the impact of globalization on vietnamese company’s financial performance a case study of lang son cement company (lcc)

From this analysis of financial statements, suggestions and proposals about investment, financial statements can be submitted to LCC to have an improvement of financial statement prepara

The Impact of Globalization on Vietnamese company’s financial

performance: A Case Study of Lang Son Cement Company (LCC)

Declaration of Originality and Word Count

DECLARATION

I here by declare that this graduation project is based on my original work except for quotations and citation which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other courses/degrees at HELP University College or other institutions The word Count is 10,007 words

TA THI PHUONG THU

28 March, 2011

Acknowledgement

This project would not have been made possible without the assistance, support and encouragement of many people I wish to take this opportunity to thank all the people who have helped me during the time of completing the dissertation

Firstly, I would like to express my deep gratitude to my supervisor Dr Dao Thi Thu Giang at the Foreign Trade University (FTU) of Viet Nam SHe has kindly helped

me and supported me all the way through For that, I am very grateful I also would like to express my thank to Ms Sumathi at Help University College, who initiated the project and give so much instruction and support

TA THI PHUONG THU

Supervisor: Dr Dao Thi Thu Giang

Globalization is not new trend in the world but is still new in Vietnam Vietnam is

one of the developing countries, so the impact of globalization on Vietnam‟s

economy has many things to discuss The objective of the research is to assess the understanding of globalization trend and its effect on Vietnamese company‟s

financial activities Besides, the research also wants to show the role of the financial analysis in its investment strategies and good financial planning of the board of management In this research, Lang Son Cement Company is taken as a typical case study that goes through my study

TABLE OF CONTENT

Declaration of Originality and Word Count……… ii

DECLARATION………ii

Acknowledgement……… iii

Abtract……….iv

TABLE CONTENT……….v

LIST OF FIGURES AND TABLES………vii

LIST OF ABBREVIATIONS……… viii

CHAPTER 1: INTRODUCTION……….1

1.1 Introduction……… 2

1.2 Need for research……… 3

1.3 Elements of the research………3

1.4 Scope of research………3

1.5 Assumptions………4

1.6 Plan of presentation………4

CHAPTER 2: LITERATURE REVIEW……… 5

2.1 A general look at financial statement………6

2.2 The general approach applied in analysis of financial statement……… 7

2.3 The nature of globalization……… 17

2.4 The impact of globalization on the financial performance of

Vietnamese’s company; a typical example is LCC’s financial performance… 18

CHAPTER III: RESEARCH METHODOLOGY……….20

3.1 Research objective………21

3.2 Research strategy……… 21

3.3 Research hypothesis……… 21

3.4 Research methodology……… 26

3.5 Data sources and sampling……… 26

3.6 Limitation of research 27

CHAPTER IV: ANALYSIS……….28

4.1 Results Analysis……….29

4.2 Discussion……… 34

CHAPTER 5: CONCLUSION……….36

5.1 Implication of research……….36

5.2 Conclusion……….36

Bibliography……… 38

Appendices……….39

LIST OF FIGURES AND TABLES

Figure 1 The Du Pont system of financial analysis model 26

Table 1 : The liquidity ratio 31

Table 2 : Asset – Management ratios 33

Table 3 : Financial – leverage ratios 35

Table 4 : Profitability ratios 36

LIST OF ABBREVIATIONS

LCC Lang Son Cement Company WTO World Trade Organization BEP Breakeven point

CHAPTER I: INTRODUCTION

1.1 Introduction

1.2 Need for Research

1.3 Elements of the Research

1.4 Scope of Research

1.5 Assumptions

1.6 Plan of Presentation

1.1 – Introduction

To begin my task, I will talk about the meaning of globalization Globalization is considered as “a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology This process has effects on the environment, on culture, on political systems, on economic development and

prosperity, and on human physical well-being in societies around the world.”1

Globalization has a strong effect on the Vietnamese company‟s financial

performance As you can see, companies should prepare their annual financial

statements in order to measure the benefit rate after each financial year Reviewing and assessing financial information bring about an understanding of a company‟s strengths and weaknesses, how its annual plan has been carried out and what

investment effect level its plan implementation results in This activity will make an impact on its investment strategies and good financial planning

As can be seen, the financial statement of a company is based on financial facts but can be influenced by its management and may cause misstatements or fraud in them Therefore, the purpose of this paper is to revise and reanalyze the 2007 and 2008 financial statements of Lang Son Cement Company (LCC) in order to assess and make a comparison of financial activities between 2007 and 2008 From this analysis

of financial statements, suggestions and proposals about investment, financial

statements can be submitted to LCC to have an improvement of financial statement preparation

1 http://www.globalization101.org/What_is_Globalization.html

1.2 Need for research

Today, the competitive world of business is so high; the analysis of a financial statement takes an important role in business activities of a company Because any company also need an improvement of financial statement preparation to attract the investments from other investors or cooperation from other companies Moreover, the business results are also reviewed and assessed to show the positive and negative aspects in financial situation This research‟s purpose is to provide the better

information to managers that can help them to understand the overall the positive indirect impact of globalization on Vietnamese‟s financial statement in general and impact on the financial situation of Lang Son Cement Company (LCC) in particular

1.3 Elements of the research

In the context of economic globalization and crisis in the past few years, companies

in Vietnam meet multiple challenges; they prove their business activities to be productive and beneficial, survive in global crisis LCC also suffers these influences

and still survive The question of whether or not a financial support from the

government has been provided or LCC has saved itself needs to be investigated

1.5 Assumptions

Globalization is the great trend of economy in all over the world It takes an

important role in the economy development in almost countries in the world In my task, I will give the details of financial statement analysis and the impact of

globalization on financial activities in Vietnam in general and in LCC in particular

1.6 Plan of presentation

My research is organized in five chapters In chapter II, the literature will be

reviewed on the general look at financial statement, the general approach applied in analysis of financial statements, the nature of globalization, and the impact of

globalization on the financial statement of Vietnamese‟s company; a typical example

is LCC‟s financial statement Then, in chapter III, I present methodology that shows the description of my research data, hypothesis, variables‟ measurement and

limitations Next, in chapter IV, I analyze results of the statistical estimation, and a discussion Finally, in chapter V, I summarize my findings and the study implications for future research

CHAPTER II: LITERATURE REVIEW

2.1 A general look at financial statements

2.2 The general approach applied in analysis of financial statements

2.3 The nature of globalization

2.4 The impact of globalization on the financial performance of Vietnamese‟s company; a typical example is LCC‟s financial performance

2.1 A general look at financial statement

Financial statement is one of the most important things in running business because it shows the last business results in each company In traditional view, “financial statements are summaries of monetary data about an enterprise The most common financial statements include the balance sheet, the income statement, the statement of changes of financial position and the statement of retained earnings These

statements are used by management, labor, investors, creditors and government regulatory agencies, primarily Financial statements may be drawn up for private individuals, non-profit organizations, retailers, wholesalers, manufacturers and service industries The nature of the enterprise involved dramatically affects the kind

of data available in the financial statements The purposes of the user dramatically affect the data he or she will seek.”2

In new economy, financial statement can be considered as “Financial statements can organize accounting data to facilitate

decision-making by management and by investors The way financial data is

presented for such decisions may be quite different from the way data is presented to fulfill legal requirements that satisfy tax authorities and other regulators Thus, companies have increasingly produced more than one financial statement, each

intended for a different audience The "pro forma" financial statements which

emerged from the bull market of the 1990s are the most notable example of an

investor-directed statement.”3

2 http://www.benbest.com/business/finance.html

3 http://www.benbest.com/business/newecon.html

2.2 The general approach applied in analysis of financial statements

The general approach applied in analysis of financial statements will be used in this thesis, presented as follow:

2.2.1 Ratio analysis: is a financial technique that involves dividing various financial

statement numbers into another

Ratios are computed by dividing one number or data on the financial statements into another And the results of these calculations are percentages Ratio analyses permit the manager of the company to determine business trends and compare its ratios to average ratio of similar businesses in the same industry Ratios are important devices because “they standardize balance sheet and income statement.”4

2.2.1.1 Trend or time series analysis: uses ratios to evaluate a firm‟s

performance over time It concerns the analysis of data collected over time weekly values, monthly values, quarterly values, yearly values, and so on The intention is usually to differentiate whether there is some patterns in the values collected to date, with the intention of short term forecasting (to use as the basis of business

decisions).5 We will write:

Yt = response of interest at time t

Standard analysis of business time series involves smoothing trend assessment, assessment of accounting for seasonality, and assessment of exploiting serial

It can be defined as “A type of analysis an investor, analyst or portfolio manager may conduct on a company in relation to that company's industry or industry peers The analysis compares one company against the industry it operates within, or directly against certain competitors within the same industry, in an attempt to discover the best of the breed.”6

2.2.1.3 Industry – comparative analysis is used to compare a firm‟s ratios against average ratios for other companies in the same industry

Industry – comparative analysis can be considered as “Just as important as trend analysis is industry analysis It's very important, particularly in today's economic

climate, to know what your industry is doing as compared to your company For

example, if your industries ratios are much different than your firms, you want to

examine why and perhaps take action.”7

2.2.2 Types of financial ratios

There are many types of ratios which can be calculated from financial statement data; however, it can be grouped in five main categories such as liquidity ratios, asset – management ratio, financial – leverage ratio, profitability ratio, and market – value ratio They will be illustrated in the following paragraphs

2.2.2.1 Liquidity ratios:

a Liquidity refers to how quickly a firm can turn its assets into cash Liquidity ratios indicate the ability to meet short – term obligations to creditors as they mature or come due Any firm must have responsibility to pay financial

obligations when needed If they cannot pay financial requirement, they will be

6 http://www.investopedia.com/terms/c/cross_sectional_analysis.asp

7 http://bizfinance.about.com/od/financialratios/qt/comparative_rat.htm

bankrupted Almost firms want to convert assets into cash with little or no loss in value

b The net working capital of a firm is its current assets minus current liabilities

Year 2007:

The net working capital: 29,886,328.339 - 25,430,762.984 = 4,455,565.35(VND) Year 2008:

The net working capital: 31,664,296.641 – 28,248,834.480 = 3,415,462.16(VND)

c The current ratio is a measure of a company‟s ability to pay off its short – term debt as it comes due The current ratio is one of the best known measures of the financial strength It can be calculated as:

Current ratio = current assets / current liabilities

Year 2007: current ratio: 29,886,328.339 / 25,430,762.984 = 1,175.2 (VND)

Year 2008: current ratio: 31,664,296.641 / 28,248,834.480 = 1.1209 (VND)

d The quick ratio, or acid – test ratio is compared by dividing the sum of cash, marketable securities, and accounts receivable by the current liabilities

Quick ratio =

liabilitycurrent

receivableaccounts

cash 

984.762,430,25

378.593,914,8994.463,601,1

0.4135 times

380.834,248,28

111.893,344,9817.015,247,10

payableaccounts

=

dayper soldgoodofcost

payableaccounts

Year 2007: average payment period: 

365/784.268,919,62

283.716,473,1

8.5 per day

365/692.544,009,107

417.773,331,1

4.5 per day

2.2.2.2 Asset – management ratios: indicate the extent to which assets are

used to support sales These are sometimes referred to as activity or utilization ratios, and each ratio in this category relates financial performance on the income statement with items on the balance sheet

a The total – assets – turnover ratio is compared by dividing net sales

by the company‟s total assets

Total assets turnover =

assetstotal

salesNet

Year 2007: total assets turnover: 

804.794,163,103

234.292,174,73

0.7 times

Year 2008: total assets turnover:

955.873,443,102

786.728,739,131

= 1.28 times

b The fixed – assets – turnover ratio is compared by dividing net sales

by the fixed assets and indicates the extent to which long – term assets are being used

to produce sales

Fixed assets turnover =

assetsfixed

salesnet

Year 2007: fixed assets turnover:

712.913,368,69

234.292,174,73

= 1.05 times

Year 2008: fixed assets turnover:

612.202,433,67

786.728,739,131

= 1.95 times

c The average collection period is calculated by taking the year – end accounts receivable divided by the average net sales per day

This indicates the average number of days that sales are outstanding In other words,

it reports the number of days it takes, on average, to collect credit sales The average collection period measures the days of financing that a company extends to its

customers Obviously, a shorter average collection period is usually preferred to a longer one

d The receivable turnover is computed by dividing annual sales,

preferably credit sales, by the year – end accounts receivable

365 / salesnet

receivableaccount

(account receivable/net sales per day)

Year 2007: average collection period:

365/234.292,174,73

738.593,914,8

= 44.5 days

Year 2008: average collection period:

365/786.728,739,131

111.893,344,9

Year 2007: inventory turnover:

537.852,327,12

784.268,919,62

= 5.1 times

Year 2008: inventory turnover:

879.894,851,11

692.544,009,107

the inventory is out of line in relation to the volume of sales when compared against industry rules or when tracked over time for a detailed company

2.2.2.3 Financial – leverage ratios

a Financial – leverage ratios indicate the extent to which borrowed or debt fund are used to finance assets

Total debt to total assets =

assetstotal

debttotal

Year 2007: total debt to total assets:

804.794,163,103

231.525,188,61

= 0.593 = 59.3 %

Year 2008: total debt to total assets:

955.873.433,102

097.735,318,55

= 0.54 = 54 %

These ratios are also a good way to assess the ability of the firm to meet its debt payment obligations The total-debt-to-total-assets ratio is computed by dividing the total debt or total liabilities of the business by its total assets This ratio shows the portion of the total assets financed by all creditors and debtors

b The total – debt – to – equity ratio shows a firm‟s total debt in relation

to the total dollar amount owners have invested in the firm

c The equity – multiplier – ratio provides another way of looking at the firm‟s debt burden

Equity multiplier =

equitytotal

assetstotal

Year 2007: equity multiple:

745.686,971,41

804.794,163,103

= 2.45

Year 2008: equity multiple:

605.655,153,47

955.873,433,102

= 2.17

d The interest coverage or times – interest – earned ratio, is calculated by dividing the firm‟s operating income or earnings before interest and taxes (EBIT) by the annual interest expense

Interest coverage =

expenseinterst

taxes

&

interest before

earnings

Year 2007: interest coverage:

417.462,464,1

745.686,166,3

= 2.16 times

Year 2008: interest coverage:

049.736,296,10

987.207,521,4

= 0.43 times

The interest coverage figure indicates the extent to which the operating income or EBIT level could decline before the ability to pay interest obligations would be delayed In addition to interest payments, there may be other fixed charges, such as rental or lease payments and periodic bond principal repayments, the sinking fund payments

2.2.2.4 Profitability ratios: indicate the firm‟s ability to generate returns on its

sales, assets, and equity Two basic profit margin ratios are important to the financial manager, the operating profit margin and the net profit margin

a The operating profit margin is calculated on the firm‟s earnings before interest and taxes divided by net sales This ratio indicates the firm‟s ability to control operating expenses relative to sales

Operating profit margin =

salesnet

taxes

&

interest before

earnings

Year 2008: operating profit margin:

234.292,174,73

745.686,166,3

= 0.043 = 4.3 %

Year 2007: operating profit margin:

786.728,739,131

897.207,521,4

= 0.034 = 3.4 %

b The net profit margin: a widely used measure of a company‟s

profitability is calculated as the firm‟s net income after taxes divided by net sales

Net profit margin =

salesnet

incomenet

Year 2008: net profit margin:

234.292,174,73

745.686,166,3

= 0.043 = 4.3 %

Year 2007: net profit margin:

786.728,739,131

605.655,348,4

Operating return on assets =

assetstotal

taxes

&

interest before

earnings

Year 2007: operating return on assets:

804.794,163,103

745.686,166,3

= 0.0306 = 3.1 %

Year 2008: operating return on assets:

955.873,433,102

897.207,521,4

= 0.044 = 4.4 %

d The net return on total assets: commonly referred to as the return on total assets, is measured as the firm‟s net income divided by total assets Here we measure the return on investment in assets after a firm has covered its operating expenses, interest costs, and tax obligations

Return on total assets =

assetstotal

incomenet

Year 2007: return on total assets:

804.794,163,103

745.686,166,3

= 0.0306 = 3.1 %

Year 2008: return on total assets:

955.873.433,102

605.655,348,4

= 0.042 = 4.2 %

e The return on equity measures the return that shareholders earned on their equity invested in the firm The return on equity is measured as the firm‟s net income divided by stockholders‟ equity This ratio reflects the fact that a portion of a firm‟s total assets are financed with borrowed funds

Return on equity =

equitycommon

incomenet

Year 2007: return on equity:

745.686,971,41

745.686,166,3

= 0.075 = 7.5 %

Year 2008: return on equity:

605.655,153,47

605.655,348,4

= 0.092 = 9.2 %

2.2.2.5 Market – value ratios: indicates the willingness of investors to value a

firm in the marketplace relative to financial statement values

A firm‟s profitability, risk, quality of management, and many other factors are reflected in its stock and security prices by the efficient financial markets Financial statements are historical in nature, but the financial markets look to the future We know that stock prices seem to reflect much of the known information about a

company and are fairly good indicators of a company‟s true value Hence, market value ratios indicate the market‟s assessment of the value of the firm‟s securities

a The price/ earnings ratio, or P/E ratio, is simply the market price of the firm‟s common stock divided by its annual earnings per share

Sometimes called the earnings multiple, the P/E ratio shows how much investors are willing to pay for each dollar of the firm‟s earnings per share Earnings per share come from the income statement, so it is sensitive to the many factors that affect net income Though earnings per share cannot reflect the value of the firm‟s patents or