RESEARCH TOPIC: ASSESSING THE IMPACT OF CAPITAL STRUCTURE AND SHORT-TERM LIQUIDITY ON PROFITABILITY – AN ANALYSIS OF HIGH SPEED TWO (HS2) LIMITED

research topic: assessing the impact of capital structure and short-term liquidity on profitability – an analysis of High Speed Two (HS2) Limited

Table of Contents

1.     introduction.. 3

1.1.          background of the study. 3

1.2.          problem statement. 3

1.3.          research aim and objectives. 3

1.4.          research questions. 4

1.5.          significance strucy. 4

1.6.          research structure. 4

2.     brief literature review… 5

2.1.          relationship between liquidity and firm profitability. 5

2.2.          relationship between capital structure and profitability. 6

3.     research strategy.. 7

3.1.          Research philosophy. 7

3.2.          Research approach. 7

3.3.          Research strategy. 7

3.4.          Time horizon. 7

3.5.          Data collection method. 8

3.6.          Data analysis. 8

3.7.          Timeline. 8

3.8.          Research limitations. 9

3.9.          Ethical aspects. 9

references. 10

research topic: assessing the impact of capital structure and short-term liquidity on profitability – an analysis of High Speed Two (HS2) Limited

1.   introduction

1.1.       background of the study

In the present era, financial crises have the potential to influence the economic growth and development of nations all around the world. This scenario holds true for developing as well as developed economies (Owolabi and Obida, 2012). This is because in the face of the financial crises, there has been an increase in the number of debtors, in terms of nations, as most of the nations borrowed from institutions, such as IMF. The financial crises established the need for liquidity at broader national levels (Lamberg and Vålming, 2009). The same could be translated on the organizational levels as well, where liquidity has become increasingly important for the organizations. This is because fluctuating sales, volatile exchange rates, as well as an increase in the levels of inflation, require the organizations to ensure that they have sufficient levels of liquidity so as to ensure that the business operations are conducted in an effective manner (Owolabi and Obida, 2012).

Even though there are costs associated with the maintenance of high levels of liquidity, as the opportunity costs is the income, which could be generated through the investment in less liquid assets, lost. The high levels of liquidity, specifically when the key object of the organizations is to maximize overall shareholder’ wealth, may not always be supported (Eljelly, 2004).

Another crucial factor for the effective functioning of the organizations is that of the capital structure, which can be regarded as one of the most crucial decisions for the management of the organizations. The selection of the right capital structure is very important as it leads toward the maximization of the returns of firms. In addition to that, the capital structure decisions also assess the degree to which the company can operate in an increasingly competitive environment. In this case, the capital structure consists of a mixture of different sources of funds, include debt and equity. In this case, the organizations can go for adopting a wide range of capital structures, such as arrangement of lease funding, deployment of warrants, issuance of convertible bonds, signing of forward contracts as well as trading of bond swaps. In addition to that, the companies can also go for the issuance of a dozen of different securities in a range of different combinations to attain a capital structure that maximizes their market value as a whole (Abor, 2005).

In this case, the decisions associated with the overall capital structure of the companies is very important because of the costs and benefits associated with the sources of fund and their impact on the profitability and financial performance of the firms. The capital structure determines the ability of the company to exploit various opportunities through investments and at the same time remain profitable in the face of increasingly competitive business environment (Gill, Biger and Mathur, 2011).

1.2.       problem statement

Even though various researches have been conducted in relation to the impact of liquidity and capital structure on the overall profitability of the firms. However, most of the research in this area has been conducted on the banks, specifically financial institutions. On the other hand, studies on manufacturing sector also exist. However, the public transportation sector has not be addressed in great detail. Hence, this study aims at assessing the impact of the capital structure and liquidity on the overall profitability with a special focus on the public transportation sector, where HS2 has been used as the case organization.

1.3.       research aim and objectives

The key aim of this study is to assess the impact of the capital structure and liquidity on the overall profitability of the firms within the public transportation sector, with specific focus on HS2 UK.

To attain the above-mentioned aim, the research will have the following key objectives:

  • To conduct an in-depth review of literature pertaining to the topic.
  • To assess the manner in which debt to equity ratio influences firm profitability.
  • To identify the impact of current and quick ratio on firm profitability.
  • To recommend strategies for optimum capital structure and liquidity management.

1.4.       research questions

The key questions that will be addressed by the research are listed below:

  • What arguments have been put forward by literature in relation to the impact of liquidity and capital structure on firm performance?
  • What is the manner in which debt to equity ratio influences firm profitability?
  • What is the impact of current and quick ratio on firm profitability?
  • What are the strategies for optimum capital structure and liquidity management?

1.5.       significance strucy

The research under consideration will make important contributions to the overall contributions to the existing literature in relation to the topic under consideration as the already existing in relation to this topic is already limited. In addition to that, the research will also provide the concerned officials with insights into the strategies that can allow them to manage the liquidity as well as the capital structure of the organizations that operate under the public transportation sector.

1.6.       research structure

The research under consideration will consist of a total of 6 chapters, the details of which are given below:

  • Introduction: This chapter will put light on the overall background, objectives, aim, questions as well as the significance of the study. The key purpose of this chapter is to provide readers with an overview of the study.
  • Literature Review: This chapter will highlight the already existing literature in relation to the topic under consideration. It will highlight the key arguments provided by different researchers and compares and contrasts them in an effective manner.
  • Research Methodology: This chapter will put light on the tools and techniques that the researcher will use for the collection and analysis of the data. The chapter will include an overview of these tools and techniques and the justification for the selection of these techniques.
  • Data Analysis: This chapter will put light on the overall results of the data analysis and will also interpret them.
  • Discussion: This chapter will include a side by side comparison of the literature and the data analysis part, where the findings of this study will be compared with that of the existing literature and the similarities and differences between the two will be identified.
  • Conclusions: This chapter will tie all the previous chapters together by summarizing the aims, methodology, as well as the key findings of this study. In addition to that, it will also propose recommendations that can allow the companies in better managing their capital structure as well as liquidity. Finally, this chapter will propose recommendations for future research as well.

2.   brief literature review

2.1.       relationship between liquidity and firm profitability

Liquidity has been observed to have an influential impact on the overall profitability levels of the organization. In this case, weak levels of liquidity pose threats to the overall liquidity as well as profitability of the firms, as it makes the firm instable and risky. Apart from that, the levels of liquidity within the organization also determines the attractiveness of the companies for the investors and creditors, as it is indicative of the ability of the organizations to pay off their short-term debt in a timely manner. Additionally, liquidity also determines the degree to which the organization can effectively run its operations, as low levels of liquidity can hamper the overall routine operations of the organizations, which in return influence. In addition to that, the companies are also required to maintain effective levels of liquidity as it allows them to ensure that they have the working capital required to run the operations, which can aid them in successfully completing the day to day tasks required to generate revenues and profits (Pandey, 2000). In this case, the company shall also ensure that it maintains optimal levels of liquidity, this is because if the company has excessive idle working capital, then it can cause opportunity costs in terms of income lost. On the other hand, the insufficient levels of working capital hinder the overall profitability of the form by causing interruptions and inefficiencies in the operational processes (Saleem and Rehman, 2011).

2.2.       relationship between capital structure and profitability

On the other hand, the relationship between capital structure of the firms and their overall profitability has been debated thoroughly in the literature. In this case, a point of agreement is the fact that the firms shall adopt an optimal capital structure that can allow them to reduce the overall costs of capital while at the at the same time ensuring that their profits are maximized. One of the key theories in this case is that of Modigliani and Miller Propositions. In the year 1958, Modigliani and Miller proposed the M&M (I) proposition, under which they indicated that no relationship existed between the capital structure and profitability of the companies. In this case, a set of stringent assumptions, however, was undertaken. These assumptions included, absence of taxes, presence of a capital market without any friction, absence of the cost of bankruptcy, as well as the elimination of all the other real-world implications (Ahmeti and Prenaj, 2015). However, Rahman, Sarker and Uddin (2019) and Gill, Biger and Mathur (2011) that even though within a perfect capital market, which is assumed under M&M (I) proposition, the total value of the firm is equal to the market value of the cash flow generated by the firms, but such a market does not exist. Hence, the capital structure can influence the overall profitability of the firms, as it determines the financial leverage which adds to the overall expenses of the companies. Further research based on the M&M (II) proposition indicated that in the presence of taxes the use of debt has the capacity to provide the companies with tax benefits. However, these tax benefits can be out shadowed by the costs of debt, which increase with the increase in the overall debt balances of the company. In such a case, the companies can confront financial distress, which is a situation when the organizations’ costs of debt or interest expense exceed the overall tax benefits. Hence, it has been established by research that increasing levels of debt in the capital structure have a negative impact on the overall profitability of the firms (Ahmeti and Prenaj, 2015).

3.   research strategy

3.1.       Research philosophy

The research under consideration will be based on a positivism philosophy. This is because this philosophy indicates that the variables can be best studied in their true state. As the researcher will not be including any moderating and control variables, hence the positivism paradigm best suits the study. This is because it will allow the researcher to assess the relationship between liquidity, capital structure, and profitability (Bell, Bryman and Harley, 2018).

3.2.       Research approach

The research under consideration will be based on a deductive approach, which develops hypothesis based on the review of literature and then tests them statistically. This approach will allow the researcher to assess if the already existing claims pertaining to the relationship between liquidity, capital structure, and profitability also hold true in the public transportation dynamics or not (Zikmund et al., 2013).

3.3.       Research strategy

The research under consideration will be based on a case study approach, where HS2 will be used as a case organization. the key reason behind the deployment of a case study approach is that it will allow the researcher to get in depth insights into the overall dynamics of the public transportation organizations. This will allow the research to get more accurate findings in relation to the relationship between liquidity, capital structure, and profitability (Bell, Bryman and Harley, 2018).

3.4.       Time horizon

The research under consideration will be a time series analysis, where an analysis of the relationship between liquidity, capital structure, and profitability in the context of HS2 will be conducted for a time period ranging between 2010 and 2018. In this case, the study will be based on one object, which is HS2, multiple time periods from 2010 to 2018, and three variables, namely liquidity, capital structure and the overall profitability of the firms (Zikmund et al., 2013).

3.5.       Data collection method

The research under consideration will be based on secondary data only, where the key source of the data will be the annual reports of the company. This is because the researcher will be basing the analysis on the liquidity, capital structure, and profit based figures taken from the annual reports of the company. In addition to that, the secondary data will also be collected for the purpose of literature review. Even though the deployment of secondary data will allow the researcher to develop a strong rationale for the study, but collection of unauthentic and irrelevant data can hamper the quality of the research. In this case, to ensure that the researcher has only authentic information, the researcher will deploy an inclusion and exclusion criteria, which will ensure that only the sources relevant to the study and coming from authentic publishers are used for data collection (Bell, Bryman and Harley, 2018).

3.6.       Data analysis

The data analysis for this research will be based on SPSS, where correlation and regression analysis will be used in specific. This is because as the study aims at assessing the nature as well as the rigor of the relationship that exists between the selected variable. The deployment of these tests will allow the researcher to test the hypothesis in an effective manner and develop a concrete empirically backed conclusion (Zikmund et al., 2013).  

3.7.       Timeline

Project Activity Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10
Topic selection                    
Proposal Draft                    
Submission of proposal                    
Introduction chapter                    
Literature review                    
Methodology                    
Data collection                    
Data analysis                    
Discussion, conclusion and recommendations                    
Final report submission                    

3.8.       Research limitations

One of the key limitations of this study is the inclusion of one case organization only. This limits the scope of the study and can lead towards the issue of mass generalization. Another weakness of the study is the absence of primary data, which can also reduce the accuracy and detailedness of the conclusions as firsthand information has not been cited in the study. In addition to that, the absence of qualitative data can also be counted as a weakness, as the findings of the study may lack the depth and detailedness (Bell, Bryman and Harley, 2018).

3.9.       Ethical aspects 

As the research under consideration is based on secondary data only, hence one of the key issues is that of plagiarism. To ensure that this issue is avoided in an appropriate manner, the researcher will use proper referencing and will acknowledge the original authors in an appropriate manner. Another issue is the objectivity of the analysis. To ensure that the findings of the researcher are objective, the researcher will avoid personal bias in the analysis process. This will be done through the backing up of all the points with detailed research (Zikmund et al., 2013).

references

Abor, J., 2005. The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. The journal of risk finance6(5), pp.438-445.

Ahmeti, F. and Prenaj, B., 2015. A critical review of Modigliani and Miller’s theorem of capital structure. International Journal of Economics, Commerce and Management (IJECM)3(6).

Bell, E., Bryman, A. and Harley, B., 2018. Business research methods. Oxford university press.

Eljelly, A.M., 2004. Liquidity‐profitability tradeoff: An empirical investigation in an emerging market. International journal of commerce and management14(2), pp.48-61.

Gill, A., Biger, N. and Mathur, N., 2011. The effect of capital structure on profitability: Evidence from the United States. International Journal of Management28(4), pp.3-13.

Lamberg, S. and Vålming, S., 2009. Impact of Liquidity Management on Profitability: A study of the adaption of liquidity strategies in a financial crisis. Umeå School of Business.

Owolabi, S.A. and Obida, S.S., 2012. Liquidity management and corporate profitability: Case study of selected manufacturing companies listed on the Nigerian stock exchange. Business Management Dynamics2(2), pp.10-25.

Rahman, M.A., Sarker, M.S.I. and Uddin, M.J., 2019. The Impact of Capital Structure on the Profitability of Publicly Traded Manufacturing Firms in Bangladesh. Applied Economics and Finance6(2), pp.1-5.

Saleem, Q. and Rehman, R.U., 2011. Impacts of liquidity ratios on profitability. Interdisciplinary journal of research in business1(7), pp.95-98.

Zikmund, W.G., Babin, B.J., Carr, J.C. and Griffin, M., 2013. Business research methods. Cengage Learning.

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