Impact of Capital Structure on the Financial Performance of CSR Limited

This research paper analyzes the impact of capital structure on the financial performance of CSR Limited. It includes a literature review of different theories of capital structure and their impact on firm performance. The paper uses qualitative and quantitative data analysis to understand the impact of debt and equity on the financial performance of the company. The study concludes that the capital structure of the company has not been effective and recommends changes in the company's policies to improve financial performance.

Running head: IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL
PERFORMANCE OF CSR LIMITED
Impact of Capital Structure on the Financial Performance of CSR Limited
Name of the Student:
Name of the University:
Author’s Note:

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IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF CSR
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Abstract
The current research looks to assess the impact of capital structure on the financial
performance of CSR Limited. CSR Limited is the company that has been taken into
consideration in this research. Under the capital structure, any changes brought in the level of
equity or debt will contribute towards the modification of the value of the companies. For
example, under the burden of tax, the tendency of the companies is to utilize more debts in
ensuring the higher performance of the companies. The research would be dependent on
qualitative data as well quantitative data for analysis and would be using secondary data
which can be obtained from company annual reports and official websites. The analysis of
the company explains the fact that the capital structure of the company has an impact on the
financial performance of CSR Limited. It is seen that capital structure of the company has not
been an effective one and therefore the financial performance of the company has been
hampered as well. The results that have been attained have been helpful in the development
of recommendations. It is therefore recommended that the management changes their plans
and policies with respect to their capital structure with the help of which capital of the
company will increase and accordingly the financial performance will improve as well.

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Table of Contents
Chapter 1: Introduction..............................................................................................................4
1.1 Research Aim...................................................................................................................4
1.2 Research Question............................................................................................................4
1.3 Research Hypothesis........................................................................................................5
1.4 Framework.......................................................................................................................5
1.5 Overall Performance........................................................................................................6
1.6 Financial Performance.....................................................................................................6
1.7 Debt Ratio........................................................................................................................6
1.8 Justification of the study..................................................................................................6
Chapter 2: Literature Review.....................................................................................................8
Chapter 3: Research Methodology...........................................................................................11
3.1 Research Outline............................................................................................................11
3.2 Research Philosophy......................................................................................................11
3.3 Research Approach........................................................................................................11
3.4 Research Design.............................................................................................................11
3.5 Data Collection Method.................................................................................................11
Chapter 4: Data Analysis and Discussion................................................................................12
4.1 Introduction....................................................................................................................12
4.2 Income Statement...........................................................................................................12
4.3 Balance Sheet.................................................................................................................14
4.4 Ratios..............................................................................................................................17
4.5 Descriptive Statistics......................................................................................................18
4.6 Correlation......................................................................................................................19
4.7 Regression......................................................................................................................19
Chapter 5: Discussion..............................................................................................................21

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Chapter 6: Conclusion and Recommendation..........................................................................22
6.1 Conclusion......................................................................................................................22
6.2 Recommendation............................................................................................................22
6.3 Limitations.....................................................................................................................22
Reference List..........................................................................................................................23

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Chapter 1: Introduction
The key aim of the companies that are operational in the global economy is to raise
their profit percentage by a significant margin and in order to do the same; they need to make
use of the available resources in an effective manner. Finance is known to be one of the
essential requirements of a company as it provides decisions with respect to the direction and
the performance of an organization (Muritala, 2018). It is due to this fact that all the
companies need to maintain a proper balance and effective performance on the perspective of
finance for a company. There are several factors that make sure that the financial
performance of an organization is precise and balanced (Robb & Robinson, 2014). In order to
ascertain the aim that has been explained, the companies make use of various kinds of
techniques and out of them capital structure is one of them. Capital structure of an
organization is known to be a process incorporated by the companies in order to finance their
developments and entire operations by making use of various fund sources. Capital structure
is known to be a mixture of debt and equity. The debt is known to be the issuance of bond
and the long term payable notes (Elsas, Flannery & Garfinkel, 2014).
The current research looks to assess the impact of capital structure on the financial
performance of CSR Limited. CSR Limited is the company that has been taken into
consideration in this research. This company is ASX listed and the company aims towards
marketing services that is inclusive of capital formation and hedging, trading, security
settlements etc. It is due to this fact that the primary goal of this paper is to understand the
impact capital structure has on the financial performance of CSR Limited. In this manner, the
research aims and research questions are developed.
1.1 Research Aim
The research aim is prepared so that the paper can focus on specific aspects with the
help of which the entire paper can be concluded on the basis of the desired topic. The aims of
this research are as follows:
 To understand the capital structure based on the debt and equity of the company and
its effect on the financial performance
 To understand the influence of capital structure on the overall performance of CSR
Limited

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Financial
Performance
EPS
ROE
ROA
Debt Ratio
IMPACT OF CAPITAL STRUCTURE ON THE FINANCIAL PERFORMANCE OF CSR
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1.2 Research Question
The research questions for the current paper are as follows:
Q1: What is the impact of debt and equity on the financial performance of CSR Limited?
Q2: How does the capital structure have an impact on the financial performance of CSR
Limited?
1.3 Research Hypothesis
The hypothesis for the concerned paper is as follows:
Null hypothesis: There is negative correlation between capital structure and financial
performance (ROA, ROE and EPS)
Alternate hypothesis: There is positive correlation between capital structure and financial
performance (ROA, ROE and EPS)
1.4 Framework
The explanations that have been made in the earlier paragraphs has revealed that
capital structure of a company is the pattern that highlights the technique that an organization
incorporates in order to finance their assets with the help of an effective combination of
equity and debt (Graham, Leary & Roberts, 2015). The variables that have been taken into
consideration in order to understand the financial performance has been given as follows:

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Figure 1: Conceptual Framework
(Source: As Created By Author)
The above figure depicts the conceptual framework within which the dependent and
the independent variables related to the concerned topic have been highlighted. It is seen that
the dependent variable is financial performance and the independent variables are return on
asset, return on equity, debt ratio and earnings per share. These variables need to be analysed
in order to have an understanding of the financial performance of CSR Limited. The factors
are directly related to the capital structure and in this manner the financial performance can
be understood as well (Chechet & Olayiwola, 2014).
1.5 Overall Performance
The entire performance of the organization is one of the essential elements which is
taken into account prior to the creation of an insight about the organization. The insight that
is developed is liable for the investments that will be undertaken in the organization, the
customer base and the various other strategic advantages of the organization. The key
recognitions that assist in formulating the entire performance are satisfaction of the
customers, financial performance and management of the resources.
1.6 Financial Performance
The performance related to finance of a company is known to extent to which the
companies have been able to reach their financial goals. It can even stated as the process of
assessing the result of the policies and operations of the company with a monetary outlook.
There are several factors that are undertaken to assess the financial performance of an
organization and there are certain key factors like ROA, ROE and EPS on the basis of which
the profitability of the organization can be understood. Debt ratio is known to be one of the
key elements that have an impact on the financial performance of the organization (Maina &
Ishmail, 2014).
1.7 Debt Ratio
Debt ratio is a key element that is taken into account in order to explicitly understand
the financial performance of an organization. It is even one of the processes that are used for
the assessment of the capital structure of an organization.

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1.8 Justification of the study
This research is deemed to be vital for the business analysts and researchers, since it
looks into the realm of capital financing. This research has contributed to the current
literatures for verifying the claim of traditional theory of capital structure. There are two
wider views on the effect of capital structure on the financial performance of organizations,
while it asserts the importance of capital structure in ascertaining their performance.

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Chapter 2: Literature Review
Literature review is considered as an important part in the whole research project as it
focuses on the assessment of the existing literature on the chosen topic. It can be seen that the
main aim of this research is to analyse the impact of capital structure on the financial
performance of CSR Limited. CSR Limited is regarded as one of the leading industrial
company of Australia having business operations in the production of building materials and
products. This part of the research explores the impact of various aspects of capital structure
on the performance of the companies.
Business organizations can use different sources of finance to cater to their need of
business capital; such as equity shares as internal finance and debts as external finance
(Zeitun & Tian, 2014). Most of the business organizations utilize a mix between the debt and
equity that forms the Capital Structure. Modigliani and Miller first provided the definition of
capital structure that is the combination of debt and equity that the business organizations use
for their businesses. Thus, capital structure can be regarded as a trend at how a firm finance
the assets of their business through the mix of debt, equity (Zeitun & Tian, 2014). It is needed
to shed lights on the different theories of capital structure with the aim to measure the impact
of the same in firm’s performance.
Modigliani and Miller Theory: This particular theory of Modigliani and Miller on capital
structure states that there is not any relevant relationship between capital structure and cost of
capital (Brusov, Filatova & Orekhova, 2013). It implies that the increase in debts does not
have any effect on the cost of capital of the firms. As a result, the expectation of the investors
on future benefits largely depends of the value of the firms and cost of capital. Certain
assumptions have been used under this model such as absence of taxes, similar expectations,
perfect capital market and absence of transaction costs. Later, a new evidence was introduced
by Modigliani and Miller that cost of capital has effect on capital structure and thus, has
effect on value of the firms while considering taxes as assumption (Ghosh, 2017).
Pecking Order Theory: This particular theory can be considered as the result of Unequal
information. This particular theory is not grounded on the discussion of optimal capital
structure, but this theory states that the business organizations have two main sources of
finance which are internal and external sources of finance (Serrasqueiro & Caetano, 2015).
As per this theory, companies prefer to use internal finance firms like retained earnings, extra
liquid assets and then external sources of finance. In case the internal sources of finance is

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inadequate, companies go for external finance sources. With the aim to reduce the costs of
asymmetric information, the organizational managers opt to select between different sources
of external finances. Generally, the firms’ preference of the companies is the elimination of
debt leverage; after that, the companies go for preferred stocks and common stocks
(Serrasqueiro & Caetano, 2015).
Trade-off Theory: This particular theory can be considered as the addition of the Modigliani
and Miller model and this theory states that the optimal capital structure of the companies
consists of balance between taxes, bankruptcy costs, agency costs and others. As per this
theory, companies select level of debt for achieving a balance in the benefits from interest tax
with the future finance cost (Ghazouani, 2013).
The Agency Theory: This particular theory is grounded on the discussion about the conflict
of interest between principals and decision-makers and this conflict develops from the
difference in decision or behaviour. The main conflict in the case of capital structure that the
firms’ shareholders face to ensure the fact that the organizational managers do not make the
investments in free cash flow in the unprofitable projects. On the other hand, increase in the
debt to equity ratio helps the business organizations in making sure the fact that the managers
are conducting the necessary operations of the companies in the most responsible as well as
efficient manner (Muritala, 2018).
According to the belief of the traditional capital structure theory, the best combination
of capital guarantees the low weighted average cost of capital that leads to the maximization
of the market value per share. However, it is not possible for the equity and leverage ratios to
determine the firms’ performance as there are many other factors that interfere in this
particular relationship (Fosu, 2013). There are certain crucial factors like taxes, business
risks, financial flexibility, managerial behaviour and others that have role in the
determination of the performance of the companies. Companies are needed to consider these
aspects in capital structure as capital structure is the trade-off between expected return and
risk. Consideration of these aspects guides the organizational managers towards the selection
of an optimal debt and equity combination which minimizes the cost of capital and
maximizes the values of the companies to ensure the good future return for the shareholders
(Park & Jang, 2013).
Under the capital structure, any changes brought in the level of equity or debt will
contribute towards the modification of the value of the companies. For example, under the

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burden of tax, the tendency of the companies is to utilize more debts in ensuring the higher
performance of the companies (Iavorskyi, 2013). Performance of the firms can be considered
as how effectively the firms are managing their resources so that the key stakeholders’ value
can be enhanced. It implies that the optimal capital structure has positive influence on the
performance as well as profitability of the firms. Hence, it can be seen from the above
discussion that the capital structure choice of the companies has a definite impact of the
performance of those firms (Adewale & Ajibola, 2013). With the aim to avoid business risks,
the profitable business organizations tend to avoid high leverage. However, an optimal mix of
capital structure has certain positive influence on the performance of the firms.

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Chapter 3: Research Methodology
The research methodology deals with the various designs and structure which is
followed for the purpose of this research(Dang &Pheng, 2015).The company is a specific
which gives a specific area for research and therefore the research would be dependent on
qualitative data as well quantitative data for analysis.
3.1 Research Outline
The research would be using a variety of tools and approaches for the purpose of
effective data analysis. The research philosophy and approach would be considered on the
basis of the nature of the research. The main source of data on which the research paper
would be relying on is secondary source of data and would be using significant tools such as
excel and statistical tools.
3.2 Research Philosophy
This deals with the beliefs as to the nature and source of the data and how the same
data is to be analysed by the management of the company. The research philosophy helps in
conducting an in-depth research on the topic applying all relevant theories and models
(Dumay & Cai, 2015). The research would be applying the model of positivism which would
help in effectively widening the perspective of the research.
3.3 Research Approach
The research topic focuses on the impact of capital structure on the business of CSR
ltd. The research approach which is selected for this research would be a deductive approach
as already established theories and concepts which are applicable to the company are to be
considered for this research. The capital structure theories are already established and the
same would be used considering what is applicable to CSR Ltd
3.4 Research Design
The research would be following a descriptive approach as there are numerous
theories which are present relating to capital structure and the same needs to be analysed on
the basis of the selected company (Marczyk, DeMatteo & Festinger, 2017).
3.5 Data Collection Method
The research would be dependent on qualitative data as well quantitative data for
analysis and would be using secondary data which can be obtained from company annual
reports and official websites (Brannen, 2017).

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Chapter 4: Data Analysis and Discussion
4.1 Introduction
The precious section of the paper has revealed the sort of data that would be collected
and the approach and the design that will be selected with the help of which the data analysis
for the data can be undertaken. The data that has been collected from the annual report of the
company has been used with the help of which ratio analysis has been undertaken and
thereby precise result in accordance to the topic can be completed. A detailed analysis will be
done in this section of the paper with the help of which the entire data analysis process will
be completed. The analysis is undertaken by assessing the income statement of the company
for the previous five years along with assessing the balance sheet as well. Descriptive
statistics and correlation and regression is undertaken with the help of which the impact of
capital structure on the financial performance of CSR Limited will be understood.
4.2 Income Statement
Particulars
2014 (in
million
$)
2015 (in
million
$)
2016 (in
million $)
2017 (in
million
$)
2018 (in
million
$)
Revenue 1,747 2,023 2,299 2,468 2,606
Cost of revenue 1,235 1,369 1,527 1,635 1,742
Gross profit 511 654 772 834 864
Operating expenses
Sales, General and
administrative 241 278 907 989 1,023
Restructuring, merger and
acquisition 6 25 29 18
Other operating expenses 44 72 84 86 66
Total operating expenses 285 357 1,015 1,104 1,108

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Operating income 226 298 -244 -271 -244
Interest Expense 21 21 21 13 12
Other income (expense) -82 -84 498 550 544
Income before taxes 123 193 234 267 288
Provision for income taxes 24 46 64 62 81
Net income from
continuing operations 99 147 169 205 207
Other -11 -21 -27 -27 -18
Net income 88 126 142 178 189
Net income available to
common shareholders 88 126 142 178 189
Earnings per share
Basic 0.17 0.24 0.28 0.35 0.38
Diluted 0.17 0.24 0.28 0.35 0.37
Weighted average shares
outstanding
Basic 506 504 505 504 503
Diluted 506 504 508 507 506
EBITDA 221 291 338 368 384

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The assessment of the income statement of the company reveals that the performance
of the company has declined in the past five years. It is seen that the net income of the
company has not been maintained and therefore has incurred loss in the year 2018 and
therefore it can be stated that the operational activities of the company has not improved and
rather has fallen.
4.3 Balance Sheet
Particulars
2014 (in
million $)
2015 (in
million $)
2016 (in
million $)
2017 (in
million $)
2018 (in
million $)
Assets
Current assets
Cash
Cash and cash
equivalents 6 68 73 19 14
Short-term investments 6
Total cash 6 68 73 25 14
Receivables 210 241 289 292 286
Inventories 326 320 349 386 467
Deferred income taxes 30 12 - - 7
Prepaid expenses 6 5 11 13 10
Other current assets 54 58 63 20 21
Total current assets 632 705 786 736 805
Non-current assets
Property, plant and
equipment
Gross property, plant and

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equipment 1,666 1,681 1,786 1,867 1,920
Accumulated
Depreciation -824 -860 -922 -1,018 -1,086
Net property, plant and
equipment 842 821 864 849 834
Equity and other
investments 44 63 61 43 57
Goodwill 29 66 74 97 98
Intangible assets 31 42 48 47 46
Deferred income taxes 273 262 239 201 152
Prepaid pension benefit 3 7 4
Other long-term assets 149 153 139 124 146
Total non-current
assets 1,373 1,414 1,430 1,361 1,333
Total assets 2,005 2,119 2,216 2,097 2,138
Liabilities and
stockholders' equity
Liabilities
Current liabilities
Short-term debt 34
Accounts payable 166 202 227 240 276
Deferred income taxes 7 21 38 10 5
Other current liabilities 218 243 224 263 225

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Total current liabilities 425 466 489 514 506
Non-current liabilities
Long-term debt 2 30 28
Deferred taxes liabilities 25 19 21 7
Pensions and other
benefits 21 42 21 5 8
Minority interest 55 60 133 52 47
Other long-term
liabilities 380 387 366 341 314
Total non-current
liabilities 481 507 543 428 404
Total liabilities 906 974 1,032 942 910
Stockholders' equity
Common stock 1,042 1,042 1,041 1,037 1,036
Other Equity 24 20 21 -67 -49
Retained earnings 39 86 127 192 244
Accumulated other
comprehensive income -7 -3 -5 -7 -5
Total stockholders'
equity 1,099 1,146 1,184 1,155 1,227
Total liabilities and
stockholders' equity 2,005 2,119 2,216 2,097 2,138
The balance sheet of CSR Limited for the last five years even shows that the capital
structure of the company has not improved and the company has increased their level of

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equity of the company. The asset of the company has increased even though the impact has
not been seen in the financial performance of the company.
4.4 Ratios
Particulars
Detail
s
2014 (in
millions)
2015 (in
millions)
2016 (in
millions)
2017 (in
millions)
2018 (in
millions)
Total liabilities A
$
906
$
974
$
1,032
$
942
$
910
Total assets B
$
2,005
$
2,119
$
2,216
$
2,097
$
2,138
Total equity C
$
1,099
$
1,146
$
1,184
$
1,155
$
1,227
Net income D
$
88
$
126
$
142
$
178
$
189
Operating
income/(loss) E
$
226
$
298
$
-244
$
-271
$
-244
Interest expense F
$
21
$
21
$
21
$
13
$
12
Average number of
outstanding shares G 506 504 505 504 503
Debt ratio A/B 0.45 0.46 0.47 0.45 0.43
Equity ratio C/B 0.55 0.54 0.53 0.55 0.57
Debt-to-equity ratio A/C 0.82 0.85 0.87 0.82 0.74
Interest cover ratio E/F 10.76 14.19 -11.62 -20.85 -20.33
Return on assets D/B 4.39% 5.95% 6.41% 8.49% 8.84%
Return on equity D/C 8.01% 10.99% 11.99% 15.41% 15.40%
Earnings per share D/G
$
0.17
$
0.25
$
0.28
$
0.35
$
0.38

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The ratios that have been discussed in this section address the fact that the company
has taken more of funds from equity rather than from the debts. The interest coverage ratio
has been negative for the company in the years 2016 to 2018 and therefore the company has
problems in paying interest to their investors.
The analysis of the company explains the fact that the capital structure of the
company does not have an impact on the financial performance of CSR Limited. It is seen
that capital structure of the company has not been high but the financial performance of the
company has been hampered.
4.5 Descriptive Statistics
The descriptive statistics is undertaken by making use of the financial data for CSR
Limited available in their annual report. The data has been taken for 5 years and accordingly
the analysis has been done in order to have an understanding of the impact capital structure
has been on the financial performance of CSR Limited.
Particulars Debt Ratio EPS ROA ROE
Mean 0.45 0.29 0.07 0.12
Standard Error 0.01 0.04 0.01 0.01
Median 0.45 0.28 0.06 0.12
Mode #N/A #N/A #N/A #N/A
Standard Deviation 0.02 0.08 0.02 0.03
Sample Variance 0.00 0.01 0.00 0.00
Kurtosis 2.01
-
0.96
-
1.62
-
1.15
Skewness
-
1.26
-
0.38
-
0.13
-
0.39
Range 0.04 0.20 0.04 0.07
Minimum 0.43 0.17 0.04 0.08
Maximum 0.47 0.38 0.09 0.15
Sum 2.25 1.43 0.34 0.62
Count 5 5 5 5
Independent Variables

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Debt ratio (Dependent
variable) EPS ROA ROE
2014 0.45 $ 0.17 4.39% 8.01%
2015 0.46 $ 0.25 5.95% 10.99%
2016 0.47 $ 0.28 6.41% 11.99%
2017 0.45 $ 0.35 8.49% 15.41%
2018 0.43 $ 0.38 8.84% 15.40%
The figures that have been ascertained from the above table reveal that the company
has been more dependent on the debt ratio and the debt ratio has determined the capital
structure of the company. The standard deviation of all the variables has been close to each
other. The mean for ROE and ROA have been low and the mean for debt ratio has been high.
4.6 Correlation
Debt ratio Debt ratio EPS ROA ROE
Debt ratio (Dependent variable) 1.00
EPS
-
0.58 1.00
ROA
-
0.62 1.00 1.00
ROE
-
0.54 0.99 1.00 1.00
The correlation analysis for the featured variables reveals that EPS, ROA and ROE
are not correlated to debt ratio. It therefore determines the fact that debt ratio does not have
any impact on the other variables that have been taken into consideration. All the variables
are negatively correlated as the values are negative and therefore the same has been
recognized.
4.7 Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.999441735
R Square 0.998883782
Adjusted R Square 0.995535128
Standard Error 0.001022603

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Observations 5
ANOVA
df SS MS F Significance F
Regression 3 0.000935794 0.000311931 298.294 0.042530824
Residual 1 1.04572E-06 1.04572E-06
Total 4 0.00093684
The regression table shows that the data that has been used has adequate evidence that
the regression analysis is fitting the data more than the model.

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Chapter 5: Discussion
The discussion is undertaken on the basis of the analysis that has been completed in
the previous chapter. It is seen that with the help of the analysis, a proper understanding can
be attained with respect to which of the two hypothesis are correct in accordance to this data.
The explanation of the hypothesis has been expressed as follows:
H1: The first hypothesis addresses that there is a negative correlation between capital
structure and financial performance of CSR Limited.
The analysis that has been undertaken for this research addresses the fact that there is
a negative correlation among capital structure and financial performance for CSR Limited. It
is seen that there is negative correlation among the variables and hence it can be inferred that
the capital structure does not impact the financial performance.
H2: The first hypothesis addresses that there is a positive correlation between capital
structure and financial performance of CSR Limited.
This hypothesis has been rejected for this paper simply due to the fact that the
analysis addresses the fact that there have not been any positive relations among the
variables. The financial figures of the company addresses the fact that performance of the
company with respect to finance has been poor as the company has been facing looses
currently. However, it is observed that there has been an effective capital structure but this
has not affected the financial performance. Hence, it can be said that H1 is selected.

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Chapter 6: Conclusion and Recommendation
6.1 Conclusion
The results that have been attained with the help of data analysis reveals that the
performance of the company from the perspective of finance has not been an effective one.
The company has been taking most of their finances from the equity services and the extent
of debt has been low. The capital structure of the company has been very poor and therefore
the company has been facing losses for the past three years. The results reveal that the
performance of the company has been poor because of the capital structure of the company.
Hence, it can be stated that the capital structure has significant impact on the financial
performance of CSR Limited.
6.2 Recommendation
The results that have been attained have been helpful in the development of
recommendations. It is therefore recommended that the management changes their plans and
policies with respect to their capital structure with the help of which capital of the company
will increase and accordingly the financial performance will improve as well. The
management even has to be monitor the capital structure on a regular basis and amend the
issues that are created with the help of which the financial performance of CSR Limited will
improve the company will be able to incur profit for the future years.
6.3 Limitations
In order to complete the research, the limitation that had impact on the research was
shortage of time. It is due to this fact that data for more than 5 years could not be collected
and thereby a much better result could not be ascertained.

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LIMITED
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