Capital structure is the way a company finances its assets by using different sources, namely debt and equity. It plays an essential role in the development of a firm. First, considering the capital structure of Nick Scali Limited in 2015 compared to 2014. Debt position of the company from 2014-2015 has increased and it illustrated that the capital structure has a slight increase in debt financing. The company’s debt ratio has risen from 50.10% in 2014 to 52.02% in 2015 (see Appendix 2). As a consequence, Nick Scali Limited used more debt than equity, however, the business invested part of debt financing in its assets in order to gain the long-term finance. Besides, a slight change in the interest coverage ratio indicates there is a good balance in debt and equity due to a small ratio, the firm’s interest expenses consumed 1.54% (1/65.1333) in 2014 and in 2015 consumed 1.8% (1/55.3256) of operating profit, which makes a slight shift. It demonstrates that there is no significant effect of paying interest to creditors on the company’s profit margin regardless of the firm has borrowed a small amount in 2015.
Second, Dick Smith Holdings Limited’s debt position from 2014-2015 has increased from 63% (2014) to 66.74% (2015) in borrowing debt financing (see Appendix 2). As can be seen, Dick Smith Holdings Limited has tax advantage to debt financing, yet, if the company keep using more debt financing than equity, it will affect the company’s ability to repay to the creditors and the company will be at risk of bankruptcy. A decrease in the interest coverage ratio from 2014 to 2015 indicates the firm needs the long-term assets investment. The firm’s interest consumed 5.35% (1/18.6910) of its operating profit in 2014, which is less than 7.2% (1/13.8793) of earnings before interest and tax in 2015 (see Appendix 2). It indicates that there has a substantially impact on the firm’s profit margin because of interest to creditors from borrowings.