CAPITAL STRUCTURE & SHAREHOLDERS VALUE IN PETRO RABIGH

Petro Rabigh’s long-term loan was 19,015,070,000 Saudi Riyals, while loan from founding shareholders was 4,575,000,000 Saudi Riyals. The total liabilities, all obligations of the company, which arose from its past transactions, were 41,765,999,000 Saudi Riyals. The company’s financial leverage, the indicator, which represents proportion of equity and debt Petro Rabigh is using to finance its assets, was 296.9%, while as of December 2010, the financial leverage was 319.53%. The decrease of the financial leverage reveals that the company has decreased its indebtedness by decreasing the amount of both long and current debts. Total shareholders’ equity was 8,085,698,000 Saudi Riyals, which is five times less than the total liabilities. Considering that shareholder’s value is less than total liabilities, Petro Rabigh relies more on debts to finance its projects and transactions rather than equity. Having scrutinized Petro Rabigh’s balance sheet for 2009 – 2011, it could be concluded that the long – term debts significantly exceeds the total shareholder’s value, however, the amount of long-term debt began to decrease through the following years, which reveals the improvement of company’s capital structure and overall financial position. In general, the company raises financial resources through two methods – debt financing and equity financing. The company has used different credit facilities, which increased the amount of long – term debt, in order to expand its activities and operations. However, to improve the financial position, the company has to balance the ratio of equity and assets in order to ensure solvency. The profitability ratios, such as return on assets and return on equity, reveals company’s poor management in terms of using its assets and equity to earn profits. Thus, as of December ROA and ROE were 0,13% and 0,81% respectively. The indicators shows that the company earns 13 cents from 1 Saudi Riyal invested in assets and 81 cents from 1 Saudi Riyal of equity. Although the company has improved profitability ratios since 2009, the low returns indicate poor financial management. Considering the low return ratios, the company did not pay dividends to its shareholders, and as the result, during 2009 – 2011, the dividend per share and dividend yield was 0. The earnings per share, the amount of earning per one outstanding share, was 0.08 in 2011. Therefore, the company has to improve its financial management in terms of increasing return ratios and increasing shareholders’ value. ReferencesBalance Sheet. Petro Rabigh Officinal website. Retrieved from: http://www.petrorabigh.com/en/Balance_Sheet.aspxBrigham, E.F. Houston, J.F. (2001). Fundamentals of Financial Management. Harcourt Asia, Singapore. Ratios. Petro Rabigh Officinal website. Retrieved from: …
Posted by: Consuelo Priebe

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