Comparative Analysis of the Information Technology Service Sector Between 2019-2021 Based on the Capital Structure of the Hungarian and Slovak SME Sectors

Abstract

During its operation, a company must develop an effective and sustainable strategy, the purpose of which is to increase the company’s assets. In the past few years, the pandemic has weakened many market players, so some got a smaller share of the declining market share than expected, while other players tried to prepare for the post-COVID period with investments and developments. To achieve this, they needed financial resources, the conscious selection and formation of which is one of the keys to the company’s effectiveness and profitability. The main goal of the research is to use statistical methods to determine whether there is a significant difference between the capital structure and liquidity of enterprises belonging to the Hungarian and Slovak SME sector. This study focuses on the capital structure and liquidity of randomly selected enterprises in the national economic classification, using annual report data. When choosing the topic, I basically assumed that the creation of the optimal capital structure, as well as financing and liquidity decisions, have a special role in gaining a competitive advantage in the global market, as they determine the success and the basis of the company’s survival.

Introduction, goals

Research dealing with the capital structure examines the factors affecting own capital and foreign capital, as well as the relationships between the performance and market value achieved by the established capital structure. The main questions are aimed at the optimal equity rate, the method of financing investments, and the sequence of financing options. Since the capital structure of enterprises may differ by industry, in order to avoid a distorting effect and to achieve a correct result, it is justified to examine the capital structure and liquidity indicators and their correlations by industry. Accordingly, and due to scope limitations, in my present research, I limited the area on the basis of which I conducted the analyzes exclusively to the enterprises operating continuously between 2019-2021, conducting double bookkeeping in the Hungarian and Slovak SME sector, and operating in the Information Technology service sector.

The economic shutdown due to epidemic restrictions created a completely different situation compared to previous crises, which could be explained by the functioning of economies in recent decades. Furthermore, one of the most decisive economic factors in connection with COVID-19 was uncertainty, which could be observed to a significant extent in the life of businesses even in the post-pandemic period. (Baker et al, 2020)

Literature review Financing of businesses

The financing of the enterprise therefore means the creation of the financial resources necessary to ensure the value-creating process of the enterprise and its operation, thus creating the financing process of the sustainable enterprise. In the course of their operations, enterprises use assets which, in terms of accounting, are classified in the main groups of fixed assets and current assets in the balance sheet. From a financing point of view, we group the assets based on how long they have to be financed, and how permanently they are tied up in production. Based on this, fixed assets are considered assets to be permanently financed, but the financing of current assets can be further divided into two groups. (Pataki, 2003) Some of the current assets are permanently available during the operating cycles, they are constantly renewed, but the capital tied up in them is not released, because their constant presence is necessary for the continuity of production. This permanently present stock is the permanently tied up current asset, or working capital. This value of current assets is also classified as assets to be permanently financed. Another group of current assets, which only periodically participates in the production process, are classified as assets to be financed on a temporary basis.

Improving access to financial services can have a positive impact on the economy and the SME sector in many areas. It can contribute to economic growth by facilitating the financial activity of businesses, enabling businesses to engage in more sustainable and environmentally friendly business practices, and increasing financial efficiency. (Nasir et al., 2022)

Forms of financing

There are different forms of financing. One of the possible aspects of the grouping is where the capital used as a resource comes to the enterprise. According to the source of financing, we distinguish between internal and external, and based on the related rights, own and foreign sources. It is important to note that internal sources are not synonymous with own sources, just as external and foreign sources do not denote the same group of sources. Own resources typically mean internal resources that ensure the capital needs of enterprises by using the profit generated during profitable management and by making more intensive use of existing resources (Béza et al., 2013), but they can also be made available to the enterprise from outside the enterprise, for example in the form of a capital increase.

Internal resources

We distinguish three cases of internal financing, which typically use assets previously produced by the company to raise the funds needed for investments.

Retention of profit: the sum of free cash flows generated by the business in the current year and accumulated in previous years, not paid out as dividends to owners, which increases the value of the equity capital, thereby increasing the assets of the business (Belovecz – Borszéki, 2013). This type is also called self-financing in various specialist literature.
Amortization: it actually increases the company’s profit through the reducing effect of the tax base, thereby implicitly financing the company, the financing is realized as part of the retained profit.
Asset sale: sale of assets that the business is willing to sacrifice in order to create the necessary liquidity. This group also includes the sale of fixed assets and current assets, as well as the sale of assets that are unnecessary for the operation of the business, unused or operating at a loss. This also includes the sale of securities and shares for investment purposes, which can be considered the sale of fixed assets with the lowest risk. (Béza et al., 2013) At the same time, the company must also consider the current market conditions and minimize losses related to the transfer of assets. (Myers, 2001)
In relation to internal financing, it is worth mentioning the „bootstrapping” techniques, or money-saving self-financing techniques in Hungarian, which are not a direct financing solution, but their correct application can create an opportunity to eliminate financial difficulties. (Carter & Van Auken, 2005) In the literature, bootstrapping often appears as a compensation for scarce financial resources. (Bhide, 1992) With such compensation, the company can ensure the creation of more favourable conditions for its suppliers, purchase and payment discounts, bonus and incentive systems for its customers. In the case of bootstrapping, basically two types of entrepreneurial behaviour can be imagined. In one case, by using the given bootstrapping technique, the business concerned is put in a more advantageous position, which also favourably affects the other party. The situation that develops between the two parties is win-win (symbiotic bootstrapping technique), however, there are bootstrapping techniques from which the self-financing business makes a profit, but they affect the other party in a distinctly negative way. The resulting situation is win-lose (parasitic bootstrapping technique). Instead of resorting to parasitic techniques, it may be more profitable to look ahead, develop and innovate, which requires a long-term external source of financing, which cannot be replaced by surplus resources from frugal operations. (Horváth, 2016)
Innovation activity forms such as eco-innovation (Al-Hanakta et al. 2021) or e-commerce adoption (Hossain et al., 2022) may also improve the business performance and improve non-tangible assets of the firm.
External resources
External funds are funds provided from outside the company, which, based on the fact that they embody property or debt, can also be own and foreign funds, in other words equity and debt funds.
Debt resources: financing solutions that are only temporarily available to the business, the providers of capital impose an obligation to repay the capital and charge a pre-fixed usage fee for their capital. This type of financing solutions embody a lending relationship, a credit relationship is created between the company that provides the capital and the company that uses the capital. This group includes bank or commercial loans (supplier loans, customer advances), owner/member loans, leasing and bond issuance.
Capital resources: which are made available to the enterprise by persons or institutions outside the enterprise (venture capital fund managers), typically in order to achieve a high return, in the form of equity financing. With this solution, you enter the business as an owner through a capital increase that provides capital, or you increase your previous ownership share. This form of financing is called equity financing. External financing cannot be identified with the acquisition of foreign capital, since it is also possible to acquire equity capital in this way.
From the point of view of a business, the most favourable option for obtaining external funds is a commercial loan, because in this case the company is not burdened with the obligation to pay interest until the payment deadline and the stronger the market position of an economic organization, the more it can use this opportunity to obtain funds. Obtaining such funds is not smooth in all cases, especially for enterprises belonging to the SME sector, which generally have limited own funds due to their lack of capital. Due to their low equity capital, low risk-taking and lack of collateral, they pose a high risk to creditors, so their creditworthiness is minimal. It should be noted that these enterprises also use foreign capital, which most often comes from relatives and acquaintances, but these sources do not appear at all in the reports and accounting, and often appear as equity capital. (Borszéki, 1998) In addition, due to their few customer and supplier relationships, even the loss of a customer or a supplier can cause serious problems for them. (Gál, 2013)
Cost of capital
The cost of capital can be approached from the side of those who provide the funds and from the side of the company that uses the capital. From the investors’ side, the cost of capital is the return they expect for the investment, and from the company’s side, it is the price of obtaining the necessary funds. Within the capital structure, therefore, each capital element has its own and unique cost, which primarily depends on its risk. (Pratt – Grabowsi, 2010)
Determination of the capital structure
In a business, the available funds can come from the owners or creditors. The composition of these sources is called the capital structure, which actually reflects the company’s ownership structure (Tripathi, 2019) and is one of the company’s capabilities that is key to meeting the needs of various stakeholders. (Yildirim et al., 2018) The capital structure, as the rate of the company’s foreign and own funds, gives an answer to the combination of funds behind the financing of the investment in real assets. (Bélyácz, 2009) In the literature, we can find many definitions regarding the definition of the capital structure. In the definitions, a fundamental difference can be observed in which capital elements can be considered part of the capital structure according to maturity. Equity is basically considered as a source without maturity and comes directly or indirectly from the owners of the business. In contrast, foreign sources can be short-term or long-term, and their beneficiaries can be very different.
The factors influencing the capital structure can be divided into two large groups, macroeconomic (exogenous) external factors to be treated as endowments, and microeconomic (endogenous) internal, changeable factors. In the literature, endogenous factors are identified as those factors that the enterprise itself can influence and has a direct effect on. This could be the size of the company, its growth prospects, the composition of its assets, its business risk, its ownership structure, the nature of its activities, and the tax protection of interest. External, exogenous factors appear as factors that the company cannot influence, such as bankruptcy costs, the development of the capital market or the banking system. Some research also identifies the issue of trust as an indirect, soft factor. (Gyurcsik-Tóth, 2019)
Definition of macroeconomic factors
Macroeconomic factors are factors that the decision-maker must take into account because they determine the company’s operating environment. Macroeconomic factors are country- or region-specific factors, they explain the main differences between countries or regions, factors that apply at the macro level, the elements of which companies have no influence on. (Bozsik, 2018)
The impact of the capital market, banking system, and monetary policy on the capital structure: A well-functioning financial system, appropriate and high-level financial services, and adequate provision of funds for investments and operations are indispensable for the competitiveness of the economy (Túróczi, 2016). The banking system primarily affects the funding structure of enterprises through the easing or tightening of credit conditions, thus through its lending activity. (Baranyi-Csernák-Péli, 2021)
The impact of the tax system and fiscal policy on the capital structure: Most of the research focuses on the tax protection of interest, which is based on the fact that the interest on the loan reduces the tax base. Since the interest paid on loans reduces the result of financial operations, the company’s pre-tax profit will be lower, thus the tax payable will be lower. It follows from this that by involving external sources in the form of loans, tax savings can be achieved for businesses, which in economic parlance is called the „tax shield” effect.
Effect of legal system, financial difficulties, bankruptcy laws on the capital structure: In this kind of interpretation of the legal system, the effectiveness of the frameworks created to deal with insolvency, the enforceability of contracts and the average size of assets recovered during bankruptcy or liquidation proceedings must be considered, the effective operation of which can have a positive effect on the creditworthiness of financial service providers. willingness and, through this, corporate indebtedness.

Definition of microeconomic factors

Microeconomic factors are factors resulting from the management of the enterprise, which the enterprise can influence. Such factors are: the industry, composition of assets, company size, profitability, liquidity, interest tax shield. (Krénusz, 2007) Among such endogenous factors, there are factors that are decisive for every company and there are unique factors that only affect the capital structure of the given company.

Profitability: During the examination of the income-generating capacity, we look for the answer to what role the given production factor played in the creation of the result due to the determined magnitude and composition of the production factors.

Company size: Due to a larger size, the assets are more diversified, the likelihood of financial difficulties is lower, which represent a lower risk in terms of lending, and bankruptcy costs are lower. In contrast, the operation of the SME sector is difficult to predict, they are less capital-intensive, have low collateral, and are often characterized by a lack of transparency. From the above, it follows that it is more difficult and also more expensive for enterprises of the SME sector to involve external sources in their financing. (Béza et al., 2013)

Territorial location: Territorial location, as a factor influencing the capital structure, expresses the effect of the economic characteristics of regions, countries, and larger geographical areas.

Composition of assets: Among the variables that play a role in shaping the capital structure, the composition of assets is one of the most studied and cited factors, despite this, researchers do not agree on the direction of the relationship. Fixed assets are assets that permanently serve the company’s income-generating activities, a high proportion of which contributes to increasing the company’s creditworthiness, since these assets can serve as collateral during a possible loan transaction. The higher the rate of assets that can be taken into account as collateral, the greater the chance that businesses can benefit from external sources.

Nature of activity, industry: Companies monitor their competitors operating in a similar industry and refrain from developing a capital structure that is too different from the average. A correlation can be shown between the industry affiliation of the enterprises and the composition of the assets, because in the case of industrial enterprises, tangible assets represent a significantly larger share in relation to all assets than in the case of commercial or service enterprises, where the emphasis is placed on the stock of current assets.

Liquidity: The effect of liquidity on the capital structure is twofold, because high liquidity presupposes the existence of retained profit. At the same time, high liquidity is associated with a low risk of non-payment, thus increasing the chance of raising external funds, since the high value of the indicator has a positive message for credit institutions.

Situation picture of the SME sector and the examined sectors

In 2020, the coronavirus epidemic had a significant impact on the economic life of the entire world. The epidemic and the restrictive measures introduced to curb it forced the economic actors to react quickly, so the changed market situation entailed the transformation of the operating environment. The effects of the epidemic affected individual economic areas differently. During 2020, most of the sectors were characterized by overall unfavourable processes, which ended a multi-year growth period. As a result of the measures taken due to the epidemic, the national economy experienced a sudden, shock-like downturn, but at the same time, the volume of added value in the field of information and communication increased.

The SME sector

The SME sector is the backbone of the European Union’s economy. In the European Union, 99 percent of enterprises are made up of the SME sector, they provided job opportunities for nearly two-thirds of the employed and contributed to slightly more than half of the gross added value. These rates have not changed or changed little since the beginning of the 2000s. As a result, economic growth, innovation and job creation also depend on the ability of the SME sector to develop. (Holicza, 2016)

The problems of the competitiveness of the SME sector are primarily caused by low capital availability and a significant number of market players operating at a low technical level. This sector is also generally characterized by low wages, risk aversion and avoidance of external sources. Due to the low wage level, access to skilled and experienced labour is also limited in this sector. The financial resources of SMEs are usually based on the owner’s wealth, which greatly limits their growth opportunities. This is also confirmed by the fact that micro-enterprises employ roughly the same number of people as organizations not belonging to the SME sector, which shows that the corporate sector is fragmenting. (Hegedűs, 2019) It is generally true for small and medium-sized enterprises that they operate primarily at the national level. Currently, there are few companies belonging to the SME sector that would conduct cross-border business activities within the European Union (Gouardères, 2020), despite the fact that internationalization would also be an essential element of the growth of businesses belonging to the SME sector.

Information technology service sector

Today, with the strong spread of digitalization, the increase in the share of the info communications sector plays a special role. IT is the most dynamically developing industry in the European Union, its social and economic role is important, and it is in a leading position worldwide in terms of employment and the added value produced. Information and communication is one of the least vulnerable areas of the Hungarian economy, and its performance has risen continuously in recent decades, even during economic recessions. The trend was not broken by the epidemic either, the suddenly changed social and economic conditions were accompanied by an increase in the demand for info-communication technologies. During the covid epidemic, the use of information communication technologies increased in value compared to before, also in the field of work, education and communication in a broader sense.

Material and method

During the analysis of the relationship between capital structure and liquidity indicators, I relied on the balance sheet and income statement data of double-entry bookkeeping companies subject to corporate tax, taking into account the territorial location of the companies. The data of the SME sector report for 2019-2021 required for the capital structure analysis was provided by the Crefoport database. The database contains 2,660 lines of unique data, which represent the data of cca.850 companies’ 3-year reports. The sample was narrowed down exclusively to enterprises in the 62: Information technology service sectors. The majority of the analyzed sample is made up of companies that are not required to be audited, so unaudited data is examined, but regardless of this, I primarily assumed that the majority of their activities were based on their main activity and that they kept their books in accordance with national legislation and thus the published reports provide a reliable and true overview. In order to make the data comparable, it was selected from the enterprises operating between 2019-2021 and belonging to the SME sector during the entire period. During the query, state and local government enterprises, social cooperatives, and enterprises with consolidated accounts were excluded. The companies that had zero sales or zero receivables and liabilities, as well as those that did not comply with the mandatory requirements of the Accounting Act in the data of the published report, were also deleted from the data set.

In the statistical analyses, the lower limit of the optimal sample is determined by the values of the lower quartile interquartile range reduced by one and a half times, and the upper quartile interquartile range increased by one and a half times. (Freedman et al., 2005) In the analysis, I used this methodology to determine the outlier thresholds. The remaining 1,388 lines of unique data contain data from the annual reports of cca. 450 businesses. This truncation caused a large amount of data loss, but regardless, I considered that the smaller but regularly distributed sample, trained on the basis of methods accepted in statistical procedures, can more accurately represent the objectives of the research, and also provides information for accepting or rejecting the hypotheses with great certainty. As a result of narrowing the database, I was able to reduce the distorting effects caused by the lack of data, in addition to the fact that the existence of the indicators for the entire time series assumes that companies with truly active economic activities were included in the sample.

According to the territorial grouping, I distinguished the enterprises operating in Hungary and Slovakia, which I took into account in all background calculations of the analysis. The analyzes were also broken down according to levels 2 and 4 of the NACE grouping.

As I mentioned earlier, the capital structure is also influenced by macroeconomic factors, but in this analysis, the micro perspective comes to the fore, which is justified by the available company database.

I prepared the analysis using result variables and explanatory variables, where the factors affecting the result variable are the explanatory variables. The result variables are the capital structure and liquidity indicators, the explanatory variables are the country codes of the Hungarian (HU) and Slovak (SK) enterprises.

I used the one-way analysis of variance (ANOVA – analysis of variance) method for data analysis. ANOVA allows us to determine whether there is a significant difference between groups, i.e. whether the differences are due to chance or true differences. Variance analysis is a linear modelling method for evaluating the relationships between fields, the null hypothesis of which is that the averages of each group do not differ from the grand average. Variance analysis is used to compare variances between and within groups, where we can verify the relationship between a quantitative and a qualitative variable. I did not use a post-hoc test in this analysis, since only the data of Hungarian and Slovak enterprises were compared and the existence of at least three quality variables would have been necessary to perform the post-hoc test.

In addition to examining the capital structure, it is also worth paying attention to the development of liquidity indicators. The rate indicators that determine financial performance in the short term measure the risk of creditors. The evaluation of the liquidity situation means the comparison of the liquid assets of the enterprises and the short-term liabilities, with the help of which it can be determined whether the enterprise will be able to fulfil its obligations.

Limitations of the analysis

The regulations for accounting reports may contain special regulations for enterprises in the SME sector, therefore, in the case of micro businesses, comparability is only ensured for the main lines of the report. It is not in the interest of businesses to give external stakeholders a fully analyzable picture of their activities, therefore the accounting reports do not contain detailed data for an analysis, they only strive to comply with the mandatory regulations by keeping accounting records containing consolidated data. The accounting data refer to a specific time in the past, so the general indicators or information formed from the reporting data are also historical and static. Monthly or quarterly data are needed to generate dynamic indicators, but such regular data provision is not particularly typical for enterprises in the SME sector. Among the enterprises in the SME sector, the profitable and financially aware enterprises optimize their market risks and tax obligations by creating well-structured corporate groups and asset management holding companies, which information is also not revealed in the numerical data of the report.

Results

The objective of my research is to use statistical methods to determine whether there is a significant difference between the capital structure of the Hungarian and Slovak SME sectors. As capital structure indicators, I included the following indicators: Leverage, Equity rate (capital strength), Liabilities rate, Long-term liabilities rate, Short-term liabilities rate. From my point of view, micro-enterprises mostly show only member loans among short-term liabilities, which are transferred from short-term liabilities in order to embellish the capital structure and profitability indicators necessary for taking out loans, beyond that they do not have real liabilities beyond 5 years. As a result, I have combined the proportion of deferred liabilities and long-term liabilities in my statements during the examination of liabilities. Regarding the liquidity indicators, I included the Liquidity rate and the Cash rate in the analysis.

Table 4 shows the average values of the indicators of the examined enterprises, in which it can be seen that the leverage of Hungarian enterprises is higher, so Hungarian enterprises have a higher proportion of foreign capital (73.19%), as a result, their capital strength is slightly lower (61.10%) ). The proportion of liabilities compared to all sources is also higher for Hungarian enterprises, 35.1%, but at the same time, a similarly low proportion of long-term liabilities can be observed in both areas.

In terms of liquidity indicators, Slovakian enterprises have a higher average liquidity rate in the period under review, a difference that is also reflected in the cash rate indicator. At the same time, based on the fact that the return on current assets is generally lower than the return on fixed assets, an excessively high liquidity rate reduces the average return on assets. As a result, the benefit of keeping too large a stock of cash is high due to lost interest income, while too little stock of cash entails the risk of insolvency. (Orr, 1974)

The last significance level (Sig.) column of Table 5 shows that significant differences can be discovered with regard to the territorial location of the enterprises and the chosen capital structure and liquidity indicators. It can be concluded from the table that the analyzed data are significantly different, since the significance level of the probability belonging to sample F is in all cases 0.000<0.050, therefore the null hypothesis is rejected in the field study. This means that it can be stated with a probability of 99.5% that there is a significant difference in the capital structure and liquidity indicators of enterprises belonging to the Hungarian and Slovak SME sector in the period under review.

Conclusions

In the course of my research, I examined the capital structure and liquidity of the enterprises operating in the information technology service sector and their territorial connections based on indicators compiled from the reporting data of Hungarian and Slovak enterprises belonging to the SME sector. The main goal of the research is to use statistical methods to determine whether there is a significant difference between the capital structure and liquidity of enterprises belonging to the Hungarian and Slovak SME sector.

I started the research by studying and processing the literature related to the topic, then I briefly presented the characteristics and main statistical data of the SME sector and the Information Technology service sector in the European Union, as well as defined the limitations of the results of the analysis. After narrowing down the database, I determined the indicators included in the study from the set of data, which I further narrowed down using the truncation method in order to ensure that the data were not distorted.

I processed the final data set with descriptive statistical data analysis and one-way analysis of variance (ANOVA – analysis of variance). Based on the descriptive statistical data, it was observed that compared to Hungarian enterprises, Slovak enterprises have higher equity capital, lower liabilities and better liquidity, but at the same time, the share of their long-term liabilities was minimal, similar to Hungarian enterprises. On the part of Slovak enterprises, the higher liquidity was also associated with lower profitability, however, examining the average annual data, no significant changes were observed. In my background calculations, there were no outstanding differences in the results even in the lower-level grouping of the Information Technology Services sector, however, I did not represent these data due to scope limitations. Based on the results of the variance analysis, it can be stated that it can also be verified statistically that significant differences can be observed in the capital structure and liquidity of the examined Hungarian and Slovak enterprises.

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Tamás Németh PhD student,
István Széchenyi PhD School of Economics and Organizational Sciences, Hungary

Dr. inz. Ilona Paweloszek,
Faculty of Management, Częstochowa University of Technology, Częstochowa, Poland

Dr. Mihály Hegedűs, College professor,
Paul Tomori College, Hungary

Dr. László Pataki, Associate professor,
John von Neumann University, Hungary