ACADEMY OF POLICY AND DEVELOPMENT INTERNATIONAL SCHOOL OF ECONOMICS AND FINANCE GRADUATION THESIS Topic: “Financial statement analysis at Song minh Development Investment Join Stock C
Organizational structure
- Board of directors: they have the right to elect or hire the person to become general director of the company and the vice directors They also can set the company’s present and future strategies and take responsibility for financial management
- Director: have responsibility for company activities and development, can change the team’s structure below the vice directors, make decisions after viewing the report of vice directors, be able to lay off members in all the departments and below, take legal responsibility for the company decision and sign the contracts
- Vice general director: managing the business department, the project management department, Office of Administrative Organization, Planning - Engineering Department, Financial-accounting department
Making decisions if new ideas of staff can reach the director, Analysis the contracts
- Business department: conducting market analysis, building business networks, negotiating and sending the contracts to vice general directors
- Project management department: organizing construction activities, consulting on issues related to the project’s processing management At the same time, searching and finding the most effective plans to develop projects
- Planning - Engineering Department: advising on the progress of production and business plans, ensuring the development objectives of the Company and investment planning, construction as prescribed, organizing vehicles, tools and staff members in the construction activities
- Financial-accounting department: advising and assisting in the fields of finance and accounting; capital and asset management; internal inspection and control; cost management and economic performance analysis
- Office of Administrative Organization: is the organization and training of personnel, operating and managing all activities of the Company Plan, arrange and train methodically for the staff of the company to suit the tasks of each period
2.1.4 Business orientation of SONG MINH Development Investment
With the goal of becoming a reputable and strong company in the field of construction, technical infrastructure and transportation, the company always try create the best quality and effective products The covid-19 situation made the “Nam Cum 4” project slow down quite a lot The company is trying to push forward the four remaining projects, which was the “Nam Cum 4” project
When the company finishes it can join others project or do construction on house hold
Besides, the owner of the company is also trying to diversify industries, in the near future, the company will produce tea, participate in environmental treatment and agricultural land improvement according to Japanese BiO technology and the main project is distributing Japanese iron paint in Vietnam
The members of the company’s staff have done several research on the Japanese iron paint The company is doing more research on the paint on some iron surfaces and compared it to local products But it still needs to be tested in hash condition after the research After that the sample of the products will be ready to be delivered to several local shops in order to take some opinion on the products and find the retailer for the paint Transportation for the product can be depend on the construction side of Song Minh, the website of the company is in the process of development According to plan, the release of the products will be in 2028
On the other hands the company also have a big side project is the
“SongMinh tea”, which is a high quality “Shan Tuyết’’ tea, which is a Vietnamese specialty tea has large gray-white buds, under the tea leaves are covered with a layer of white, fine fluff, with that people call it snow tea “Shan Tuyết’’ tea soothing scented, yellow watercolor and condense like honey Tea is processed according to the manual method of ethnic Tay, H'mong, Dao The product lineup of SongMinh tea is very diverse with Dragon-tail tea (dragon- claw tea), “Bach tra”, …
Source: Song Minh profile’ documents
Business orientation of SONG MINH
Investment Join Stock Company in the period of 2018-2020
The world’s economy according to the United Nation (2018, 2019, 2020):
In 2018, economic growth accelerated in more than half of the world's economies Developed economies grew at a steady pace of 2.2%, with growth rates in several nations approaching their potential and unemployment rates in numerous developed economies falling to very lows East and South Asia, among developing countries, maintained a reasonably robust growth trajectory in 2018, rising by 5.8% and 5.6 percent, respectively Many commodity
Finishing the large unfinished projects
Japanese iron paint in Vietnam Song Minh Tea
“Shan Tuyet’’ tea research on the paint on some iron surfaces comparing to local products
Construction on housing and others big infrastructure projects
Developing a website while they remain vulnerable to price volatility In 2018, global economic growth remained stable at 3.1%, with a fiscally induced increase in the United States offsetting slower growth in certain other large economies
Global economic activity is forecast to grow at a robust 3% rate in 2019, but there are growing indications that growth may have peaked Since the beginning of 2018, growth in global industrial output and merchandise trade volumes has slowed, particularly in the trade-intensive capital and intermediate goods sectors Leading signs suggest that many countries' economies would slow in 2019, owing to rising trade conflicts, financial stress and volatility, and an undertone of geopolitical concerns Simultaneously, several developed economies are experiencing capacity limits, which could slow development in the short term
The global economy grew at its slowest pace since the global financial crisis in 2019 The economic crisis has been well coordinated, with growth in practically all major economies moving downward Except for Africa, annual growth slowed in all geographic regions Approximately two-thirds of the world's countries are expected to have seen lower GDP growth in 2019 than in
2018 The decreasing trade activity and more muted domestic investment are mostly to blame for the slowdown in GDP growth across developed and developing regions in 2019 World industrial production slowed in parallel with declining merchandise trade, and the Global Manufacturing Purchasing Managers' Index plummeted to its lowest level since 2012 Private consumption, on the other hand, kept up quite well for most countries during the year, owing to tight labor markets and low inflationary pressures
Nonetheless, there are signs that household spending in several global economies has begun to decline, with consumers becoming less optimistic
In 2020, the world's gross GDP is expected to fall by 4.3 percent, the greatest drop since the Great Depression During the Great Recession of 2009, however, global output fell by 1.7 percent Given the tight lockdown measures that many governments in Europe and some states in the United States of America enacted early on during the outbreak, the pandemic plainly affected the developed economies the hardest In 2020, output in developed economies is expected to fall by 5.6 percent, with growth expected to pick up to 4.0 percent in 2021
Vietnam’s economy according to General Statistics (2018, 2019, 2020):
The gross domestic product (GDP) shot up by 7.31% in the fourth quarter of 2018, the figure was up by 3.90% compared to the same year-on-year period, with the agricultural, forestry and fishing; the construction and industrial sectors increased by 8.65% Additionally, the service sector grew 7.61% In the fourth quarter of 2018, the figure for growth was below 2017, although compared to the fourth quarter of 2011-16, it was higher Final consumption expanded by 7.51 percent in the same period of 2018 from the GDP spending approach in the fourth quarter of 2018, gross capital formation climbed by 9.06 percent, goods and services exportation grew by 10.69 percent, goods and services importation spread by 9.5%
GDP growth in 2018, the highest rate since 2008, reached 7.08 percent, reinforcing the timeliness and efficiency of government solutions, drastic direction at all levels of authorities and localities Impact on the overall growth rate for the entire agricultural, forestry and fishing industry grew by 3,76%, representing 8,7% of the overall growth rate, while the industrial and construction sectors grew by 8,85%, representing 48,6% In addition, 42.7% was represented by the service sector
The economy's current-price size was 5,535.3 trillion VND in 2018; GDP per capita was estimated at 58.5 million VND (equal to 2,587 USD), a gain of
198 USD over 2017 The agricultural, forestry and fishing industries contributed 14,57% of the GDP in the economic structure of 2018, the others were 34,28% for the industry and construction sector, 41,170% for the service sector, 9,98% for the product tax less production subsidies The numbers for the same figure in the economic structure were 15.34%, 33.40%, 41.26%, 10% respectively
In 2019, Viet Nam's socio-economic status occurred in the setting of the global economic situation continuing to slow Commercial conflicts between the United States and China, as well as geopolitical challenges, have greatly worsened the insecurity of the global trading system, hurting business confidence, investment choices, and global trade Unexpected swings in international monetary and financial markets, as well as complex adjustments in oil prices, have had an influence on credit growth, market attitude, and predictions On a national level, the macroeconomic system was stable, however Viet Nam faced several difficulties and challenges, despite the positive results of 2018 growth, the difficult weather has a big impact on productivity and crop yields; the cattle industry faced difficulties due to African swine fever, which occurred in all 63 provinces and cities directly under the Central Government; slow down the growth of some key export products
GDP had a significant result in 2019, with an increase of 7.02 percent, above the national assembly objective of 6.6 percent to 6.8 percent, over the target set GDP grew by 7.48 percent during the third quarter; 6.97 percent in the fourth quarter The growth rate of this year was higher than it was from the period of 2011-2017, however this figure still lower than 2018, at 7.08% 4.6% of overgrowth was the agricultural, forestry, and fishery sector, which expanded by 2.01% Additionally, there was a slight growth in the industrial and construction sector by 8.90 percent, it consumed 50.4% of the overall growth, the rest of the overall growth was service (45%), it increased 7.3%
In 2020, GDP rose by 2.91 percent (in the first quarter, by 3.68 percent; in the second quarter, by 0.39 percent; in the third quarter, by 2.69 percent; and in the fourth quarter, by 4.48 percent), this became the lowest growth rate of all in the period of 2011 to 2020 However, considering the circumstances of the Covid-19 crisis, which occurred in a convoluted manner, badly affecting many socio economic spheres, this is a huge achievement for Vietnam, with the country's development rate in 2020 being among the highest in the world
The accuracy in the guidance and administration to heal the economy, prevent illness, and struggle, agreement of the whole political system, the Government, efforts of people and the business community to successfully accomplish the objective of “both avoiding pandemics and building socio- economic” 13.5% of the overall growth rate of the economy was agriculture, forestry and fishery, which increased 2.68% the industry - construction sector (53% of whole economy) and service sector (33.5% of the whole economy) increased by 3.98% and 2.34% respectively
According to General Statistics 1 , in 2018, Construction industrial activities maintained a solid growth rate of 8.79 percent in the industries and buildings sector, bringing 2.85 percentage points into the economy's total added value increase Furthermore, the manufacture business has affirmed the bright spot in the industry, which is the leading driver in growth, with growth of 12.98%, which is below the 2017 increase but significantly greater than that of the same period between 2012 and 2016 Building operations in 2018 affirmed an excellent 9.16 percent growth rate, representing 0.65 %
In 2019, the industrial and construction sector established a positive growth rate of 8.86 percent, bringing 2.91 percentage points to the overall economy's growth rate of total added value With a gain of 11.29 percent by 2,33 percentage points of overall, the processing and manufacturing sectors continued to play a vital role in leading economic growth After three years in a row of decline, the mining industry grew marginally to 1.26%, contributing 0.07% to an increase in total value added throughout the economy With a positive growth momentum of 9.1 percent, the construction industry contributed 0.66 percentage points to total development
Assets, Liabilities and Owners' Equity structure of Song Minh
2018 2019 2020 current assets long-term assets liabilities owners'equity
On the balance sheet of three years 2018, 2019, 2020, the company do not have any long-term assets The reason for this is mainly on the capital size of the company, the company just only open for little while and also the company was open for the project that already in hand with the owner With the project that already in hand and the combination of network, connection from the past of the owner, it would be more efficient for the company only use current asset and had no need to worry about the depreciation With the variety in industry the company can work in and the changing mindset of the owner, it is quite obvious to understand the lack of commitment in long-term assets
Assets structure remained stable with 100% of the total asset is current assets and experienced a slight changes and Capital structure over the time:
- The current assets declined 6.68% in 2019 from 11,773,087,591 to 10,986,718,921 After that in 2020, the company witnessed a significant rise in current assets up to 21.96%, which was 13,399,207,284
- The growth rate of equity in 2019 was faster than its liabilities so that makes the equity bigger than the liabilities The figure for liabilities in
2018 occurred for 16.1% but in 2019 this figure dropped to 9.6%, this was mainly because of the Short-term advances from customers This figure was only occurred in 2018 with the reduction of it, it can easy to be understand why Liabilities became lower in 2019 With the significant increase in Short-term trade payables, Statutory obligations and Short- term other payables, the company meet quite a big increase in 2020’s Liabilities, this make the company make a Short-term loans and debts
Due to struggle in 2020, the liabilities of the company rose to 22.8% of total equity
The increase in liabilities show the need in capital of the company The Liabilities was not that big but it showed the struggle when many other big projects come in place
Source: Song Minh balance sheet
Current assets structure of Song Minh
Current assets structure of Song Minh’ fluctuation is quite big In addition, the company do not have any short-term financial assets and inventories due to the operation of the company as a construction services:
- Cash in 2018 was very big, it occurred 83.4% of total current asset This situation happened mainly because the company was only open for several months and need cash to run the operation smoothly This make it more efficient in liquidity In 2019 and 2020, Song Minh changed the structure of current assets reduce the amount of cash, which only occurred 23.3% in 2019 and 20.7% in 2020
- Because of the great amount of cash in 2018, only 16.6% of the current asset was short-term account receivable The changes in 2019 and 2020 make the short-term account receivable shot up to 76.1% and 79.1%
2018 2019 2020 cash short-term financial assets short-term account receivable inventories other current assets
- The change in cash to other short-term account receivable, which was Privatization receivables show that the company was in the process of equitization This was not a good strategy for this period because of the lack in capital show from the Short-term loans and debts in 2020 The company was in the process of equitization, but 100% of the company still under the origin owner This might be a good move after the company prove itself in the filed so it can provide the evidence on its efficient in operating in order to call out for more capital In a different perspective, from the eyes of the owner, the other short-term account receivable was not cash, with that in mind the owner can move the cash to another investment but still kept the value of the company in the eyes of some investor due to the undone of several projects and the value behind its
2.2.2.3 Liabilities and equity structure analysis
Source: Song Minh’s balance sheet
Liabilities and Owners’ Equity structure of Song Minh structure of
2018 2019 2020 owners'equity current liabilities long-term liabilities
The company do not have long-term liabilities because Song Minh calculated that after 1 year several projects would be done, the profit can pay its debt easily With that, the company do not want any long-term impact on the future cash flow
- The Owner’s equity fluctuated during 3 years, reached the lowest point at 77.2% in 2020 The share capital of total owner’s equity in 2020 was the highest number of all, at 10,350,334,907, but it only occurred 77.2% of total equity
- The current liabilities of 2020 occurred 22.8% of total equity and it also increased 1.88 times compared to 2019 (from 1,060,108,325 to 3,048,872,377), this was occurred by the appearance of Short-term loans and debts This situation happened because the lack of cash flow in operating the company when there were too many big projects In 2018, the proportion of current liabilities was the highest at over 20% due to the Short-term advances from customers
- At the end of 2020, owner’s equity has been increased only 4.27% compared with 2019 and only 4.73% compared with 2018 This show that Song Minh have increase it fund for the last 2 years, but not much The increased in owner’s equity was from undistributed earning not from the growth in owner’s capital The company did not have any common stock, preferred stock
1 Revenue from sale of goods and services
3 Net revenue from sale of goods and services
4 Cost of goods sold and services rendered
5 Gross profit from sale of goods and rendering of services
(Source: Song Minh financial statement)
From the income statement of the company, the Revenue from sale of goods and services in 2019 was 4,927,691,500, which increased significantly by 484.85% higher than its from 2018 Due to the finishing of the project
“Repairing Ministry of Domestic Affairs” and collected all the money in this project In 2020, the Revenue from sale of goods and services declined slightly by 18.57% compared to 2019 The Revenue from sale of goods and services of three years 2018-2020 was all revenue from services, there did not have any revenue deductible in three years so Net revenue from sale of goods and services depend on Revenue from sale of goods and services
Cost of goods sold and services rendered of three years were Cost of services rendered In 2018, the company did not have to start any big project from ThanhHung Investment and Construction Joint Stock Company so it easy to see Cost of goods sold and services rendered was small compared to 2019, at 776,606,088 In 2019, the project from ThanhHung Investment and Construction Joint Stock Company started this make quite an impact on Cost of goods sold and services rendered, this number increased by 472,20% In
2020, this number drop slightly by 17.75% due to the slowing down from Covid-19 The increased percentage of Cost and Revenue of company almost at the same, at 472,20% and 484.85% respectively In addition, the drop in 2020 were quite similar 17.75% for the Cost and 18.57% for the Revenue With this number, the company witnessed a bad negotiation in price, the proportion of Cost in 2018 was 92.17% of the Revenue, the figure for 2019 was slightly lower but still significant at 90.18% of the Revenue and number increased in 2020 at 91,09%
With the increased in both Revenue and Cost, the Gross profit from sale of goods and rendering of services still come out with a relatively small number In 2018, the number was 65,947,546, which only 8.49% of Cost of goods sold and services rendered The figure for 2019 increased significantly by 633.89%, but the proportion of this was still only 10.89% of Cost of goods sold and services rendered In 2020, the number declined by 26.16% so is the proportion of its, which was only 9.78% of Cost of goods sold and services rendered Due to the number and percentages, it easy to see a slight glim of the small interest rate and the inefficient in investing
Song minh Development Investment Join Stock Company have a very small finance income because the source off this was coming from interest in banking deposit The company only use this for the safety and storage for cash
The finance income in 2019 decreased by 25.74% and in 2020, it increased by 75.80%, the figure for 2020 was only 21,667
One the big factor pointing out the inefficient or efficient in operating of the company is General and administrative expenses In 2018, the number was already big for its operation, at 176,707,280 The figure for 2019 increased significantly by 148.77% mainly to operate on other big project In 2020, the figure run low, it declined by 36.75% compared to 2019
Due to the high Cost of goods sold and services rendered and high General and administrative expenses, it was clear that the Operating profit was relatively low or even negative The Operating profit in 2018 was negative, the company loss 110,743,136 in the first year of operation After that, the number for 2019 was positive but it just only a small amount, the Operating profit of
2019 was only 1,00% of the Cost of goods sold and services rendered This figure continued to grow in 2020 by 75,80%, however it only occurred 2.13% of Cost of goods sold and services rendered The Net profit after tax was the same as operating profit but in 2020, the company have other expenses of 4,309,364, which was the penalty of the company over transportation This make the Net profit after tax increased by 66.07% compared to its in 2019
Table 2.3 Cash flow statement (unit: VND)
I Cash flows from operating activities
2 Cash paid to people providing goods and services
Net cash flows from operating activities
II cash flows from investing activities
III cash flow from financing activities
Net cash flow from financing activities 0 0 1,399,993,316
Net increase in cash and cash equivalents for the period
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
(Source: Song Minh financial statement)
In the cash flow from operating activities segment, the profit before tax in
2018 was 2,015,219,850 In 2019, the number increased significantly by 49.05%, however, the figure for 2020 was quite low The number for 2020 declined by 33.41% compared to 2019 and it became the lowest number out of the three years
The profit before tax was low, meanwhile Cash paid to people providing goods and services were very over three years, specially in 2020 The number for 2018 was already higher than Profit before tax, at -2,067,363,348 In 2019, the figure kept rising, it increased by 117.15% Even in 2020, the number still increased by 5.52% even when the Profit before tax lower than its in 2019 This might give a sign about the inefficiency in investing and overload in projects
The payment to employees also increased almost double in 2019 compared to 2018, mainly because the company hired more employees The payment to employees in 2020 still increased by a small amount of 1.38%
Short term solvency ratios
All 3 years the company's current ratio were greater than 1 In 2019, current ratio increased 66% compared to 2018 (from 6.22 to 10.36) In 2020, the current ratio decreased to 4.39 (decreased 58% compared to 2019) The cause of the increase is due to the large amount of current asset compared to current liabilities despite the growth rate of current asset was significantly lower than the growth rate of current debts From the results in 2020, for every current debt contract there are 4.39 current assets to ensured it This proves that the company has enough current assets as security for current liabilities, but the company invested way too much on current assets This is also a positive sign
2018 2019 2020 industry current ratio quick ratio cash ratio as it shows the ability to pay current debt of the company is guaranteed, so the business risk is reduced In addition, the company do not have inventory so the quick ratio is also the current ratio quick ratio is pretty high, indicating the solvency of the company over the years have been fared Because of the lack on company's inventory that is a source of cash to meet the payment immediately to fast company
The current ratio and quick ratio of the firm were very high because the company did not have any long-term assets so when dividing the Short-term assets with the Short-term liabilities, the ratio would be high When compared to the industry ratio, it is clear that the number for 2018 2019 2020 was significantly higher From this point, Song Minh do not use the Current asset as efficient This make the company financial situation in trouble From the lack of long-term, the company do not have any offices, tools, so in the current asset the company rent all of that from the offices to the transportation and construction tools
However, current ratio and quick ratio have not yet reflected the full payment capacity of the company, which we need to analyze the other indicators for accurate conclusions Let see through the cash ratio of the company
In the period of 2018 – 2020, the company witnessed a significant decrease in cash ratio The figure for 2018 was the biggest, at 5.19, while the number for 2019 was only half of 2018 Additionally, in 2020, the cash ratio also declined from 2.41 to only 0.9 With this low cash ratio, the company has a quite a big in financial difficulty, this situation occurred because it trying to stretch itself in order to finish several project on the making, which lead to a financial loan Not just that this figure also shows the process of equitization
This was not a right decision for the company when there was a large amount of projects that need to be finished but on the side of financial difficulties
2.2.5.2 Long-term solvency or financial leverage ratios
Table 2.5: Long-term solvency ratios
Source: Song Minh’s financial statements and Stocbiz
Source: Song Minh’s financial statements and Stocbiz
Long term solvency ratios
The company does not have interest, the large proportion of the company’s equity was the owner’s equity and the rest of it was current liabilities Due to this, it does not have Times interest earned ratio and Cash coverage ratio Meanwhile, the total debt ratio in the period of 2018-2020 was relatively low In 2018, the total debt ratio was 0.16, which means 16% of the company’s assets was financed from debts By 2019, it declined to 0.096, which was the company only financed 9.6% of its assets The figure for 2020 increased significantly to 0.23, which became the largest number out of the three The company financed 23% of its total assets through debts It is clear from the lack of capital in 2020 due to the overweigh of too many big project and the slight delay of Covid-19 that the company need short-term debts
However, when compared to the figure from the industry side, it showed the total debt of the company was too low even in 2020 This is a bad sign for the company, the company did not take advantage of financial leverage to increase profitability
In 2018, the debt-equity ratio of the company was 0,19 The figure for
2019 declined slightly to only 0.11 (decreased 44% compared to 2018) The company witnessed a significant rise in 2020 from 0.11 to 0.29 (increased 176% compared with 2019) the debt-equity ratio of the company was always smaller than 1, which means that companies used equity rather than debt used to finance assets This makes the company doesn’t dependent on debt too much but in 2019, the company was in the process of equitization make the company have a short on cash flow With that in 2020, the company immediately need to depend on debt The independent form debts and the possibility of financial autonomy as well as the ability to also lower the company's debt were correct in 2018, when the company did not the process of equitization, now the company did not have that abilities
Meanwhile the equity multiplier kept increasing overtime In 2019, the figure declined slightly from 1.19 to 1.11 However, in 2020, the number come back up strong from 1.11 to 1.29 The equity multiplier for 3 years were greater than 1 but still quite a small number With the low leverage ratio, the company will face less risk of default on debts, more flexibility and last but not least the company has the capacity to add more debt if required but it still has some problem like higher cost of using equity than debt, the lack of capital on requirement
Source: Song Minh’s financial statements and Stocbiz
Source: Song Minh’s financial statements and Stocbiz
Asset utilization ratios
The company does not have inventory so the inventory turnover cannot be calculated
In 2018, every VND in asset of the company only brought in 0,071 VND of revenue In 2019, the figure for total asset turnover increased significantly to 0.44 VND (increased more than 5 times compared to 2018) And in 2020 it was down to 0.29 VND (declined by 33% compared to 2019) We can see that the company did not use its assets efficiently in 2020 The company is quite new so with this figure it easy to see the struggle on managing the assets The company’s receivable turnover was very low It is what to expect in a construction company In 2018, the number for receivable turnover was only 0.43 and the average collection period was 848 days In 2019, the receivable turnover slightly increased to 0.59, the average collection period was 620 days
The figure for 2020 dropped to 0.37 and became the lowest figure out of all and average collection period of 2020 was far too long 964 days The average collection period of the company was too high, showed that the company sold under duration relatively long credit sales A low receivable turnover suggests that credit is granted to poor credit risks and collection efforts are ineffective
Source: Song Minh’s financial statements and Stocbiz
Source: Song Minh’s financial statements and Stocbiz
Profitability ratios
In 2018, the net profit margin was the lowest point of three years, this indicated that the company gain negative money from their sales The figure for 2018 was -13.14% but after that in the year after profit margin increased a large amount to 0.9% In addition, the profit margin in 2020 increased 1.16 times the figure for 2019, about 1.94% when seeing the industry number, it is clear that it is a rough situation for the construction sectors Industry’s net profit margin was way lower than the lowest point of the company But Song Minh was not the outsider from this situation, the high number on net profit margin was mainly on the short-term debts (according to cash flow statement), another point was the company is quite small from the overall of the industry so it easy to recognize the low loss of it In addition, the undone projects were already signed by both side
The graph also illustrates the upward on return on asset in the period of three years The proportion of 2018 ROA was very low, at only -0.94% and this is the lowest point of 3 years In 2019, the ROA rose up to 0.40% The figure increased continuously to 0.55% in 2020 but still under the industry average, which was way higher (at 3.91%) The number shows that Song Minh deployed ineffectively their assets to generate sales and eventually profits In addition, ROA of Song Minh in three years are lower than the industry average, it means that Song Minh operate less efficiently in using assets than other competitors
This was a bad sign for the company
ROE of Song Minh was very low like and quite close to the ROA of the company due to the lack of liabilities In 2018, the ROE of the company was negative, at -1.12% This show the owner have to take some unbeneficial in the return, the owner received an -1.12% investment However, in 2019, the ROE increased to 0.45% and the number kept rising in 2020 to 0.71% this is a good effort when it increasing overtime But when compared with the ROE of industry, the figure of the industry was significantly higher, almost over 14 times Comparing to the average ROE in this industry then this company is ineffectively using capital, the company not looking attractive for the investors when it need to be fund, which can be saw as a bad signal for investor, owner and the company itself
Source: Song Minh’s financial statements
The DuPont analysis of Song Minh in 2020 is shown in the model below and determined what financial activities are contributing the most to the changes in ROE The company has a weak ROE in 2018, about -1.12% In the next two years, there is an upward trend that make the ROE of the company increased to 0.45% in 2019 and increased to 0.71% in 2020 This data indicated that Song Minh is using the equity provided by owner during three years slightly effective, especially in 2020 The equity multiplier still remained the same because there is only one owner The profit margin also increased over time and the figure for 2020 was biggest This might cause the ROE small increase over time
If comparing with the industry, Song Minh is become one of the company that have problems in return on equity More importantly, company is becoming weaker than their rival This problem might be the result of the decrease in sales and the fairy new to the industry
In conclusion, the company is putting multiple effort on Improving the ROE of the company The company’s ROE depend on three main factor, which are equity multiplier, profit margin and total asset turnover Both of these factors which are equity multiplier, profit margin, were increased in the 3 years-
Year ROE Profit margin Total asset turnover Equity multiplier
2020 0.71% 1.84% 0.30 1.29 period (2018-2020) showing the intension of the company, however the total asset turnover increased significantly in 2019 but decreased in 2020
The assets turnover in 2020 declined 33% compared to 2019, the assets of the company had not been used properly in 2020 The company faced the struggle on managing the assets
The profit margin increased significantly in 2019 from a very low point of -13.14% to 0.90% The profit margin in 2020 continued to increase by 1.16 times the figure for 2019, to about 1.94% This mean that the net revenue in
2020 generated 1.19 dong in profit With the small amount of profit, the company still tried to improve its ROE
The equity multiplier also increased over time The figure for 2018 was 1.19, equity multiplier declined slightly to 1.11 however, due to the struggle in
2020, the number increased by 17%, get the number from 1.11 to 1.29 This growth was mainly from a short-term debt in 2020
Through that, the growth of ROE was mainly on two factors: the profit margin and the equity multiplier The increase from profit margin was a good sign for the company because it making some profit despite its struggle in the beginning The second increase from equity multiplier was a very bad signal, the factor for this increase was mainly on debt This situation would contain a large amount of risk potential.
LITERATURE REVIEW ON FINANCIAL STATEMENT
Overview of financial statements
According to the Institute of Certified Public Accountants (AICPA): “The financial statement is created for the purpose of periodically evaluating or reporting about the investing situation and the result achieved The financial statement system reflects the combination of recorded events, accounting principles and the evaluation apply mainly on noting the events
According to Vietnam Accounting system (2010), Financial statement is a kind of accounting report, reflecting a general overview of assets situation, capital, the situation and result of a firm’s business activities in a specific period of time With that, Financial statements not only provide the necessary for the outsiders of the company like: investors, creditors, tax organization, … but also provide the information for the firm manager, help them evaluate, analyze the financial situation like the results of the firm production activities Financial statement is a combination of a balance sheet, income statement, cash flow statement and notes
According to the scope of the study, the author applies the definition for financial statements from Viet Nam Accounting system (2010) in this thesis
According to Nguyen Nang Phuc (2009), financial statements play a really important role in analyzing the financial activities of the company In addition, it is also important to business operations All of that are express to several key opponents:
- The financial statement provides an overview about the economy and finance, this helps in analysis of the situation and the outcome of over a period of time In that perspective, this helps to check, supervise the use of capital and the abilities to increase it on productivity Financial statement also evaluates the execution of the company’s financial economic policy
- The information on the financial statement is the important base of the analysis, it also discovers the potential of the economy With that info, it can give several forecasts on the productivity situation and the development trend of the company That is the important info to base on, that helps the company make its decision on operation and productivity, this info also helps the investor, the creditor, future stockholder make their decision too
- Financial statement provides helpful info on analysis of the asset, equity situation, the situations and results productivity on a specific period of time and the current financial situation of the company like: the movement, the size of the company’s asset and capital structure, payment capacity of the company, …
- The data on financial statements are an important base in order to calculate the further economic ratios, this number will then help evaluate and analyze the efficiency in productivity, the use of capital
In the financial statement categories, there are a lot of different kinds of reports, sheets and statements, but for the wide use of investors, managers, … These are four of the most familiar when talking about financial statement:
According to “FSA Gibson 12e”, The balance sheet is a photo from the accountant of firm’s financial position by the control on the company’s resources, which is from its asset generated by owner’s equity and liabilities on a specific period of time, this “picture” can be as the firm stand stood The balance sheet has three parts, which can be represented by the equation:
Balance sheet: According to “FSA Gibson 12e”, it provides the information about the assets, liabilities situation and the source of asset’s generating in a specific period of time, help the current financial situation analysis of the company like: the movement in scale and the structure of the assets, the source generating the assets, the situation of the payment and payment capacity of the company In addition, it also helps value the abilities to call for capital on the company’s productivity in the future
According to “FSA Gibson 12e”, The income statement is the movie about the activities of the firm from the time its start to the end of a period It collects the info about revenues and expenses, gain and loss, and close with the amount of net income Additionally, the accounting equation for the income statement is:
The income statement: According to “FSA Gibson 12e”, it provides information about the productivity results of the company in a specific period of time, provides information about the current financial duty of the company to the government From the number analysis of the income statement, it helps the company’ management, helps the ones use the information to evaluate the changing potential about the economic resources which the company could control in the future, evaluate the profit generated and the effectiveness of using
According to “FSA Gibson 12e”, The cash flow statement can be seen as the most important aspect of the financial statement This focuses on the cash and cash equivalent The transactions of cash flow in and out of the company are being reported in the cash flow statement The amount of cash and the assets can be seen as cash separate into three main groups: Cash flows from operating activities, Cash flows from investing activities, Cash flows from financing activities
Cash flow statement: According to “FSA Gibson 12e”, it provides the information about the financial fluctuation in the company, help analyze the investment, financial and business activities of the firm, in order to evaluate the abilities to create cash flow and cash equivalent in the future, as well as using this resources for further business activities, financial investment of the firm
According to “FSA Gibson 12e”, The notes to the financial statements are an integral part of the financial statements The notes to the financial statements are the explanation and the added complicated information from balance sheet, income statement, cash flow statement
Overview of the financial statements analysis
1.2.1 Definition of financial statements analysis
According to Nguyen Nang Phuc (2009), Financial statements analysis is the process of considering, checking, contrasting and comparing the date about finance in current time to the period of time in the past The financial statements analysis might provide to the information user the info on evaluating the potential, the business efficiency, also the financial risk of the firm in the future
1.2.2 Roles of financial statements analysis
According to Nguyen Nang Phuc (2009), The basic purpose of the financial statements analysis is providing the necessary information, to help the information users see through an objective evaluation about the financial power, the abilities to generate profit and further development in business production of the firm With that, financial statements analysis is attractive to many people, who use the data differently, like: the board of directors, investors, creditors, suppliers, stockholders in the present and future, customers, insurances, workers, … Every subject using the information of the firm has different needs about different information Through that, every subjects that uses the information tends to focus on many different angles of the firm’s “the financial picture”
In order to achieve the basic purpose of the financial statements analysis, the role of it is reflected to several following aspects:
- Financial statements analysis must provide the full information, which is useful for the investors, lenders and other people for different info to help them make the right decision on investing or lending
- Financial statements analysis must provide the full information to the firm’s owner, investors, lenders, other people for different info on evaluating the abilities and the assurance of the cash flow coming in and out, the efficiency of using its assets, the situation and the payment
- Financial statements analysis must provide the information about the owner’s equity, debts, results of the production activities, events and situations that can make a change in the capital and debts of the firm
The regularity of the financial statements analysis is understandable, its help the corporate governance saw the picture of the current financial situation clearer, confirm and see the drawback, the stage of effect from the firm’s financial situation From that, provide useful solutions to stabilize and build up the financial situation
1.2.3 Process of financial statement analysis – EIC analysis
There are a large number of ways to analyze the financial statement but one of the most popular methods is the EIC analysis (top down EIC) EIC Analysis stands for Economic Industry Company Analysis The acronym EIC stands for economic, industrial, and corporate analysis The individual conducting the EIC analysis looks at the entire economy and then determines which industries are the most appealing in light of the current economic situation Finally, the analyst highlights the most appealing companies within the appealing industry
The economy analysis is the understanding of important economic parts affecting the business activities, industry, region, … of the economy through the eyes of experts This process is based on the real activity and the whole economy conditions With this, the company can make better decisions
The economy analysis provides information on several aspects like inflation rate, exchange rate, … Every firm can be impacted by external factors
So in order to recognize the factors outside either it is opportunities or threats, the company should have an in-depth look at the evaluation of the economics element
A large number of companies tend to invest in organizing the plan for everyone to two times and play several economic scenarios in mind for 2 or 3 year times After that, the company will analyze each scenario in order to know which of these situations can affect the company A specific project can be evaluated to match the economic situation and financial feasibility by the economic analysis
The analysis also gives the owner of the company a detail situation on the current economic environment and helps the company see its ability on development With this, the vision over the market strengths and weaknesses
Industry analysis is the process of understanding and evaluating one specific business industry from the market supply and demand, the level of competitiveness in the industry, future potential and the effect from the external components… In the process of evaluating and selecting stock, industry analysis is one of the most important parts because it provides an in-depth look at the production environment, the benefit over other competitors, the chance of development and the financial risk of the firm
Industry analysis has an important role in basic investment method:
- The understanding of the business structure and business environment of the company: it provides an in-depth look at the production environment, the benefit over other competition, the chance of development and the financial risk of the firm With the credit analysis, Industry analysis helps evaluate the abilities to pay out the debts
- Evaluate the opportunities with efficiency: the investor can perform a top- down investment method through Industry analysis in order to identify the potential for the growth of profit and development of the industry
- Portfolio diversified: Industry analysis helps the portfolio manager to
Company analysis is a process that includes financial situation analysis, goods and services analysis and the competitive strategy of the company
Company analysis will be started after the analyst figures out the external factors, macroeconomics, demographic, government, technology and society that can impact the industry competitively
The function of Company analysis is:
- Provide the overview of the company, including: the basic understanding about business activities, investment activities, corporate management and the strength and weakness of the company
- Explain characteristics relevant to the industry which the company operates in
- Analyze the need for goods and services of the company
- Analyze the goods and services supply, including analyzing the expenses
- Analyze the factors affecting the price of a company’s goods and services
- Explain the financial ratio, compare in time and competitors
Company analysis usually include forecasting the financial statement, especially when its purpose is the company valuation
1.2.4 Financial statements analysis methods 1.2.4.1 Common-Size analysis (vertical analysis)
According to Investopedia, the approach of evaluating financial information known as common-size analysis involves representing each item in a financial statement as a percentage of a base amount for the same time period This examination can be used for a company's balance sheet or income statement
In Common-Size analysis, the following equations is used:
Common Size Amount = (Analysis Amount / Base Amount) x 100%
When one item is compared to the base item, a vertical analysis of items from the company's statements is performed Vertical is commonly applied for a single period Common-Size calculates the weight from each segment divided by the overall amount like total asset, total liabilities, …
Factors affecting financial statements analysis
According to Michael (2016), external elements that influence the study of a company's financial status include the political and social environment, economic growth rate, scientific and technological advancements, monetary policy, and so on can be called the Subjective factors
Growth motivation and Direct conduct can be influenced by subjective factors Despite the fact that objective factors only influence subjective impressions in part, they can have a significant direct impact on outcomes
There are 3 external factors that have connections with each other: industry environment, national environment and macroeconomic
The industry analysis environment needs to evaluate the competitive structure of that industry, including the competitive position of the company and its main competitors, the trend in development of the industry This also help evaluate the impact of globalization on industry competitive
The national environment analysis helps the company evaluate the situation of a country which the company operates in If the country meets the same needs of the firm in order to compete with others, the company should stay there If not, the company should move to another location
The macroeconomic analysis also needs to be considered The company needs to consider the macroeconomic factors, social situation, government, national policy, international and technological advancements that can make an impact on the firm
According to Michael (2016), internal elements that belong to the company organization are referred to as objective factors The objective factor analysis can help point out the strengths and weaknesses of the firm It would help figure out the way for the company to maximize its benefits and the function of the differences in abilities, the capital and the abilities to create, keep a stable benefit In conclusion, to create and keep a stable benefit over others, the company needs to have efficiency in operation, top-notch product development over time and responsibilities to customers The strengths will help the company stand out in its field, but opposite that, the weakness will lead to poor performance.