Debt Structure of Ziptel Limited

Ziptel Limited is one of the leading telecommunication companies from Australia. The main objective of this report is to focus on the debt structure, valuation of shares, and cost of capital and financial performance of the company. The report will also analyse the market analysis and peer comparison of the company.

1. Short-term and long-term debt of Ziptel

As per the annual report of Ziptel Limited dated 30^th June 2016, the amount of short-term as well as long term debt or borrowing is nil. Various reasons may be there that may prevent the company in using debt in their capital structure. For instances, the firms from telecommunication or technological industries are more prejudiced to zero or low debt structure for capital. This activity is not surprising keeping in mind the uncertainties of the innovation or technologies. Further, another factor that influences the organization to have nil debt is the structure of hierarchy and the shareholder’s impact on the company’s decision making. Though the debt is tax deductible, it is only one part to be considered. There are other facts too those have the negative effect on the company like shifting of risk. The debt capital also involves other risks like interest risk, currency risks and the risk of bankruptcy. Therefore, it may be argued that the nil debt organizations are considered more favourable for the long term growth aspect.

1. Structure of debt

Ziptel limited is a zero debt entity as for the year closed on 30^th June 2016 the company has zero short term as well as long term debt (Ziptel.com.au 2017).

1. Influence of the industry

Generally the telecommunication entities are engaged in the capital-intensive projects and they require huge amount even before they start providing services to the customers. Financing through debts requires the company to pay regular interest periodically which may create burden on the company at the initial stages. On the other, hand, equity capital is to be repaid only when the company earns profit. Therefore, the reason behind Ziptel’s zero debt structure may be owing to the characteristics of telecommunication industry.

1. Cost of debt

As the company does not have any debt in its capital structure for the year closed on 30^th June 2016, the cost of debt is nil.

1. Cost of equity of the company

Cost of equity (k_e) = R_{f +} β (R_m – R_f)

Where,

Β = Beta = -0.8467

R_f  = Risk free rate = 2.76%

R_m = Market risk premium = 5.50%

Thus, k_e = 2.76 – 0.8467 (5.50 – 2.76) = 0.44%

1. Analysis of the financial performance

Revenue – it is recognized from the financial statement of the company that the revenue for the year closed on 30^th June 2016 were increased by 53% as compared to the previous year. The figure of revenue as on 30^th June 2016 was $ 762,388 whereas the same was $ 498,981 as on 30^th June 2015 and on 30^th June 2014 the revenue was $ 570 thousand. Therefore, the revenue of the company significantly went up compared to the previous two years (Ziptel.com.au 2017).

Cost of Capital

Earnings – for the accounting year 2016, the company recorded loss amounting to $ 14,009,805. The loss for 2015 accounting year amounted to $ 56,87,639 and 2014 was $ 2,445 thousands. The reason behind the loss was major investment in new platform and the acquisition of Zipt campaigns in the key market segments. Further, a large amount of loss was attributed to the payments on non-cash shares.

EPS – as the company was not able to generate any positive earnings for the last three years, its EPS are also negative for 2014, 2015 and 2016. The EPS for the year 2014 was -8.81, for 2015 was -8.21 and for the year 2016 the EPS was -17.21 (Ziptel.com.au 2017).

Dividend – the company did not pay any dividend for the past 5 years.

Growth expectation

The company as well the Australian telecommunication industry is expecting the bottom line growth to make it double in future years and a triple digit figure for the growth in the earnings (Valta, 2016).

Over all the industry, growth rate is stagnant and to maintain the profitability level there is the only way that is curtailing the cost. During the last few years, the telecommunication industry experienced a negative growth at -4%, however, Ziptel was leading at 96% earnings growth over the last years and is expected to perform better in the coming years.

1. Comparable approach for stock valuation

Under the comparable approach the stock of the company is compared with the competitors from the same industry using various methods like P/E ratio and dividend growth model.

P/E approach – this is most common method for comparing the stock of the company with its competitors. The next year’s data is regarded most appropriate for the purpose of comparison. However, the current year as well as the last year’s data is also taken into consideration. The comparison with competitors are shown through following table –

Name of the company	P/E 2015	P/E 2016	P/E 2017
Ziptel Limited	0.00	0.00	0.00
Amaysim Australia	19.10	0.00	0.00
Telstra	14.29	15.02	15.20

It can be noticed from the above table that the P/E ratio Ziptel for past, present and next year is 0.00 whereas the same for Telstra that belongs to the same industry is far better than Ziptel  (InvestSmart  2017).

Dividend growth model – under this the dividend yield of the company with its competitors are compared for the purpose of stock valuation.  The comparison with competitors are shown through following table –

Name of the company	Dividend yield 2015	Dividend yield 2016	Dividend yield 2017
Ziptel Limited	0.00%	0.00%	0.00%
Amaysim Australia	4.57%	0.00%	0.00%
Telstra	7.81	8.22	8.88%

It can be noticed from the above table that the dividend yield of Ziptel for past, present and next year is 0.00 whereas the same for Telstra that belongs to the same industry is far better than Ziptel (InvestSmart  2017).

1. From above table, it is identified that the P/E ratio and dividend yield both are nil for Ziptel. Therefore, it cannot be said which approach is better. However, in general view the P/E approach is considered better.
2. In addition to the dividend growth and P/E ratio, the market capital, growth aspect, DPS, EPS and net profit can be considered as crucial for valuation of stock.

1. Calculation of WACC

Net debt = Nil

Shareholder’s equity = $ 522,246

Weight of debt = 0%

Weight of equity = 100%

WACC after tax –

WACC = w_d (cost of debt after tax) + w_e (cost of equity)

= [(1-0.30)*(0*0)] + (1.00*0.44)

= 0.44%

1. Tax rate of the company for the calculation of WACC was 30%.
2. Difference between cost of equity and debt

Debts are generally raised from the financial institutions and banks are repayable with interest at regular period. On the other hand the equity finances are raised from the investors through issuing the shares and are repaid on the basis of company’s profitability. Further, the debt involves more risks like credit risk, interest risk and market risk as compared to the equities (Della Seta, Morellec and Zucchi 2015).

1. Yes, the current liabilities can be included in the cost of capital computation as it is tax deductible. However, the main disadvantage of the current liability inclusion is in enhances the risk.
2. While computing the WACC for Ziptel, the major component was equity as the company did not have any debt component and the capital structure is entirely comprised of equity only. It states that the company is lower leveraged and it will attract the investors.
3. Two major investment of the company during the year using the WACC are investments in the new platform and the acquisition of Zipt campaigns in the key market segments
4. The company’s capital structure is not consistent with the industry as 1:2 proportion for debt and equity is considered to be ideal structure whereas the company’s capital structure is comprised of 100% equity and zero debt.
5. Optimal capital structure is the structure of debt and equity at which the company can minimise its interest burden and maximise its return.

1. Company’s financial performance

As analysed by the Simply Wallst the low institutional ownership of the company at 4.77% included the company under the group that are not exposed to the volatility spikes. Further, as the company is not able to generate positive earnings from last few years, it will not be a good company from the investor’s prospect.

1. Financial analyst report

The financial analyst is not impressed with the performance of the company as it was not able to generate positive earning, positive EPS and no dividend was paid to the shareholders for the last few years. Therefore, no investors will invest their hard earned money in such company (De Fiore and Uhlig 2015)

I am agreeing with the report of financial analyst as the facts highlighted by the financial analyst can be conformed from the annual report of the company.

1. The important fact that is required to mention in the report that not only the current year’s performance is negative, if the past few years performances are also taken into consideration, the company is not performing well for those years also.

Conclusion

It can be concluded from the above discussion that the firms from telecommunication or technological industries are more prejudiced to zero or low debt structure for capital. Further, if the performance of Ziptel is considered specifically, it can be recognised that the company is not earning any positive income from last few years. therefore, the company is suggested to make some changes in their technologies and arrange the funds through debt.

Reference 

De Fiore, F. and Uhlig, H., 2015. Corporate debt structure and the financial crisis. Journal of Money, credit and Banking, 47(8), pp.1571-1598.

Della Seta, M., Morellec, E. and Zucchi, F., 2015. Debt structure, rollover traps, and default risk. Working Paper.

InvestSMART. 2017. Ziptel Limited. [online] Available at: https://www.investsmart.com.au/shares/asx-zpt/ziptel-limited [Accessed 20 Oct. 2017].

Valta, P., 2016. Strategic default, debt structure, and stock returns. Journal of Financial and Quantitative Analysis, 51(1), pp.197-229.

Ziptel.com.au. 2017. Ziptel Telecommunication. [online] Available at: https://www.ziptel.com.au/ [Accessed 20 Oct. 2017].