ARB Corporation Limited Financial Analysis and Capital Structure

This report provides a comprehensive financial analysis of ARB Corporation Limited, focusing on its capital structure and overall financial performance. The analysis includes a company overview, financial statement analysis, and capital structure evaluation. Key aspects covered are Weighted Average Cost of Capital (WACC), Capital Asset Pricing Model (CAPM), financial ratio calculations (profitability, efficiency, liquidity, and capital structure ratios), and a comparison of capital structure with a competitor, Halords Group plc. The report also examines significant changes in capital structure over the past three years and evaluates shareholder wealth maximization. The conclusion recommends that the company reduce its equity amount and increase its debt to optimize capital structure and lower its cost of capital. Detailed financial ratios and calculations are presented in the appendix, supporting the analysis and recommendations. This report is contributed by a student to be published on the website Desklib, a platform which provides all the necessary AI based study tools for students.

Running Head: Accounting and financial analysis report
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Accounting and financial analysis report

Accounting and financial analysis report 2
Executive summary
In the report, financial statement analysis and capitals structure analysis of ARB
Corporation limited has been done. The report express that the capitals structure of the
organization is not at all competitive and due to it the cost of capital is also high. On the basis
of the report, it is suggested to the comapny o reduce the equity amount to manage the capital
structure and reduce the cost of capital.

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Contents
Introduction.......................................................................................................................4
Company overview...........................................................................................................4
Financial analysis..............................................................................................................4
Capital structure........................................................................................................4
WACC......................................................................................................................5
CAPM.......................................................................................................................5
Capital structure comparison........................................................................................6
Financial ratios of ARB................................................................................................6
Significant changes into capital structure.....................................................................7
Shareholder wealth maximization................................................................................7
Recommendation and conclusion.....................................................................................7
References.........................................................................................................................9
Appendix.........................................................................................................................10

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Introduction:
Financial analysis is financial processes which s conducted by the financial analyst,
financial managers, investors and other stakeholders of the company to evaluate the
performance of the company. The financial analysis process takes the concern of various
factors to evaluate the performance of an organization. In the report, capital structure,
WACC, CAPM, Financial ratios, comparison with Competitors Company, shareholder
wealth maximization etc points have been evaluated.
Company overview:
ARB corporation limited is an Australian company which manufactures, distributes
the off road vehicle accessories. It also deals in light metal engineering work. The company
has been founded in 1975 and currently, the total revenue of the company has been estimated
around $ 385 million (Bloomberg, 2018). The financial analysis study has been done on the
company to recognize the performance, risk factors, return etc of the company.
Financial analysis:
Financial analysis is mathematical tool which evaluates the financial statement of an
organization to recognize the various financial factors of an organization which are great base
to make better decision about financial position of the company.
Capital structure:
Capital structure of an organization explains about the relationship of total debt
amount and the total stockholder’s equity amount of an organization. On the basis of capital
structure of ARB Corporation limited, it has been evaluated that the 15% of funds are raised
by the company through debt amount and 85% of the funds are raised by the company
through equity amount (Margaritis & Psillaki, 2010). The below image explains about the
capital structure of the company:

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Figure 1: Capital Structure
WACC:
Weighted average cost of the capital of the company has been evaluated further to
identify the total associated cost which is bear by the company for the total funds. On the
basis of the below calculations, it has been found that the total cost of capital of the company
is 7.26%. However, on the basis of WACC calculations, it has been found that the company
should reduce the level of equity amount and must enhance the debt amount to manage the
performance of the comapny (Fan, Titman & Twite, 2012).
WACC calculations of ABC Corporation Limited
(Book value)
(Amount in $ '000)
Price Cost Weight WACC
Debt 48,092 3.85% 0.15 0.58%
Equity 2,72,341 7.87% 0.85 6.69%
3,20,433 Kd 7.26%
CAPM:
CAPM is an equity valuation model. It explains that how much return could be
expected from the equity of an organization. On the basis of CAPm calculations, it has been
recognized that the invetors could expect 7.87% return from the stock of the company.
Calculation of cost of

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equity (CAPM)
RF 2.41%
RM 8.54%
Beta 0.890
Required rate of
return 7.87%
Capital structure comparison:
Capital structure of the company has been compared with its competitive company,
Halords group plc. On the basis of the capital structure of the company, it has been evaluated
that the capital structure of Halords group is way better than the capital structure of ARB
corporations. The company is required to enhance the level of the debt amount to manage the
optimal capital structure.
Halofords Group plc (ARB)
Amount %
2017 2017
Debt 103 25.62%
Equity 299 74.38%
402 100%
(Morningstar, 2018)
Financial ratios of ARB:
Financial ratios explain about the financial position and performance of an
organization. Ratios are the quantitative analysis. Financial ratios study has been done on
ARB Corporation limited to measure the performance of the company. Various profitability
ratios, liquidity ratios, efficiency ratios, capital structure ratios and the investors ratios have
been calculated to measure the financial performance of the company.
On the basis of profitability ratios, it has been found that the profitability position of
the company has been lowered. The company is required to manage the operating cost and
the cost of revenue to enhance the level of gross profit and operating profit (Teker, Tasseven
& Tukel, 2009).
Further the efficiency ratio calculations express average performance of the company.
It explains that the company has blocked lot amount in inventory and debtor’s amount. And
due to it, the requirement of working capital of the company has been enhanced. In addition,

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the liquidity ratio explains that the risk position of the company is lower and the company
could reduce the current asset amount (Pao, 2008).
Lastly, the capital structure ratio and investor ratio have been calculated and it has
been recognized that the debt amount should be enhanced by the company and the investment
position of the company is better.
Significant changes into capital structure:
From last 3 years, the company has made few changes into its capital structure to
make it optimal capital structure. In 2018, the debt amount has been enhanced at a good level
from last year. However, the equity amount has also been enhanced. The overall analysis
explains that the no special changes have been done by the management of the company in
capital structure.
ARB CORP LTD (ARB)
Amount
2015 2016 2017
Debt 40,619 39,718 48,092
Equity 2,26,348 2,49,608 2,72,341
2,66,967 2,89,326 3,20,433
(Morningstar, 2018)
Shareholder wealth maximization:
In last 3 years, the company has offered high earnings per share to the dividend
holders of the company. In 2015, the EPS was 0.57 which has been enhanced to 0.621 in
2017. It explains that the company has managed all the factors enough to maximize the worth
of the shareholders in the organization (Lemmon, Roberts & Zender, 2008).
Further, it is always important for an organization to reduce the level of the cost of
capital as the more the cost of capital of an organization would be the more it would be tough
for the organization to manage the profits and evaluate the investment which offer higher
internal rate of return
Recommendation and conclusion:
According to the study, it has been found that the company should reduce the level of
equity amount and must enhance the debt amount to manage the performance of the comapny
and reduce the cost of capital of the company. The lower the equity amount would be the
lower the weighted average cost of equity of the organization would be and it would lead to

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lower cost of capital of the company at the end. The debt and equity structure of the company
should be 40:60.

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References:
Bloomberg. (2018). ARB corporation limited. (Online). Retrieved on 12 May 2018 from:
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=877447
Fan, J. P., Titman, S., & Twite, G. (2012). An international comparison of capital structure
and debt maturity choices. Journal of Financial and quantitative Analysis, 47(1), 23-56.
Lemmon, M. L., Roberts, M. R., & Zender, J. F. (2008). Back to the beginning: persistence
and the cross‐section of corporate capital structure. The Journal of Finance, 63(4), 1575-
1608.
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm
performance. Journal of banking & finance, 34(3), 621-632.
Morningstar. (2018). ARB corporation limited. (Online). Retrieved on 12 May 2018 from:
http://financials.morningstar.com/cash-flow/cf.html?t=ARB&region=aus&culture=en-US
Morningstar. (2018). ARB corporation limited. (Online). Retrieved on 12 May 2018 from:
http://financials.morningstar.com/cash-flow/cf.html?
t=XFRA:HDK&region=deu&culture=en-US
Pao, H. T. (2008). A comparison of neural network and multiple regression analysis in
modeling capital structure. Expert Systems with Applications, 35(3), 720-727.
Teker, D., Tasseven, O., & Tukel, A. (2009). Determinants of capital structure for Turkish
firms: A panel data analysis. International Research Journal of Finance and Economics, 29,
179-187.

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Appendix:
Ratio Calculations 2015 2016 2017
Profitability Ratios: 2015 2016 2017
Return on Capital employed
Operating profit / -131272 -150685 -161064
Capital employed (total assets
- current liabilities) 2,27,325 2,50,864 2,73,458
Answer: % -57.75% -60.07% -58.90%
Gross Profit Margin
Gross profit / - 4,597 - 9,984
-
13,089
Sales Revenue (note used
operating revenue) 3,29,755 3,56,905 3,82,599
Answer: -1.4% -2.8% -3.4%
Operating profit margin
Operating profit / -1,31,272 -1,50,685 -1,61,064
Sales Revenue % 3,29,755 3,56,905 3,82,599
Answer: -39.81% -42.22% -42.10%
Asset Efficiency Ratios 2015 2016 2017
Trade payable payment
period ratio
Accounts payable/ 22,559 21,028 21,703
Cost of sales 3,34,352 3,66,889 3,95,688
Answer: (note the above needs
to be x 365) 24.6268 20.9197 20.0198
Inventory Turnover (days)
Average Inventory / 77,821 86,941 88,020
Cost of Sales # days 3,34,352 3,66,889 3,95,688
Answer: (note the above needs to
be x 365) 84.95 86.49 81.19
Receivables Turnover (days)
Average trade debtors / 41,698 43,436 49,766
Sales revenue (note used
operating revenue) # days 3,29,755 3,56,905 3,82,599
Answer: (note the above needs to
be x 365) 46.15 44.42 47.48
Liquidity Ratios 2015 2016 2017
Current Ratio
Current Assets / 1,33,820 1,48,466 1,69,177
Current liabilities 42,544 40,944 49,785
Answer: 3.15 3.63 3.40

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Acid test ratio
Current Assets - Inventory / 55,999 61,525 81,157
Current Liabilities 42,544 40,944 49,785
Answer: 1.32 1.50 1.63
Capital Structure Ratios 2015 2016 2017
Gearing ratio
Long term liabilities / 977 1,256 1,117
Capital employed 2,27,325 2,50,864 2,73,458
Answer: % 0.43% 0.50% 0.41%
Interest Coverage Ratio
EBIT / -1,31,272.00 -1,50,685.00 -1,61,064.00
Net Finance Costs (used net
interest expense) 220 170 11
Answer: times p.a
-
596.691
-
886.382
-
14,642.182
Investor's Ratios 2015 2016 2017
Earnings per share
Net income 44,093 47,439 49,152
Weighted average shares
outstanding 76,292 79,164 79,179
Answer: 0.578 0.599 0.621
Dividend coverage ratio
Net income / 44,093 47,439 49,152
Dividend paid to shareholders 21,889 24,144 26,129
Answer: 2.014 1.965 1.881
WACC calculations of ABC Corporation Limited (Book value)
(Amount in $ '000)
Price Cost Weight WACC
Debt 48,092 3.85% 0.15 0.58%
Equity 2,72,341 7.87% 0.85 6.69%
3,20,433 Kd 7.26%
Calculation of cost of debt
Outstanding debt 48,092
interest rate 5.50%
Tax rate 30.0%
Kd 3.85%

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Calculation of cost of equity
(CAPM)
RF 2.41%
RM 8.54%
Beta 0.890
Required rate of
return 7.87%