Sustainability Disclosures and Capital Structure in CSR Limited

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.

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

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?

The hypothesis for the concerned paper is as follows:  

Research Questions

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)  

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:

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).

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.

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).

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.

Theories of Capital Structure

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.

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).

Modigliani and Miller Theory

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 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).

Pecking Order Theory

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 (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.

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.

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.

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.

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

Trade-off Theory

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).

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).Chapter 4: Data Analysis and Discussion

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.

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
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

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.  

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 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
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 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.

Particulars	Details	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

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.

Agency Theory

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.

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
	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.  

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.  

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.999441735
R Square	0.998883782
Adjusted R Square	0.995535128
Standard Error	0.001022603
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.

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.

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.

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.   

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. 

Reference List 

Adewale, M. T., & Ajibola, O. B. (2013). Does Capital Structure Enhance Firm Performance? Evidence from Nigeria. IUP Journal of Accounting Research & Audit Practices, 12(4).

Bandyopadhyay, A., & Barua, N. M. (2016). Factors determining capital structure and corporate performance in India: Studying the business cycle effects. The Quarterly Review of Economics and Finance, 61, 160-172.

Belkhir, M., Maghyereh, A., & Awartani, B. (2016). Institutions and corporate capital structure in the MENA region. Emerging Markets Review, 26, 99-129.

Brannen, J., (2017). Mixing methods: Qualitative and quantitative research. Routledge.

Brusov, P. N., Filatova, T. V., & Orekhova, N. P. (2013). Absence of an optimal capital structure in the famous tradeoff theory!. Journal of Reviews on Global Economics, 2, 94-116.

Chechet, I. L., & Olayiwola, A. B. (2014). Capital structure and profitability of Nigerian quoted firms: The agency cost theory perspective. American International Journal of Social Science, 3(1), 139-158.

Dang, G., &Pheng, L. S. (2015). Research methodology. In Infrastructure Investments in Developing Economies (pp. 135-155). Springer, Singapore.

Dumay, J. & Cai, L., (2015). Using content analysis as a research methodology for investigating intellectual capital disclosure: a critique. Journal of Intellectual Capital, 16(1), pp.121-155.

Elsas, R., Flannery, M. J., & Garfinkel, J. A. (2014). Financing major investments: Information about capital structure decisions. Review of Finance, 18(4), 1341-1386.

Fosu, S. (2013). Capital structure, product market competition and firm performance: Evidence from South Africa. The quarterly review of economics and finance, 53(2), 140-151.

Ghazouani, T. (2013). The capital structure through the trade-off theory: evidence from Tunisian firm. International Journal of Economics and Financial Issues, 3(3), 625-636.

Ghosh, A. (2017). Capital structure and firm performance. Routledge.

Graham, J. R., Leary, M. T., & Roberts, M. R. (2015). A century of capital structure: The leveraging of corporate America. Journal of Financial Economics, 118(3), 658-683.

Iavorskyi, M. (2013). The impact of capital structure on firm performance: Evidence from Ukraine. Master Of Finance Economics Thesis, Kyviv School of Economics.

Kundakchyan, R. M., & Zulfakarova, L. F. (2014). Current issues of optimal capital structure based on forecasting financial performance of the company. Life Science Journal, 11(6s), 368-371.

Maina, L., & Ishmail, M. (2014). Capital structure and financial performance in Kenya: Evidence from firms listed at the Nairobi Securities Exchange. International Journal of Social Sciences and Entrepreneurship, 1(11), 209-223.

Marczyk, G., DeMatteo, D., & Festinger, D. (2017). Essentials of research design and methodology. John Wiley.

Mitani, H. (2014). Capital structure and competitive position in product market. International Review of Economics & Finance, 29, 358-371.

Muritala, T. A. (2018). An empirical analysis of capital structure on firms’ performance in Nigeria. IJAME.

Park, K., & Jang, S. S. (2013). Capital structure, free cash flow, diversification and firm performance: A holistic analysis. International Journal of Hospitality Management, 33, 51-63.

Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The Review of Financial Studies, 27(1), 153-179.

Serrasqueiro, Z., & Caetano, A. (2015). Trade-Off Theory versus Pecking Order Theory: capital structure decisions in a peripheral region of Portugal. Journal of Business Economics and Management, 16(2), 445-466.

Tahmoorespour, R., Mina, A. A., & Randjbaran, E. (2015). The Impact of Capital Structure on Stock Returns: International Evidence. Hyperion Economic Journal, 1(3), 56-78.

Tailab, M. M. K. (2014). The effect of capital structure on profitability of energy American firms. International Journal of Business and Management Invention, 3(12), 54-61.

Zeitun, R., & Tian, G. (2014). Capital structure and corporate performance: evidence from Jordan.