The analysis of the financing sources for the Romanian companies listed at Bucharest Stock Market

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1 The analysis of the financing sources for the Romanian companies listed at Bucharest Stock Market DANIS Adriana and PARV Luminita Abstract The article deals with the issues of the financing sources both theoretically and practically. The financing decision has a great importance in leading a company because it is concerned with a certain structure of the capital, the aim being to reach certain goals: maintaining an appropriate auto financing level, insuring a maximum loan degree, following an optimum structure of the capital. In order to analyze the financing sources, we have chosen 15 companies listed at Bucharest Stock Exchange, out of which 9 from the first category and 6 from the second category. We have selected those companies which didn t have so high loses so their own capital is not negative. Keywords Financing sources, global value. A I. INTRODUCTION ccomplishing the major objective of the company, namely maximizing its global value, implies the idea of having a profitable activity meant to insure a satisfying profitability for all capital suppliers both on long term and short term. This implies getting enough profit in order to be able to offer dividends to the share holders. At the same time this also has to deal with reinvesting in order to develop. Simultaneously, it is also necessary to pay the creditors at a favourable interest level, for the funds they have given to the company [1], [2]. Thus, maximizing the value of the company by the managers means adopting optimum financing decision which lead to reaching a minimum level of capital cost an implicitly to increasing the value of the company. The efficient capital markets have an important role in financing the companies, which in addition to their own internal and external capital Manuscript received November, 5, DANIS, Adriana is with the George Baritiu University from Brasov, Romania ( adr.popa@yahoo.com). PARV Luminita is now with Transilvania University from Brasov, Romania (corresponding phone: , fax: , e- mail: lumiparv@unitbv.ro). sources benefit from direct access to the capital offered by various investors by means of stock and bond issues. In other words, what stimulates companies to become public is not the permanent appropriate stock price, but especially the opportunity of attracting their own external financing sources from the capital market. The financing decision implies the fact that the managers of a company listed at the stock exchange must establish a certain capital structure, the aim being to reach simultaneously the following: - Maintain an appropriate level of auto financing (which is the guarantee of the present and future profitability of the company), and the payment of the loans taken from external financing sources ; - Ensure a maximum degree of indebtedness, considering the cost-benefit indebtedness relation; - Focus on an optimum capital structure according to the established financing strategy; - Apply a stable and stimulating dividend politics according to the business and investment perspectives environment, which are meant to allow the maintenance and even the increase of the listed companies share value; - Focus on an efficient indebtedness strategy which will offer benefits both to the creditors and share holders, and above all will avoid bankruptcy; - Apply a medium and long term capitalization strategy, the aim being to insure the activity and the development and also the satisfying payment of the share holders on short term by means of dividends. While the company follows and expands its economic activities, there is the necessity of increasing its capital by means of endogenous and exogenous sources. The most important endogenous sources are the auto financing (based on reinvested net profit and amortization) and cession of assets. By their nature, these sources are long term sources because they reflect the capitalisation of a part of the net profits as well ISBN:

2 as amortization which insures the compensation of the moral and physical usage of the company s assets. But the proper increase of a company s capital can be accomplished by means of the exogenous sources, the loan capital being also considered external financing source. The external capital sources can be both on long term and on short term. The long term ones are represented by the contribution to capital in assets, stock issues, incorporation of reserve capital, the payment of dividends as shares, bank loans, long term bond loans and the leasing. The short term ones are represented by bank loans or bond loans. It is necessary to highlight the fact that in the case of the companies listed on the capital market, the bond issues represent an alternative source of long term funds which confer them a strong competition advantage but also the danger of appreciating their performances wrongly. II. METHODOLOGY The companies listed at the Stock Market are the most representative for the functioning of a national economy. At present on the Romanian Stock Market there are 18 companies listed under the first category and 42 companies listed under the second category. In order to analyze the financing sources, we have chosen 15 companies listed at Bucharest Stock Exchange, out of which 9 from the first category and 6 from the second category. We have selected those companies which didn t have so high loses so their own capital is not negative. For the data base we have used the information provided by the official site of Bucharest Stock Exchange. The importance and the evolution of the companies different financing sources are highlighted by the structure ratio of the financing sources. The employed capital includes all the long term financing sources, meaning the own capital and the long term liability. Dealing with them aims to efficiently use them in a certain amount of time. The importance of the employed capital is noticed by means of the financial stability ratio: Employed capital/ Total Liabilities. The financial stability ratio reflects the extent to which the company has permanent financial resources. The predominance of the employed capital among the company s total financial resources shows the permanent characteristic of financing, providing a certain degree of assurance to the company [15]. The financial practice proves that the situation is comfortable for the company when the value of the ratio is between 50%-66%. By looking at the table 1 we can notice that the relative importance of the long term financing sources varies greatly and the financial stability ratio is between 31, 30% (Amonil in 2007) and 99,31% (Sinteza in 2008). Companies like Muntenia, Oltenia, Transilvania and Sinteza had very high ratio, of over 90%, while other companies had lower ratio, between 30% and 80%. TABLE I THE FINANCIAL STABILITY RATIO OF THE COMPANIES LISTED AT BUCHAREST STOCK EXCHANGE IN (%) ALRO ANTIBIOTICE AZOMUREŞ MUNTENIA OLTENIA SNP PETROM OIL TERMINAL SOCEP SIRETUL SINTEZA AMONIL TMK- ARTROM MEFIN S.A Analyzed in its dynamics, the index can register increasing values when the average of the employed capital increases among the total capital, especially by increasing the superior rhythm of the own capital as compared to the long term debts. The gradual drop of the ratio s value reflects a favourable situation only when the value of the employed capital from the company s total capital drops, and this is due to the drop of the long term debts [20], [21]. A more conservative analysis of the companies financing assets can be done by highlighting the long term average of the own sources from the assets total, through the global financial autonomy ratio: Own capital/total Liabilities. For the analysed companies, the situation looks as follows table 2. The average of the own capital, namely of the bonds out of the total of liabilities, differs from case to case, firstly according to the company s financial strategy, according to each company s real circumstances, according to the efficiency of the financial decisions. What makes it difficult to establish a reference ratio is the diversity of the circumstances under which the companies work. Still, the majority of experts recommend, as satisfying for the financial equilibrium and auto financing, a ratio greater than 33%. In conclusion, having an own capital equal or greater than a third from the company s liability is a premise for its financial autonomy. ISBN:

3 TABLE II THE GLOBAL FINANCIAL AUTONOMY RATIO FOR THE COMPANIES LISTED BSE IN ALRO ANTIBIOTICE AZOMUREŞ MUNTENIA OLTENIA SNP PETROM OIL TERMINAL SOCEP SIRETUL SINTEZA AMONIL TMK- ARTROM MEFIN S.A In the case of the analyzed companies, the autonomy ratio goes beyond 33% (with the exception of the company TMK ARTROM which had a ratio of 28,05% in 2007, 19,66% in 2008, and the company AMONIL which in 2007 had a ratio of 29,58%) for the whole analyzed period. This shows a strong financing of the own capital needs. The global indebt ratio has great variations within the analyzed sample. The lowest values are registered in the case of companies and in the case of the companies Socep and Sinteza, while the other companies (with few exceptions) have normal values. The majority of the companies had values under the level of 66%, which is a favourable aspect considering the company s solvency degree. Still, some companies had very high values: TMK-ARTROM (71,95% in 2007 and 80,34% in 2008) and Amonil (70,42% in 2007). During , the analyzed companies took short term debts, which is only natural. The short term debts ratio or the present financing degree shows the extent to which the present resources take part in creating the total financing resources of the company and they are calculated as a rapport between the short term debts and the total liabilities. This ratio shows the limit up to which the company is financed from sources other than the own ones. The normal values for this index are included within the limits 33%-50%. These values do not compromise the degree of financial stability. The lowest short term debts ratio is in the case of Financial Investment Companies and in the case of Sinteza Company. This ratio is generally under 10% and this fact shows a good financial stability. This situation is also given by the specific of these companies. Amonil company registered very high values and in 2007 it had a short term debts ratio of 68,71%. Some companies had an index increase (Alro, Antibiotice, Siretul), which reflects an increase of the average of the stable resources from the total capital. Basically, this increase can be a positive aspect if it is the result of the increase of the suppliers payment deadline and if it is the result of the short term bank loans reduction, especially the ones from the treasury. TABLE III THE SHORT TERM DEBTS RATIO FOR THE COMPANIES LISTED AT BSE IN (%) LRO ALRO ANTIBIOTICE AZOMUREŞ MUNTENIA OLTENIA SNP PETROM OIL TERMINAL SOCEP S.A SIRETUL SINTEZA AMONIL TMK-ARTROM MEFIN S.A The average of the long term debts from the total liabilities shows the importance they have in financing the needs. For the analyzed companies the long term debts ratio looks as table III. What we can notice from the above data is that companies used long term debts in an extremely low average and in many cases these were even zero. This situation is not the result of some circumstantial factors, the motivation for this being reflected by the financial strategy adopted by the managers. Consequently there is the idea of some very high cost in the ISBN:

4 case of long term debts and vice versa. There are lower costs in the case of short term debts of up to one year[21], [22]. Considering that the suppliers are also included under short term debts, the explanation might be that the managers prefer to use the commercial credit which is a little expensive and this can lead to financial jam. TABLE IV THE LONG TERM DEBTS RATIO FOR THE COMPANIES LISTED AT BSE IN (%) RO ANTIBIOTICE AZOMUREŞ MUNTENIA OLTENIA SNP PETROM OIL TERMINAL SOCEP S.A SIRETUL SINTEZA AMONIL TMK-ARTROM MEFIN S.A On the entire analyzed period the company TMK Artrom had very high values and in 2009 it had 37,08% from the total resources, the situation being considered acceptable. The global in debt ratio is obtained by summing up the short term debts with the long term debts and dividing them with the total liabilities. The global indebt ratio measures the average of the debts, disregarding their duration and origin within the company s goods, a value lower or equal with 66% being considered a favourable value. As the value of the ratio diminishes, the indebt, namely the financial autonomy, increases. III. CONCLUSION If we divide the sample companies on groups according to the values of their own capital average, the long term and the short term debts out of the total liabilities, we have the following situation: According to the table the main financing source of the Romanian companies is represented by the own capital, considering that 80% of the analysed companies have been 50% financed with own capital in TABLE V THE GLOBAL INDEBT RATIO FOR COMPANIES LISTED AT BSE IN (%) ALRO ANTIBIOTICE AZOMUREŞ MUNTENIA OLTENIA SNP PETROM OIL TERMINAL SOCEP S.A SIRETUL SINTEZA AMONIL TMK-ARTROM MEFIN S.A For the analyzed period, the researched companies preferred the short term financing sources and not the long term ones. In 2007 there were five companies which had no long term loans, and in 2008 their number diminished (four of the analyzed companies had no long term debts). Also, more than 80% of the companies had less than 50% short term debts. This structure of liability, namely of the debts can be the result of bad management which cannot take long term loans, but it can also be the result of a loan strategy which encouraged the short term loans. Adopting a certain financial structure is the result of the company s decision process which cannot be accomplished if the constraints which result from the functioning of the capital market are not taken into account, given the fact that any kind of capital costs. Thus, the structure of capital is a variable which does not depend only on the company, its economic increase objectives, its profitability or the risks which agrees to undertake. This is influenced and determined by the share holders, by the banks or by other state lenders, and also by the financial economic circumstances [15]. Generally, at the company s level there are certain factors which contribute to establishing the optimum structure of the capital: - The evolution and the stability of sales (their continuous increase maintenance at a certain ISBN:

5 level allows a better insurance of the company without taking risks; - The structure of assets (a higher tangible assets average which allows guaranteeing greater loans); - The profitability of the company (a high profitability represents an extra reason for the bank to give loans to a developing company); - Fiscality (The taxes represent costs for the companies. Thus, a high taxation will increase the company s expanses, while a low taxation will diminish the level of expenses); - The external environment of the company (it is mainly represented by the capital market. The possibility of financing by means of bond issues will increase the company s interest in attracting new funds). - The management and the flexibility of the company (a management willing to expand and a flexible structure will allow the increase of the borrowed capital within the employed capital) As far as the financial equilibrium of the company is concerned, it is part of the company s general economic equilibrium. Among the duties of the company s financial manager is also the monitoring of the way in which the equilibrium at the level of the financial resources is insured. REFERENCES [1] K. Arrow, Some Models of Racial Discrimination in the Labor Market, in A.H.Pascal (editor) Racial Discrimination in Economic Life, Lexington, Mass., Heath Barclay [2] M., Smith, C. Jr., The maturity structure of corporate debt, Journal of Finance, no. 50, 1995, pp [3] A, Bevan, A., Danbolt, Capital Structure and its Determinants in the United Kingdom. A Decompositional Analysis, Working paper, 2000 [4] Bhattacharya, S., Imperfect information, dividend policy, and the bird in the hand fallacy, The Bell Journal of Economics, vol. 10, no. 1, 1979 [5] L, Booth.,V. Aivazian,, K. Demirg u, Capital structure in developing countries, Journal of Finance, no.56, 2001, pp [6] V.,Dragotã, Minority shareholders protection in Romanian capital markets: evidence on dividends, 3rd International Conference, IFC 3, Hammamet, 2005, Tunisia [7] W.,Drobetz, R. Fix, What are the Determinants of the Capital Structure? Some Evidence for Switzerland, Working paper, no. 4, 2003 [8] M. Harris, A.Raviv The Theory of Capital Structure, The Journal of Finance, vol. 46, no.1, 1991, pp [9] M. C.Jensen,,W. H. Meckling,., Theory of the firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, Vol. 3, 1976, pp [10] C. Mayer, (1990). Financial Systems, Corporate Finance and Economic Development, in G. Hubbard (ed.), Asymmetric Information, Corporate Finance and Investment. Chicago: The University of Chicago Press. [11] M. Moh d, L Perry, J Rimbey,., The Impact of Ownership Structure On Corporate Debt Policy: a Time-Series Cross Sectional Analysis, Financial Review, Vol. 33, 1998 [12] S.,Myers, Capital Structure, Journal of Economic Perspectives, vol. 15, no. 2, 2001, pp TABLE VI THE CLASICATION OF THE COMPANIES ACCORDING TO THE AVERAGE OF THE OWN CAPITAL, THE SHORT TERM DEBTS AND THE LONG TERM DEBTS IN THE TOTAL LIABILITIES Index 0% Number of companies which have the index in the interval 25% 50% 50,01 [13] S. Myers, Determinants of corporate borrowing, Journal of Financial Economics, no. 5, 1977, [14] S. Myers, Majluf, N., 1984, Corporate Financing and Investment Decisions when Firms Have Information that Investors Do Not Have, Journal of Financial Economics, no. 13, 1984, pp [15] H. P.,Pao, B.Pikas,.,T. Lee, The determinants of capital structure choice using linear models: high technology vs. traditional corporations, Journal of the Academy of Business and Economics, 2003 [16] R. Rajan,L. Zingales,, What Do We Know about Capital Structure? Some Evidence from International Data, Journal of Finance, vol. 50, no. 5, pp [17] R L.J., Rendleman, Information asymmetries and optimal project financing, Working Paper, Duke University Graduate School of Business, 1980 [18] Shyam-Sunder, S.C. Myers., Testing static tradeoff against pecking order models of capital structure, [19] Journal of Financial Economics, no. 51, 1999, pp [20] S. TitmanWessels., The Determinants of Capital Structure Choice, The Journal of Finance, no. 43 (1), 1988, pp [21] [22] [23] %- 75% 0%- 0,01%- 25,01%- 75,00%- 100% CPR/TP CPR/TP CPR/TP DTL/TP DTL/TP DTL/TP DTS/TP DTS/TP DTS/TP ISBN: