratios. Various types of ratios that are described below are calculated
for Petronas Gas and Sapura Energy to compare financial performance of both the companies.
Profitability ratios: These ratios are calculated to evaluate profitability of an
organisation. It helps to analyse ability of a company to generate income against its expenses and
spendings.
 Gross margin ratio: This ratio is mainly used to compare gross profits of the company
with net sales. It shows the percentage of gross margin which is generated form the
revenues in a particular time period (Alviniussen and Jankensgard, 2015).
 Net margin ratio: It is calculated to analyse the percentage of net profits which is
generated against the sales of an accounting year. Purpose of calculating this ratio is to
assess profitability of the company.
 Return on capital employed ratio: Such type of ratio is used to determine efficiency
and profitability of an organisation against the investments that are made by it in a
particular time period. It is very important for the companies to keep their ROCE high
from the rate at which the entity borrows money.
Liquidity ratios: These ratios are mainly calculated to determine liquidity and financial
status of a company. It guides stakeholders to analyse that organisations are having appropriate
funds to operate business or not.
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 Current ratio: It shows capability of a company to pay out all its short term liabilities
with the help of current assets in one year. If it varies from 1.5 to 2 then it will be
considered as a good ratio.
 Quick ratio: It calculated to determine the ability of the company to pay all the short
term liabilities with the help of quick assets in less then one year. Ideal quick ratio is 1 for
all the companies (Arun, Almahrog and Aribi, 2015).
Capital structure or gearing ratios: These ratios are calculated by the organisations in
order to compare equities with different aspects of balance sheet such as debts, total assets etc.
 Debt equity ratio: This ratio is used to analyse the proportion of equities and external
debts that are invested in the organisation's operational activities. The ideal debt equity
ratio for gas industry is 1 which means that shareholder's funds and debts are equally
used to execute business.
 Equity ratio: It is calculated to determine relationship between total assets and equities
of a company which shows that percentage of equities that are involved in assets.
Efficiency ratios: Such type of ratios are calculated to analyse the way in which a
company uses all its liabilities and assets internally. It helps to determine overall efficiency of the
organisation to enhance sales.
 Total asset turnover ratio: It helps to analyse the ability to total assets to increase sales
of the organisation.
 Fixed asset turnover ratio: It is used to calculate the percentage of sales which is
generate with the help of fixed assets.
 Inventory turnover ratio: This ratio is used to measure the compatibility of a company
to manage all its inventory.
Stock market performance ratios: These ratios are calculated to analyse performance of
the company. All of them guides the investors to forecast the returns that can be provided by the
organisation in future on their investment (Blum and Dacorogna, 2014).
 Price earning ratio: It shows the relation between share prices and earning per share of a
company. It helps the investors to estimate the rate of return that can be acquired by them
in future. It is forecasted with the help of previous year data. For gas industry the ideal
ratio is 25.4.
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 Return on equity: It is used to determine the returns that are generated by a company on
its funds. It shows the capability of an organisation to use investments in appropriate
manner. The ratio between 15-20% is considered as a good return on equity.
 Earning per share: It is a part of total profits of a company which is allocated to the
shareholders according to the number of shares that are owned by them.
 Dividend yield ratio: This ratio is shows the relationship between dividend distributed
by a company and its share price. It also reflects the percentage of share price which is
paid in the form of dividend to the shareholders (Campa, 2015).
All the above described ratios are calculated for Petronas Gas and its competitor Sapura
Energy which is a Malaysian integrated oil and gas service providing company. It operates its
business in more than 20 countries such as Chine, US, Australia etc. it is mainly based in Seri
Kembangan and employing around 13000 employees. The calculations are as follows:
Financial ratios of Petronas Gas Bhd:
Basis Ratios Formula 2014 2015 2016 2017 2018
Profitability
ratios Gross margin
Gross profit/ net
sales* 100 49.97 50.36 48.00 45.30 44.55
Net margin
Net profit/ net sales
*100 53.42 41.96 44.59 38.13 37.28
Return on
capital
employed
Net operating
profit/ capital
employed *100 15.76 17.18 14.88 13.77 13.47
Gross margin ratio of Petronas are fluctuating continuously these are not stable which
shows that profits of the company are unsteady. Net profit margin of the organisation is very
high as compare to its industry average which means it has good profitability in its sector.
Industry average for net margin is 6.1%. Return on capital employed of Petronas is decreasing
since year 2016 to 2018 which shows that the company has reduced its investment in itself (Final
accounts of Petronas Energy Bhd, 2019).
Overall profitability of the company is very good as net profit margin ratio of the
Petronas is high from its industry average which is 6.1%. All the ratios under this head are
interrelated with each other because if gross profit changes then it will leave affect on gross
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margin, net margin and return on capital employed because if it decreases the other profits such
as operating and net profits will get affected. These ratios are decreasing since year 2016 which
shows their interlink (Chandra, 2017).
Basis Ratios Formula 2014 2015 2016 2017 2018
Liquidity
ratios Current ratio
Current assets/
current liabilities 1.47 1.63 2.32 2.45 4.76
Quick ratio
Quick assets/
current liabilities 1.41 1.56 2.24 2.37 4.64
Current ratio of Petronas Gas was lower then ideal ratio is year 2014 and 2015 but from
2016 it has crossed the limit of ideal ratio which means the organisation has higher liquidity.
Quick ratio of the company is very good and higher then the ideal ratio which is 1.
Organisation's overall liquidity is very good as current and quick ratios are continuously
increasing since year 2014. Both the ratios are interlinked with each other because quick assets
are a part of current assets hence if it changes then it will leave impact on both the ratios. It is
very beneficial for the investors because there are more then sufficient funds in Petronas Gas and
they will get good returns on their investment.
Basis Ratios Formula 2014 2015 2016 2017 2018
Capital
structure or
gearing ratios
Debt equity
ratio
External liabilities/
internal liabilities 0.29 0.26 0.26 0.38 0.41
Equity ratio Equities/ total assets 0.78 0.79 0.80 0.72 0.71
Debt equity ratio of Petronas is very low as compare to industry average which means
that organisation is using internal funds for operations rather then debts. Equity ratio of the
company fluctuating and it shows that more assets are purchased from shareholder's equities
rather then debts.
Capital structure of Petronas Gas is not good as its debt equity and equity ratios both are
not showing a good position. It is using internal funds for its operations and purchases rather
then external funds such as debts. Both the ratios are interlinked because if equities fluctuates
then these ratios may get affected due to this as they show relation between debts, assets and
shareholder's funds.
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Basis Ratios Formula 2014 2015 2016 2017 2018
Efficiency
ratios
Total asset
turnover Sales/ total assets 0.29 0.33 0.31 0.28 0.27
Fixed asset
turnover Sales/ fixed assets 0.34 0.37 0.36 0.33 0.34
Inventory
turnover ratio Sales/ Inventory 99.79 102.14 96.87 67.07 71.79
Total assets turnover ratios show fluctuations it takes place due to changes in sales and
assets of the company. Changes in fixed assets has resulted in vacillation in its relation with
organisation's sales. Inventory turnover ratio of Petronas Gas was decreased in 2016 and 2017
but at the end of 2018 it has again started to increase (Chaudary, Zafar and Salman, 2015).
Petronas Gas has an average efficiency to because continuous fluctuations have been
recorded in above calculated ratios. All of them are interlinked with each other because they are
based upon net sales which was generated by the company in a specific time period.
Basis Ratios Formula 2014 2015 2016 2017 2018
Stock market
performance
ratios
Price earning
ratio Share price/ EPS 22.66 24.72 21.91 22.49 19.69
Return on
equity
Net profit/
shareholder's equity 0.20 0.17 0.17 0.15 0.14
Earning per
share
Net profit/ weighted
average shares 1.05 0.93 1.00 0.88 0.91
Dividend yield
ratio
Dividend per share/
share price *100 2.10 3.48 2.64 3.04 3.70
Price earning ratio of Petronas is reflecting changes and reason behind this is changes in
share price and EPS. Return on equity is continuously decreasing which shows that overall
returns of the company are declining year by year. Earning per share is showing fluctuations
which means income on each share is varying every year. Dividend yield of Petronas has been
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increased in 2017 and 2018 which means in this period higher incomes are received by the
external parties of the company as compare to previous years.
Price earning ratio, return on equity, EPS and dividend yield ratios are showing
fluctuations which means stock market performance is not stable. All of them are interrelated
with each other because these are based upon share price, equities or EPS, If one elements
changes then it may result in fluctuations in all of them (
Final accounts of Sapura Energy Bhd, 2019).
Financial ratios of Sapura Energy:
Basis Ratios Formula 2014 2015 2016 2017 2018
Profitability
ratios
Gross
margin
Gross profit/ net
sales* 100 25.16 28.48 25.14 22.19 16.44
Net margin
Net profit/ net sales
*100 12.97 14.41 -7.78 2.72 -42.46
Return on
capital
employed
Net operating profit/
capital employed
*100 5.36 5.71 5.51 -1.89 1.08
Gross margin ratios of Sapura Energy are showing good profitability of the organisation
but net margin and return on capital employed both are showing negative results of ratios which
means its profitability is not compatible and it is bearing losses (Churet and Eccles, 2014).
Profitability of Sapura Energy is not good because the net margin and ROCE are showing
negative ratios because the company has faced losses in previous years. All the ratios are
interrelated with each other as changes in sales and gross profits may result in fluctuations in
other ratios.
Basis Ratios Formula 2014 2015 2016 2017 2018
Liquidity
ratios
Current
ratio
Current assets/
current liabilities 1.06 1.28 1.04 1.00 1.02
Quick ratio
Quick assets/ current
liabilities 0.85 1.03 0.93 0.92 0.92
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Current ratio of the company is very low as compare to ideal ratio which means the
organisation is not able to pay all its current liabilities from its current liabilities. Quick ratio of
Sapura is also very low it means liquidity of the organisation is weak.
Overall liquidity of Sapura is very low because current and quick ratios both are very low
as compare to the ideal ratios. It means organisation does not have sufficient funds to repay all its
short term liabilities. These ratios are interlinked with each other because these are based upon
current liabilities if it changes then it will result in fluctuation in ratios.
Basis Ratios Formula 2014 2015 2016 2017 2018
Capital
structure or
gearing ratios
Debt equity
ratio
External liabilities/
internal liabilities 1.61 1.88 1.99 1.86 2.17
Equity ratio Equities/ total assets 0.38 0.35 0.33 0.35 0.32
Debt equity ratio of the Sapura Energy is more then industry average which is 1, it means
organisation is appropriately using debts and equities. Equity ratio of the company is fluctuating
but it is very low which means a few percentage of funds are used to buy assets (Crowther,
2018).
Capital structure of the organisation is very good because it is using external liabilities
more then internal liabilities for its operational activities and for assets. Shareholder's equity is
appropriately utilised by the entity. Both the ratios are interlinked because there is one thing
which is common in them which is equities.
Basis Ratios Formula 2014 2015 2016 2017 2018
Efficiency
ratios
Total asset
turnover Sales/ total assets 0.31 0.29 0.28 0.20 0.20
Fixed asset
turnover Sales/ fixed assets 0.38 0.34 0.34 0.25 0.23
Inventory
turnover
ratio Sales/ Inventory 17.75 15.61 17.80 16.71 15.64
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Total asset turnover ratio of Sapura is decreasing since year 2014 and at last it remains
stable for year 2017 and 2018. Fixed assets ratio of Sapura is also declining due to fluctuations in
assets. Inventory turnover of the enterprise is fluctuating and it was reducing sine year 2017.
Efficiency of the entity is not good because all the ratios are declining continuously. All
the ratios are interrelated with each other because they are calculated with the help of sales if it
changes then all of them get affected due to this.
Basis Ratios Formula 2014 2015 2016 2017 2018
Stock market
performance
ratios
Price
earning
ratio Share price/ EPS 23.78 9.86 -14.03 52.07 -1.29
Return on
equity
Net profit/
shareholder's equity 0.11 0.12 -0.06 0.02 -0.26
Earning per
share
Net profit/ weighted
average shares 0.19 0.24 -0.13 0.03 -0.42
Dividend
yield ratio
Dividend per share/
share price *100 0.00 1.27 0.54 0.00 1.83
Price earning, return on equity and EPS are showing negative results because
organisation's overall profitability is not good. Dividend yield ratio is showing zero because in
year 2014 and 2017 dividend is not provided to the shareholders (Dunham-Taylor and Pinczuk,
2014).
Stock market performance of Sapura Energy is weak because all the ratios are showing
negative result or zero which means the organisation is not able to provide appropriate returns to
the shareholders.
3. ANALYSIS OF FINANCIAL STRENGTH OF THE COMPANIES
Comparison of financial health: ROCE of Petronas Gas is very high as compare to
Sapura Energy which means its profitability is higher. It shows that company is achieving higher
returns on the investments that are made from its internal liabilities.
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Financial risk of Sapura Energy is lower then Petronas because its gearing ratios are very
high because it is using all the internal liabilities in more appropriate manner as compare to
Petronas. Financial risk in Sapura is lower then other organisation.
Petronas is showing good return on equity then Sapura it offers higher returns to the
shareholder their funds that are invested by them in the company but Sapura Energy is not
providing appropriate returns on their money. Earning per share of Petronas Gas is more then the
other organisation which means it is acquiring higher incomes on its shares (Feng and Wang,
2016).
Price earning ratio of Petronas is very good as compare to Sapura because it is not
showing any negative result like Sapura does. This ratio shows a good stock market performance
of the organisation.
Movement of share price trend of Petronas is more clear as compare to Sapura because
the trend line is showing the increasing trend but in Sapura it is not clear because it is going to be
consolidated (Share price of Petronas Gas Bhd, 2019). In this situation it is not possible to
estimate that it will increase in future or not. Trend lines of both of them are as follows:
Trend line of Petronas:
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(Source: Share price of Petronas Gas Bhd, 2019)
Trend line of Sapura:
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Illustration 1: Share price of Petronas Gas Bhd, 2019

(Source: Share price of Sapura Energy Bhd, 2019)
From both the companies the investors will choose to invest in Petronas Gas Bhd because
its profitability, liquidity and efficiency is very good as compare to Sapura Energy Bhd. It is
providing good returns to the investor on their investment (Share price of Sapura Energy Bhd,
2019).
4. PROBLEMS OR LIMITATIONS OF RATIO ANALYSIS AND
ASSUMPTIONS
While calculating different types of ratios or conducting ratio analysis the investor have
to face different problems all of them are as follows:
 Some times appropriate data cannot be gathered by the investors as organisations does
not prefer to provide each and every information to the public.
 If companies manipulates their final accounts then it is not possible to get accurate results
and wrong decisions can be formulated by the investors and shareholders regarding
investing their money (Filip and Raffournier, 2014).
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Illustration 2: Share price of Sakura Energy Bhd, 2019

 All the figures that are reflected in final accounts are based on book value actual value is
not recorded in them so it results in inaccurate ratios that are not appropriate (Finkler,
Smith and Calabrese, 2019).
 Different organisations implement different accounting principles while recording
financial information so it is not possible to conduct an proper comparison between two
companies.
CONCLUSION
From the above assignment it has been concluded that there are different types of ratios
such as liquidity, capital structure, stock market performance etc. are also used for the purpose of
financial analysis. All the investors who are going to invest their money in a company always try
to find out actual potential of it so that they may get higher returns on their investment. It is very
important for shareholders to evaluate performance of the company where they have made
investments because it helps to assess that their money is appropriately utilised by the
organisation or not.
ASSIGNMENT 2
INTRODUCTION
Long term finance is the term which is used to reflect different types of financial
instruments such as bonds, bank loans, debt finance etc. For all the business entities it is a major
requirement because it helps to operate a business smoothly. These are classified according to
various aspects like ownership or control, time period and source of generation. Main aim of an
organisation to acquire such funds is to maximise its spendings on operational activities so that
higher profits can be generated in future. All the external monetary resources that are not paid
back within one year are considered as long term finance for a company. There are various ways
in which a company can generate it for it self (Friede, Busch and Bassen, 2015). These are
external equity and debts funds. Equities include right shares, placing, offer for sale etc. and
debts covers loan stock, debentures, hire purchase, mortgage, redeemable preference shares,
hybrid instruments, grants etc.
Main purpose of this assignment is to enhance knowledge regarding long term funds that
are used by the organisations for operational purpose. The organisation which is selected for this
project is WCT Holdings Berhad which is operating its business under construction sector. Its
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headquarter is in Petaling Jaya, Malaysia. Objective behind formulation of this report is to find
the ways in which WCT Holdings may raise external funds. Various topics are discussed under
this report these are various methods of long term finance available for a company and
recommendation regarding the method which is going to be selected. Link between investment
and financing decision is also covered under this assignment.
2.1 REVIEW OF 4 ALTERNATIVE METHODS OF LONG TERM
FINANCE
1. External sources of long term funds
External sources are the medium of generating funds from outsider parties in order to
appropriately conduct operational and executional activities of the organisation. WCT Holdings
Berhad is planning to acquire funds from outer medium so that business can be expanded in to
different geographical locations (Güner, 2015). There are two main types of sources in which the
company may generate monetary resources from outsider sources. These are external equity
funds and debt funds. When a company like WCT Holdings Berhad is planning to expand its
business then it is very important for it to arrange sufficient funds so that the goal can be achieve
easily. If there are no adequate monetary resources then it is not possible to attain long term
objectives that are set by organisation.
2. External Equity funds and debt funds
External equity funds: Such type of funds can be generated by selling organisational
shares to the parties who are interested in buying. In such type of financing the owner have to
sale or share its ownership with other person who is going to invest money in the organisation.
This option can be adopted by WCT Holdings Berhad in order to generate finance to expand its
business in more geographical locations. There is no requirement of repaying the amount to the
shareholders as they became the owners of the company and share power of decision making and
other activities (Humavindu and Stage, 2015). Various types of external equity funds are issuing
right shares, offer for sale, placing etc. It will be very beneficial for the organisation to acquire
finance from this alternative because if losses are faced by WCT Holdings then there will be no
compulsion of paying any type of dividend to the shareholders. When good profits are generated
by the company then only a particular part of revenues will be paid to them.
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External debt funds: These are the funds that are generated from external parties.
Interest on a fixed rate is also provided on this type of funding. The stakeholders who provide
such type of finance to the organisation are investors, creditors, banks etc. Loan stock,
debentures, hire purchase, mortgage, redeemable preference shares, hybrid instruments and
grants are the example of such type of funding. This option can be chosen by the WCT Holdings
Berhad as it may help to expand its business in different geographic locations (Karadag, 2015).
When this alternative is selected by the company then ownership and power of decision making
can be saved from transferring it to other parties. Different type of other benefits such as tax
deduction can also be acquired with the help of debt funds as government provide deduction to
the organisations if it is having any debts.
3 The ways in which an organisation may raise external equity funds
There are two main types of external equity funds that can be used by WCT Holdings
Berhad in order to acquire funds for its business expansion purpose in different geographic
locations. Both of them are described below:
 Issuing right shares: These shares can be issued by WCT Holdings to its existing
shareholders in order to raise additional capital to expand the business in more
geographic locations. Instead of going to the public or other external parties the company
may choose its current stockholders to enhance percentage of their holdings in the
enterprise. It is an opportunity for them to enhance their exposure in the company by
buying right shares on discounted price. These are traded as the ordinary shares in the
market any specific procedure is not used for their trading.
 Offer for sale: In this option WCT Holdings Berhad can sale its new shares to outsider
parties or public in order to enhance funding for business operations and expansion. This
procedure is done through exchange platform which is mainly established for listed
companies. All of them are offered at a fixed price because the main objective behind this
offering is to increase funds that can be utilised to accomplish all the predetermined goals
(Kroes and Manikas, 2014).
4. The ways in which an organisation may raise debt funds
There are various ways that can be considered by the director of WCT Holdings Berhad
for the purpose of business expansion in different geographical locations. These are described
below in detail:
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 Debentures: It is a type of debt instrument in which funds can be generated by WCT
Holdings from external sources. These are not secured by collateral or physical asset of
the organisation. If credit worthiness of the issuer is very good then only the buyer will
get attracted towards the debenture. Interest on a fixed rate is also provided by the owner
of the company whether it receives a profit or face huge losses. This option can be
selected by the directors of WCT Holdings in order to generate funds for expanding
business as it is considered as a safe financial asset because it has low interest rate
(Martin, 2016).
 Loan stock: These are the shares that are provided to the investor as a collateral for a
loan. It can be taken from banks or other stakeholders who want a security in exchange of
their money so that if the borrower is not able to pay back the amount then the security
can be sold and money can be recovered. Security based loans is the another term which
is also used for this alternative. WCT Holdings Berhad can also use this option if it is
able to provide a collateral to the party which may provide funds for business expansion
in different geographic locations (Mien and Thao, 2015).
5. External factors to be considered in raising debt or equity funding factors
While raising funds from external factors it is very important for the directors of WCT
Holdings Berhad to consider a few factors so that all the activities can be performed in
appropriate manner. If these are not focused by the organisation then it may affect the process of
generating funds. All the factors that are required to be centred are as follows:
 Dilution of control: This is the main factor which is required to be considered by the
shareholders of WCT Holdings Berhad as it leaves effect on ownership of shareholders.
It result in decreased share of old members of the company. Dilution of control can shift
fundamental positions of the stock such as ownership percentages, control over decision
making, voting rights, earning per share, value of shares etc. Offer for sale option leaves
major impact on the ownership because in this case the owners may require to share their
rights with other stakeholders who bought the shares and provided funds to the
organisation (O'Donohue and Torugsa, 2016). It is the situation in which the enterprise
can be divided in to small parts which means the existing investors have lost some of
their rights of decision making and controlling.
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 Issue costs: These are the costs that are going to be faced by WCT Holdings Berhad
while choosing an option from different long term finance options. Such type of costs
may take place while launching debentures, right shares, preference shares etc. If it is not
focused by the directors of the company then it may result in higher losses. When a
security is having higher issue cost then it would be better to find other option to generate
funds because it may create more liabilities for the organisation. Selecting such option
where no issue cost takes place should be chosen by the directors of WCT Holdings
Berhad because it will not create expenses for the entity (Pantea, Gligor and Anis, 2014).
 Security: It is very important for WCT Holdings Berhad to consider this factor when
such sources are selected by the directors of in which the company is required to provide
collateral to the lender. If company is not able to pay back the borrowed amount then it
would be better to ignore this alternative because the investor may sale the asset to
recover the amount.
 Duration: While selecting long term debt funds, the directors of WCT Holdings Berhad
are required to consider the duration of repayment of the option which would be selected
by them. Whether the duration is small or long the organisation needs to analyse that it is
able to pay back the amount in the decided period or not. If the company is not able to
pay them such alternative should be selected in which all the amount of debt can be paid
in predetermined period (Post and Byron, 2015).
2.2 RECOMMENDATION ON WHICH FINANCE METHOD TO USE
The options that can be adopted by WCT Holdings Berhad in order to generate long term
finance from external sources are right shares, offer for sale, debentures and loan stock. There
are various factors that may affect the options. All of them are as follows:
Internal factors: These are the forces that may affect the long term finance options and
available inside of the organisation. It is essential for WCT Holdings Berhad to analyse all of
them and then figure out their impacts on the funding alternatives. Some of the major internal
factors are described below:
 Past performance: It is the major internal factor that affects the methods of financing. If
performance of WCT Holdings Berhad is not good in past few years then it will affect
the procedure of acquiring monetary resources from external sources. Investors doesn't
choose such entities which are not performing good in the market to invest their money.
17

So, if directors of WCT Holdings Berhad are willing to generate funding then they should
make sure that company is performing well (Purnus and Bodea, 2015).
 Ability to offer security: While selecting an option the company is required to analyse
the ability of the long term funding alternative's ability tom provide security to the
organisation. If any of them is not able to offer security to the enterprise then it will not
be a good decision. While selecting an appropriate method of long term funding the
company is required to analyse their level of providing security to the organisation.
 Gearing level: While selecting an option from different types of sources of long term
funds the directors are required to analyse their gearing level. When it is assessed then
such sources should be selected whose efficiency is very high (Revelli and Viviani,
2015).
External factors: All the forces that affect funding options from external environment
are considered as external factors. It is not possible for the company to take control over them.
The directors should form appropriate strategies to reduce the affect of these factors. Some of
them are described below:
 Economic climate: It can be defined as the factor that affects the economic position of a
company and also leaves negative impacts on sources of funds. It is very important for
the directors of WCT Holdings Berhad to find out such type of factors so that effective
strategies can be formulated and the best option for acquiring funding can be chosen. If
such alternative is selected by the company which get less affected due to economic
changes then it will be very beneficial for the company (Salikin, Ab Wahab and
Muhammad, 2014).
 Interest rate movements: It is very important for the directors of WCT Holdings Berhad
to find out the movements in the interest rates that are going to paid on the debts funds so
that the right decision for the betterment of the organisation can be taken. If such option
is selected in which a higher interest rate is required then it will increase expenses for the
business entity.
 Tax rates: While making decision regarding methods of acquiring long term funds it is
very important to analyse the tax rates that are going to be paid by the company in future.
The directors of WCT Holdings Berhad should select the best alternative that may
provide tax benefits to the company (Shah and Jan, 2014).
18

By analysing all the above described factors the option which is recommended to the
WCT Holdings Berhad is debentures. It is suggested because in this option no collateral security
is not required, interest rate in this alternative is very low and when a company is having debts
from external sources the benefits in taxation is also provided by the legal parties. It also heklps
to attract large number of investors because they will get interest on predetermined rate whether
the company acquire a profit or face a loss.
2.3 LINK BETWEEN FINANCING AND INVESTMENT DECISION
1. Impacts of financing on cost of capital
Financing leaves impact on cost of capital because it is the opportunity of making
specific investment in a particular asset. It can also be defined as the rate of return which can be
achieved by a company by putting an amount in to different types of investments. WACC
(Weighted Average Cost of Capital) is the main part of it because it may decide to increase the
uses of low such sources that have lower interest rate. It also guides the investors to find out the
possible rate of return which is going to be achieved by the company in a specific time period.
For all the organisations such as WCT Holdings Berhad it is very important to analyse WACC
so that appropriateness of the long term funds can be assessed. Cost and returns of all the
securities such as debentures, preference sand equity shares can be analysed with the help of
WACC that guides to find the best suitable source of fund for the company (Vogel, 2014) .
2. Use of WACC in investment appraisal
WACC is used to value and select the best financing options by organisations such as
WCT Holdings Berhad. It is beneficial for analysing the cost and returns that are going to be
faced by a company in future. WACC helps to make appropriate decision regarding long term
financing decision as it evaluates possible risk and return of a business project. It helps the
companies to analyse the minimum interest rate which is provided to its investors. Expected
costs for the financing can be analysed with the help of this method. While an organisation is
willing to appraise its investments then WACC may guide to implement appropriate strategies to
achieve the same. Information regarding the risk and return can be monitored with the help of
this technique and then directors of the company can form policies to increase investments
(Wallace and Rafols, 2015).
19

3. Link between debt finance, WACC and NPV
In WACC returns and risks related to debt finance is analysed by the organisation. It
helps to estimate NPV of the company will be increased or decreased in future because when
NPV increases then it results in declined WACC. When funds are raised by from debts then
organisation invest them in assets and then analyse their NPV so that it is profitable for the
company or not. There is an inverse relationship between these elements because when one
increases then other decreases (Williams and Dobelman, 2017).
4. Recommendation
By analysing all the points it has been recommended to the directors of WCT Holdings
Berhad to select debentures for arranging funds for the organisation in order to expand business
in different geographic locations. It will be beneficial for the company because interest rate on
this option is very low and WACC method can evaluate its profitability and risks that can be
faced by the enterprise in future.
CONCLUSION
From the above project report it has been concluded that long term funds are the sources
that helps organisations to fulfil all their requirements regarding funding. It helps to achieve
predetermined goals such as business expansion. There are two main types of external options to
generate funds these are external equities and debts funds. Equity covers right shares, offer for
sale placing etc. and debts includes debentures, loan stock, preference shares etc. An enterprise
may choose any of them that suits their organisational structure. There are various factors such as
economic climate, interest rate, taxation etc. that may affect these options.
20

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Online
Background of Petronas Gas Bhd. 2019. [Online]. Available through:
<https://www.petronasgas.com/aboutus/Pages/default.aspx>
Share price of Petronas Gas Bhd. 2019. [Online]. Available through:
<https://www.marketwatch.com/investing/stock/petgas/charts?countrycode=my>
Share price of Sapura Energy Bhd. 2019. [Online]. Available through:
<https://www.marketwatch.com/investing/stock/sapnrg/charts?countrycode=my>
Final accounts of Petronas gas Bhd. 2019. [Online]. Available through:
<http://financials.morningstar.com/income-statement/is.html?t=6033&region=mys&culture=en-
US>
22

Final accounts of Sapura Energy Bhd. 2019. [Online]. Available through:
<http://financials.morningstar.com/income-statement/is.html?t=5218&region=mys&culture=en-
US>
23

APPENDIX
Calculation of financial ratios of Petronas Gas Berhad:
Profitability ratios:
Gross margin
Particular 2014 2015 2016 2017 2018
Gross profit 1945 2212 2139 2066 2143
Net sales 3892 4392 4456 4561 4810
Gross margin
ratio 49.97 50.36 48.00 45.30 44.55
Net margin
Particular 2014 2015 2016 2017 2018
Net profit 2079 1843 1987 1739 1793
Net sales 3892 4392 4456 4561 4810
Net margin
ratio 53.42 41.96 44.59 38.13 37.28
Return on
capital
employed ratio
Particular 2014 2015 2016 2017 2018
Operating profit 1904 2142 2017 2137 2278
Capital
employed 12083 12471 13554 15515 16912
Return on
capital 15.76 17.18 14.88 13.77 13.47
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employed ratio
Liquidity ratios:
Current ratio
Particular 2014 2015 2016 2017 2018
Current assets 1677 1290 1922 2549 3408
Current
liabilities 1139 789 828 1039 716
Current ratio 1.47 1.63 2.32 2.45 4.76
Quick ratio
Particular 2014 2015 2016 2017 2018
Quick assets 1611 1230 1853 2463 3323
Current
liabilities 1139 789 828 1039 716
Quick ratio 1.41 1.56 2.24 2.37 4.64
Capital structure or gearing ratios:
Debt equity
ratio
Particular 2014 2015 2016 2017 2018
External
liabilities 2957 2727 2943 4587 5113
internal
liabilities 10266 10534 11439 11967 12515
Debt equity
ratio 0.29 0.26 0.26 0.38 0.41
25

Equity ratio
Particular 2014 2015 2016 2017 2018
Equities 10266 10534 11439 11967 12515
Total assets 13222 13260 14382 16554 17628
Equity ratio 0.78 0.79 0.80 0.72 0.71
Efficiency ratios:
Total assets
turnover ratio
Particular 2014 2015 2016 2017 2018
Net sales 3892 4392 4456 4561 4810
Total assets 13222 13260 14382 16554 17628
Total assets
turnover ratio 0.29 0.33 0.31 0.28 0.27
Fixed assets
turnover ratio
Particular 2014 2015 2016 2017 2018
Net sales 3892 4392 4456 4561 4810
Fixed assets 11545 11971 12460 14004 14220
Fixed assets
turnover ratio 0.34 0.37 0.36 0.33 0.34
Inventory
turnover ratio
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Particular 2014 2015 2016 2017 2018
Net profit 3892 4392 4456 4561 4810
Closing
inventory 39 43 46 68 67
Inventory
turnover ratio 99.79 102.14 96.87 67.07 71.79
Stock market performance ratios:
Price earning
Particular 2014 2015 2016 2017 2018
Share price 23.8 23.02 22 19.76 17.84
EPS 1.05 0.93 1.00 0.88 0.91
Price earning 22.66 24.72 21.91 22.49 19.69
Return on
equity
Particular 2014 2015 2016 2017 2018
Net profit 2079 1843 1987 1739 1793
Shareholder's
equity 10266 10534 11439 11967 12515
Return on
equity 0.20 0.17 0.17 0.15 0.14
Earning per
share
Particular 2014 2015 2016 2017 2018
27

Net profit 2079 1843 1987 1739 1793
Weighted
average shares 1979 1979 1979 1979 1979
Earning per
share 1.05 0.93 1.00 0.88 0.91
Dividend yield
ratio
Particular 2014 2015 2016 2017 2018
Dividend per
share 0.5 0.8 0.58 0.6 0.66
Share price 23.8 23.02 22 19.76 17.84
Dividend yield
ratio 2.10 3.48 2.64 3.04 3.70
Calculation of financial ratios of Sapura Gas Berhad:
Profitability ratios:
Gross margin
Particular 2014 2015 2016 2017 2018
Gross profit 2108 2832 2560 1698 969
Net sales 8379 9943 10184 7651 5895
Gross margin
ratio 25.16 28.48 25.14 22.19 16.44
Net margin
Particular 2014 2015 2016 2017 2018
28

Net profit 1087 1433 -792 208 -2503
Net sales 8379 9943 10184 7651 5895
Net margin
ratio 12.97 14.41 -7.78 2.72 -42.46
Return on
capital
employed ratio
Particular 2014 2015 2016 2017 2018
Operating profit 1191 1720 1650 -570 273
Capital
employed 22224 30108 29947 30120 25365
Return on
capital
employed ratio 5.36 5.71 5.51 -1.89 1.08
Liquidity ratios:
Current ratio
Particular 2014 2015 2016 2017 2018
Current assets 4675 5717 6828 7308 4727
Current
liabilities 4390 4455 6545 7329 4628
Current ratio 1.06 1.28 1.04 1.00 1.02
Quick ratio
Particular 2014 2015 2016 2017 2018
29

Quick assets 3752 4595 6089 6737 4258
Current
liabilities 4390 4455 6545 7329 4628
Quick ratio 0.85 1.03 0.93 0.92 0.92
Capital structure or gearing ratios:
Debt equity
ratio 2014 2015 2016 2017 2018
Particular
External
liabilities 16420 22577 24285 24373 20543
internal
liabilities 10195 11986 12207 13076 9450
Debt equity
ratio 1.61 1.88 1.99 1.86 2.17
Equity ratio
Particular 2014 2015 2016 2017 2018
Equities 10195 11986 12207 13076 9450
Total assets 26614 34563 36492 37449 29993
Equity ratio 0.38 0.35 0.33 0.35 0.32
Efficiency ratios:
Total assets
turnover ratio
Particular 2014 2015 2016 2017 2018
Net sales 8379 9943 10184 7651 5895
30