Capital structure is defined as how a listed company has organized its capital and how it obtains the financial resources for the purpose of continue running its business. Sources of finances can be classified into 2 categories which are internal sources and external sources.
Internal Sources
Normally, there are 3 types of internal sources of finance for a public listed company, which are retained profit, working capital and sale of assets.
Retained profit occurs when a company makes business profit however doesn't spend it, but keep it for future use or reinvest on its business. The retained profit can be used in investment such as research and development (R&D). Beside this, company can also use the retained profit in the expansion of company such as purchase land, machinery and build up plant and premises. Another essential function of retained profit is for the company emergency use. This can help company when they are facing critical challenges such as lack of capital or financial crisis.
According to Genting semi-annual report at 30 June 2010, they have retained RM 8,800,686,000 of profit as compare to its expenses which is RM 149,737,000. It shows that their retained profit was about 58 times of the company semi-annual expenses. This means that even Genting doesn't create any income from now on, it still can operate its business for a such a period. Therefore, we can know that Genting have a strong capital support on its business.
Working capital
Working capital is a short-term capital that a business keeps. The purpose of working capital is to support the company's everyday trading activities such as employees' salaries and wages, rental fees, sundry fees and others. Working capital can be calculated by minus current liabilities from current assets. Current assets refer to a short term assets which will be used for company expenses or transform into cash within a short period, normally within one year. For example, current assets are cash in hand, debtors and prepayment fees. However, current liabilities are short term debts which are needed to be clear up within one year such as creditors, fees owing and bank overdraft. From the Genting semi-annual report, their current assets will be RM 6,221,279,000 and current liabilities are RM 1,080,456,000. Thus, we can get the Genting working capital by using RM 6,221,279,000 to minus RM 1,080,456,000, which will get the answer of RM 5,140,823,000.
Liquidity ratio will be defined as solvency of the company financial condition and will be normally used for the measurement of company ability in two aspects, collect the company credit and clear the debts. Current ratio is measured by current assets divide current liabilities. The calculation will be RM 6,221,279,000 over RM 1,080,456,000, and we get the current ratio of 5.758. In fact, if the company has a current ratio which is more than 1, it shows that the company has a positive net working capital. In other word, we can say that Genting have a positive and strong working capital.
Sale of assets
Assets are the most essential factors of a business. Both the fixed assets and current assets are always needed to run a business. Fixed assets will be those assets that used more than 1 year, such as buildings, machinery and fixture and fitting. Current assets however defined as the short-term assets such as cash in hand and debtors. Normally, company will sell its fixed assets rather than current assets in order to raise fund due to the measureable of fixed assets. Sometimes, company also sells the used assets and replace with a more advance assets such as a new roulette in order to enhance productivity. However, sometimes company sells it assets is because of the company may need the fund urgently.
The semi-annual report of Genting had shown that the company doesn't sell any assets within this half year, however it had been using this approach in the past few years. Due to the strong capital and great profit made by the Genting, we can come out with a conclusion that Genting sell off these assets is not because of raising fund, however will be a way to clear the unnecessary assets.
External Sources
External sources refer to the financial sources that rise from outside of the company. It can be classified as two types, which is ownership capital and non-ownership capital.
Ownership capital
Owners defined as the people who are company shareholders. For a public listed company, ownership capital can be broken down into two types, which are ordinary shares and preference shares.
Ordinary shares also known as equity shares, which it gives the right to shareholders on profits sharing (dividend) and voting on company general meeting. Ordinary shares can be considered as the main characteristic of listed company. When a company transform into public listed, it will issues ordinary shares on Bursa Malaysia. Within the six month from 1 January 30 June 2010, Genting has issued 1,902,000 new ordinary shares of 10 sen each, to raise fund for company investment.
Preference shares are so-called because preference shareholders have a priority to claim over the earning and assets of the company compare to ordinary shareholders. Preference shareholders receive their dividends before ordinary shareholders, and claim for the assets before ordinary shares holders. Genting also issued these preferences shares for fund raising. Other than that, there is also a type of redeemable preference share which can be called back by issued company. For example, in the previous year, Genting has just redeemed 136,000 preference shares which cost RM 1 each by spending RM136, 000,000.
Non-ownership capital
Non-ownership capital refers to sources of finance that is not gathering from shareholders however borrow from creditor. These sources of finance include debentures, other loans and lines of credit from creditors.
Other loans refer to loans that have a fixed amount, repayment schedule and interest charge. For example, a company may raise fund by borrow money from the bank, and this will be recorded as long term loan in balance sheets account. From the Genting semi-annual report, we can know that it also apply the long term loans from bank to run it business. In 2009, Genting had borrowed RM 32,000,000 to run it business.
Lines of credit from creditors, is referred to short term credit. It occur when supplier allow the company (buyer) to purchase the goods by credit term. For a company that can manage their credit carefully, it can also become a type of sources of finance. There will be a period for making payment to creditor, thus within this period company can use the money (credits) to reinvest and gain more profit. As usual, Genting also uses this kind of strategy in their company operation. Balance sheets of Genting ended at 31December shown that Genting still owe their creditors RM 596,264,000.
Lines of credit
The longer creditor has agree for due date for payment, the more advantage the company gain. Company can use the money that should be pay back, to reinvest in its business. Due the advantageously situation that Genting have for example like profitable, suppliers may want to be Genting's supplier because of Genting is able to pay them. In return, to become one of Genting supplier，
supplier must give more benefits to Genting due to competitive environment to make sure they have chance to do business with Genting. One of the essential elements is, provide longer due date on credit. Genting was using its advantage appropriately to gain this benefit.
