NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM BACHELOR THESIS FINANCIAL ANALYSIS AND RECOMMENDATIONS FOR HAANJSC Student Nguyen Khuong Duy Student ID CQ500394 Class Advanced Education Pro[.]
INTRODUCTION
Rationale
I choose to start my second internship in a company that specializes in the electronic process of all services available on the market Their orientation from the beginning and will continue to be in the future will be to build themselves up into a payment system provider.
The society now is really in a depressing state than many of the time in the past There may be no other times when the liquidity and cash become the most serious problem to all the people and even the nations around the world; there are no exceptions to Vietnam And it is the financial point of view that every company should pay their very attention to if they want to maintain the business state and also the vision into the future.
HaanJSC is built up with a quite small capital and that is really a big disadvantages in this world where the financial condition is evaluated very much and harshly like today So, the aim of the company tends to provide the information technology is reasonable because they really needs less capital to start The difficulties in this sector lie mainly in the technical field But there are no exceptions that financial situation, the capital structure still play a vital role in the company So taking care of the financial aspect of the company means they really care about their company, their staff, themselves and also the vision they are looking forward to.
In the view of a student specializing in finance, the problem addressed in my thesis will be to find out about the capital structure of the company by conducting a financial analysis based on the figures that have been provided by the instructor at the company. Because of the constraint of the resources, I mainly focus on the data and resources that available for the year before of HaanJsc, since it is a very young company and also because of the nature of the IT sector is the regularly and gradually changing situation in a very short term And I also want to know what a small company but has a big vision already has and what they should fulfill in order to achieve it.
Research objective
With the aim of conducting a financial analysis to study about the capital structure and financial analysis of the company, this thesis intends to indicate the following content:
1 Studying the figures stated in the financial statements and their meaning in related to the financial situation of the company so that we can have a view about this company’s health
2 Some possible recommendations for the company to be more feasible and effectively than right now.
Research methodology
The financial analysis process is a process that requires lots of information and calculations So the method I use here is:
The quantitative method: I collect the data available for me from the company where I do my internship, to calculate the necessary figures in a formal financial analysis.
The qualitative method: Based on the calculations, I would like to draw out comments and conclusion about the current situation of the company
Scope of research
Due to the resource constraints, such as human, financial and time resource, my thesis will then be limited to only about the figures in the most recent year, which is last year, that are available for me that is already decided by the company The documents will look at some basic financial aspect of the company along with the evaluation process to consider the financial health of the company and to provide some possible solutions for the development of the company in the aspects of finance (and more if possible).
BACKGROUND KNOWLEDGE ABOUT THE FINANCIAL ANALYSIS
Definition
Financial analysis is the process of evaluating the finance performance of a firm to find out whether they have fulfilled their duties through a very specific period of time When looking at a specific company, the financial analyst will often focus on the income statement, balance sheet, and cash flow statement Past performance of one company needs to be analyzed very carefully in order to have an overall view and predict the future.
Financial analysis of all firms focus on identify and meant to satisfy the following objectives:
Prediction of profitability and growth prospects Financial statement analysis helps in assessing and predicting the earning prospects and growth rates in earning which are used by investors while comparing investment alternatives and other users in judging earning potential of business enterprise.
Evaluation of current position The assets and liabilities possessed by firms can easily revealed facts about the position of them in the industry and also the market.
Evaluation of past performance Future performance can be estimated through past performance All the stake holders, especially investors or creditors, pay their best attention to sales, cost of good sold, operating expenses, net income, cash flows and many other figures.
Evaluation of the operational efficiency The analysis process can be used as a mean to assess the efficiency in the operation of the firm Simply one or some standards is set by the Board and then the comparisons between that part and the actual performance expressed in the financial statements will give out the difference and from that facts it is possible to figure out the level of efficiency of the company.
Possibility of bankruptcy and failure Financial statement analysis is an useful tool in studying the possibility of bankruptcy.
Necessity of financial analysis
As the preceding part, the analysis and interpretation of financial statements is useful in achieving several objectives:
- The evaluation of past performance
- The assessment of current status
- The prediction of growth prospect
- The efficiency of the company in its operations.
Being basically historical in nature, the financial statements are more reliable for the first two purposes However, most readers of the financial statements are interested in the future, because as many investors have claimed, if properly and relevantly used, it is possible to see the company’s ability to grow and prosper and the availability of the company to adapt to varying conditions The analysis of financial statements can provide a basis for projecting future and clues about how the company will respond to these future situations.
From an internal perspective of the company, analysis of financial statements provides many advantages to the administration:
- In planning the short and long term, when choosing between alternatives, objectives, policies, procedures and programs.
- In an organization, to coordinate the actions of people who work in an organization with the goal of better preservation of the tangible assets, technical and human resources, allowing them to detect possible deficiencies in the operations of the different areas of a business.
- In the integration, in seeking to articulate the elements and human elements and materials that show planning and organization as necessary for the proper functioning of the entity.
- In the address, to ensure obtaining the results or objectives through the administrator’s authority exercised directly or by delegating to other factors, to organize, guide and supervise their subordinates, providing a firm basis for directing the efforts towards the aims of the entity.
- In the control, to measure and compare the results with those expected, ie if there is a balance between planning and execution.
- From an external perspective, allows presenting the situation and possible evolution of the entity to all external users: credit institutions, shareholders, suppliers, employees, customers, auditors, analysts, government agencies, competitors, investors, etc.
Through the analysis of financial statements, we can give out answers to key questions in the running of the institution:
- Is there an ability to pay short and long term liabilities for the entity?
- Is it excessive inventory investment?
- How much is the working capital account and how it is invested?
- Are fixed assets utilized efficiently?
- Does the performance you get is balanced with the investment?
Methods used in the financial analysis
The methods introduced below are some basic methods that are used in many documents They help the managers and also the potential investors to have a systematic approach to the financial statements These processes have been proved to be the simplest way to have an overall view about the financial condition of one specific company and are suitable for decision making process for both the manager, director and the investors who have an interest.
Financial ratio analysis is one of the most frequently used tool of assessing and building relationships between different pieces of financial information Information from the financial statements is used to calculate financial ratios in order to determine some facts about the firm, each of them will help in a specific way to reveal one specific part of the statements.
As stated, ratio analysis is one of the most popular financial analysis techniques for companies, especially for small companies Each field of the company, including liquidity, profitability, and many others are all considered and assessed very carefully by using the figures calculated by using this approach.
Comparisons are vital parts of the ratio calculation Ratio alone does not really tell anything very significantly about the condition Comparisons are made with the company and a different one often called benchmark company They are companies that are considered most important in the industry and the information source is reliable enough to do the process regarding industry average ratios.
Analysts can refer the pace, development trend of the economic result for a purpose of describing the movement in each criterion One of the most popular, flexible in the financial analysis and frequently appeared in the first step of analysis process is comparative analysis. The information must reflected the same meaning of economic substance, consistency with calculation method and measurement unit and collected in the same length of time period for analysts use to compare Comparative analysis includes three main methods: horizontal analysis method, vertical analysis and cross-sectional analysis.
Methods of financial statement analysis generally involve comparing certain information Horizontal financial analysis can be used to compare a business entity over different months or defined periods within a fiscal year The horizontal analysis compares specific items over a number of accounting periods For example, to analyze the overall performance of business or a particular project, we can compar revenue generated over different months of a year.
An accountant can follow one of the two given below methods to conduct a horizontal financial analysis:
The first method is dollar analysis The amounts in absolute dollars of various items are compared for an entity over different periods of time This helps analyze the spending trend of a business Also, it helps analyze the effects of external factors like rise in prices over business expenditures.
Percentage analysis is based on the change in different items over different periods of time calculated in terms of percentage By using this type of analysis, analysts can compare the performance between a small business and a large business in the same industry.
This type of analysis is of great significance in carrying out the decision making process By comparing the analyses of several periods to one another, the users expand upon vertical analysis.This method compares several items to one certain item in the same accounting period In other words, this is the procedure of comparing different figures of separate entities to one specific figure of an entity for one specific period of time.
When investor, analyst or portfolio managers conduct on a company in relation to that company's industry or industry peers, they are using cross-sectional analysis method 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.
The users who use cross-sectional analysis seeks to evaluate the target company's efficiency in these areas in order to make the best investment choice among a group of competitors or the industry as a whole To do this, the analysts identify comparative metrics, the valuation, debt-load, future outlook and/or operational efficiency of the target company.
When using comparative metrics, the analyst must be careful to consider how they will be affectted by the unique operating characteristics of the company.
In this method, the research events, the economic results is divided and aggregated into a great number of group bases on the specific criteria Normally, criteria can be time period, location, business scope or constituent part of the targeted analysis By dint of this action, analyst may analyze the target object throughout the interval period of time, scope, which indicates the exact causes for results, identifies the obvious factors to create the recommendations to exploit the strengths ad restrict the weaknesses
The idea of this method is the separation of a synthetic indicator of economic performance ratio into lots of ratios which have the cause and effect relationship It allows analysts to analyze the level of effect of the composition ratios on the synthetic ratio.Therefore, analysts can find the factors, the causes leading to good and bad scenario in each of the business activities, and then can find out the strengths and weaknesses in business operation.
Content used in financial analysis
2.4 Content used in financial analysis
2.4.1 Information in the financial analysis:
Information used in the financial analysis process can be obtained from various sources The sources of the information decide the reliability of the results because they decide the complete and accurate level of the information Here are some of them:
2.4.1.1 Information from the inside of the company:
Mainly, the information from the inside of the company can be related to as the financial statements In any company the financial statements is the most important sources of financial data They are the Income Statement, Balance Sheet and the Cash flow Statement.
Income statement (also referred to as profit and loss statement (P&L) and some more terms) is a company's financial statement that indicates how the revenue (money from the sales process) become net income through the calculation process (all revenues and expenses have been taken into account) The revenues, the cost and expenses are reported on this document, including write-offs (e.g., depreciation and amortization of various assets) and taxes Showing the money made or lost by the company during the period is the main purpose of this document.
In contrary to the balance sheet, this financial statement represents the figures in a period of time Investors, creditors and managers benefits from this statement by the financial performance of the company, especially the way they do the sales process and how the costs are strictly or not controlled After that, the future performance, and the ability to generate cash is also the usefull information that should be appeared on the list.
The Income Statement, though, have some limitations:
The lacks of items that might be relevant but cannot be measured in the process are not reported (e.g brand recognition and loyalty).
Some numbers depend on accounting methods used (e.g FIFO or LIFO accounting method to measure inventory level)and also some numbers depend on judgments and estimates (e.g depreciation expense depends on estimated useful life and salvage value).
In accounting, a balance sheet or statement of financial position is a summary of the financial balances of a company There is always a specific point in time when all the accounts in the balance sheet are shown on the documents Because of that very own features, a balance sheet is also known as a "snapshot of a company's financial condition" It is also the only statement in the four ones which represents the financial information in a single point in time of a business' calendar year
A balance sheet basically has three parts: assets, liabilities and stockholders’ equity. The assets categories are always listed in the beginning and typically in order of liquidity, followed by the liabilities The difference between the assets and the liabilities is the equity or the net worth capital of the company or the net assets The accounting equation in this point requires that the net worth must equal assets minus liabilities.
In accounting, assets are economic resources Anything possessed by the company, either tangible or intangible, which is capable of producing value and having positive economic value is considered an asset In other words, assets represent ownership of value that can be converted into the most liquid asset, known as cash (cash itself is also considered an asset) The balance sheet consists of the monetary value of all the assets belonging to the firm There is one noticeable thing about the two main categories of the assets, tangible and intangible assets Tangible assets category can be sub-categorized into several ones, for example the current assets and fixed assets Current assets include cash and cash equivalent, prepayment, account receivable, inventory, while fixed assets include such items as buildings and equipment, land, plant Intangible assets are nonphysical resources and rights that give the firm some advantages such as monopoly advantage in the market Some good examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs.
A liability is an obligation of an entity arising from past transactions or events, any business agreement that can possibly raise the transfer or use of assets, provision of services or other yielding of economic benefits in the future Based on the concept, we can point out some of the characteristics of the liability:
The payable borrowing from individuals or banks for business improvements or personal income in short or long time;
A duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services, or other transaction yielding an economic benefit, at a specified or determinable date, on occurrence of a specified event, or on demand.
Liabilities have a place in a balance sheet and are usually divided into two categories. The first thing is current liabilities – the current liabilities are expected to be liquidated within a year Some of the common current liabilities are payables such as wages, accounts, taxes, and accounts payables, unearned revenue when adjusting entries, portions of long-term bonds to be paid this year Long-term liabilities are all the liabilities that are expected not to be liquidated within a year Issued notes payables, long-term bonds, pension obligations, long- term leases are some of the most frequently met sub-categories
In accounting and finance, equity is the residual claim or interest of the investors in assets minuses the liability If liability exceeds assets, negative equity occurs In the accounting area, shareholders' equity (or stockholders' equity) represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.
The owners of the business use their own money to finance the start-up operations of the company This at the same time creates a liability on the business as the capital because the business is separated from its owners The accounting equation is sum of liabilities and assets and it is somewhat can be considered as the businesses itself After liabilities have been taken into account for the positive remainder is marked the owner's interest in the business.
In the bankruptcy, the liquidation process can be understood easier by using the concept in this definition At first, all the secured creditors are paid against proceeds from assets The following is the creditors, in priority sequence, have the next claim/right on the proceeds The last or residual claim against assets, paid only after all other creditors are paid is the owner of the company It is obvious that in the situation when the creditors cannot get their money back, the owners cannot do that also Stockholder or ownership equity is also known as risk capital or liable capital.
We can point out some of the features of the balance sheet:
All the value in the balance sheet are monetary indicated So, it is possible for calculating the value of the business at a point in time The final result is the overall financial condition of the company is therefore easier to get.
FINANCIAL ANALYSIS TO HAANJSC
Establishment and general description of the company
Haan Online Payment and Technology Services Joint Stock Company (HaanJSC) is established in August, 2009 with the engagement of some experienced individuals in some areas:
At the moment, HaanJSC has finished the tools for the finance switching system, and are the technical provider for the famous website baokim.vn.
Due to the late establishment of the other online payment company in Vietnam, HaanJSC commits to serve the partners and customers with the following criterion:
- Lowest initial set up and operation cost for the partners and customers.
HaanJSC follows two specific directions:
- Become the breakthrough and market leader in the market of payment tools integrated in the social network.
- Make the company a useful and trusted tool which can nurture the success of many others, including partners and customers.
Overall, the company has been organized by two criteria: the general function management department and the project management department Due to the current limited number of people in the company, one person at this time will have to carry more than one position in the company, but they plan to recruit more to expand the current staff of the company At the moment, at least the company should have the two components:
The Board of Management (Also the Board of Director)
Projects directors and functional department manager concurrently.
At the moment, the organization structure of the company is like the following:
Figure 1 The Organization Structure of HaanJSC.
Notes: The Departments under italic format is the functional department who is in charge of management The ones under bold format is responsible for produce and sales directly in that project, and accept responsibility with the company
Position Scale of management Quantity Salary
Functional Department Manager Functional Management 3 2000
Table 1 The salary system of HaanJSC
Note: Projects director do not count in this salary table because of the existing account in the project’s cost.
Department Project 1 Project 2 Project 3 Project 4
The Board of Management(also the Board of Director)
To serve for the new project campaign which will be launched this year, HaanJSC planned to expand their personnel to 70 people and allocate as follows:
One sixth used for research & development and maintenance purpose.
Two third used for sales and marketing function.
The rest used for general management, law and functional department.
The companies listed below at the moment do not interfere with the main business that HaanJSC are trying to look at However, in the future they can be very highly competitive companies in the same business that HaanJSC is taking by virtue of their competitiveness in the technological basis and in some of them the high financial capacity.
Smartlink Card Service Joint Stock Company
Noticeable characteristics: Interbank money transference through card High cost for infrastructure and software system This is a big and strong system by dint of high amount of investment.
Noticeable characteristics: E-commerce, e-wallet is the main services provided The technical system is too large and use up high cost for development and maintenance.
Communication and Technology Development Investment Joint Stock Company Website: Payall.vn
Noticeable characteristics: Large and weak technical system which takes much cost to develop and maintain.
Noticeable characteristics: Base on another company’s technological basis Do not have their own technological basis.
Bao Kim Electronic Commerce Joint Stock Company
Noticeable characteristics: Base on HaanJSC’s technological basis.
Vietunion Online Services Joint Stock Company
Noticeable characteristics: E-wallet is the main business Large and weak technology system needs much cost for development and maintenance.
Vietnam National Finance Switching Joint Stock Company – Banknet
Noticeable characteristics: The main business is interbank money transference through cards High cost for infrastructure and software High investment creates huge and strong system.
Vina Payment Network Joint Stock Company
Noticeable characteristics: No information available.
Noticeable characteristics: Interbank money transference through cards is the main business High cost for infrastructure and software High investment creates huge and strong system.
Vietnam Payment Solution Joint Stock Company
Noticeable characteristics: Mainly do business on the telecommunication services area.
3.1.5 Advantages of HaanJSC in the technogical basis
Main advantages of HaanJSC in developing services are:
Complete finance switching network of HaanJSC
The core finance switching network of HaanJSC has been completed and connected successfully with the telecommunication companies like MobiFone, VinaPhone and Viettel. Telecommunication systems are always the kind of system that requires the highest level of security and technical capacity – even more than the banking systems because of the continuous update function of the mobile fee as well as the huge quantity of transaction and data flows through.
The succesfull connection with the telecommunication companies has proved the high level of technical capacity of HaanJSC On the other hand, this is also conducive to the approach and connection with the banking system because: o The security capacity and technical capacity of HaanJSC system has been claimed, approved and verified by the three mentioned telecommunication companies. o HaanJSC has the ability to provide value added services for Banks in which there are prepaid mobile services and many more others.
Features of the finance switching system developed by HaanJSC
With total diference from current Vietnamese payment system, the technical core system of HaanJSC does not base on the technological basis that has been used to build up the InternetBanking service that banks are now using, which accords to some reasons: o The old card technology and the method of using card for payment is starting to get old-fashioned Physical debit/credit card and the Authentication/Verification method to identify users are only suitable for the ATM but not on the Web environment and has shown to be extremely insecure The figure 3.7% of the customers who conduct transactions suffer from hacking and abusement in MasterCard or Visa services have partly claimed this idea. The cards are not safe at all, especially when it is taken away and may be used illegally with Internet transactions. o E-wallet has become popular Almost all online transactions via Internet Banking in Vietnam have stopped using card to move to other more advanced verification tools like SMS, Token key or RSA and many others The technological basis for these kinds of verification is ready to be launched and mature. o The ability to integrate e-wallet into personal mobie phones is just a matter of time and is the propect for the next three years The only remaining problem of this is the assurance for accounts security for the situation in which the individual lost his or her phones and the security for the application on the phones and completely solve the problem in the near future. o The banks do not want to do any further investments in the ATM business because initial cost and maintenance were so high The merchants who accept the card payment are not also invested strongly if we put it in comparison with approximately zero cost if Internet Banking is used. o The substitutes are coming to fruition Let’s imagine a situation in which individuals cell phones are used to access the Internet and make payment for any products in the super market even before the check out That is the thing that HaanJSC is trying to develop to serve future needs.
With the professional knowledge about the other systems, the technical team of HaanJSC have developed their own one with the direction of best integrate with each Internet Banking system This will help the interbank money transference using HaanJSC system to become so convenient and compatible with online transactions channel This will lead to the following result: o The system is not going to become bulky and insecure like the projects that base on card technology. o The compatibility and flexibility in the fact that HaanJSC totally uses authentication/verification systems of banks when conducting transactions give them some advantages: a Do not have the responsibility to store information of users – minimizing the cost of storing and security system investment. b Do not have the legal responsibility in case of unexpected situation due to the centralization of money holding accounts in the banks. c Minimize the cost and time for technical connection for each bank.
Ability to expand and upgrade
With such a light but firm and stable system, HaanJSC has very easy task in upgrading and expanding theirs The general principles of HaanJSC system is the plug-in one that can be described as a “burger” with these following features: o The whole system is built on only one axis This only has one task and that is routing financial message (data). o The data layers before coming to the routing axis are normalized (chuẩn hóa) and have only these attributes: a Source account of the transaction. b Destination account of the transaction. c Detail about paid order. o Before normalization process, the modules including encoding/ decoding, active protocol and data type switching is activated so that the system can “understand” the request from users, banks and service providers.
All the adapters to the service provider or banks can be disabled and enabled withour rebuilding or shut down The maintenance or upgrade therefore do not affect other services from other providers or banks.
The additional service setup only needs to obey technical standard that the system has pointed out base on international standards.
The successful implementation and construction the core system of HaanJSC as the criteria and description above economize a huge amount of cost used to develop, run and upgrade The light, powerful and yet highly compatible system will be more secure and effective in running in comparison with the others.
Financial results
3.2.1 The financial analysis of HaanJSC
According to the financial assessment and all the information that was provided by the company, it was well operated in the year 2010 and 2011 Despite an overall crisis especially for the small and medium enterprises, HaanJSC is able to generate good income by dint of good subjects and area that the company focuses on And the result of the analysis below was accompanied to complement with that brief piece of comments.
The data in the two below tables indicates that HaanJSC was performing well in 2010 and at an acceptable level in 2011 although having to face with the financial crisis In 2011,the company experienced a 12.13% decrease of the total sales in 2010; the Cost of goods sold had been controlled strictly by the company and saw a 9% decline of the total cost of goods sold in 2010 Therefore, in 2011 HaanJSC’s gross profit was at the level of 16% less than the total gross profit in 2010 and more than 20% of total net income after tax It was likely known beforehand that the estimation will give out the result that the total net income of company in 2011 is more than 20% lower compared with its in 2010 Besides, the company also control the inventory better with the percentage of inventory over total asset dropped from 5.57% in 2010 to 4.85% in 2011 Furthermore, it was shown on the financial statements that the company had a plan to reduce their fixed costs by changing to another place The rate of fixed asset over total asset dropped clearly by 4% from 20.96% in 2010 to 16.96% in 2011. The purchase of fixed asset was sponsored from the inventory sales made in the term. Horizontal and vertical analysis was used to evaluate and its results, which is the financial ratio analysis, will be shown as follows:
Table 2: Cursory Balance Sheet of HaanJSC in the 2010 and 2011
*Source: Balance sheet of HaanJSC in 2010 and 2011
Table 3: Cursory Income Statement (In VND million) of HaanJSC in the 2010 and 2011
*Source: Income statement of HaanJSC in 2010 and 2011
We can observe two different trends in the two turnover ratio While inventory turnover experience an increase in the period from 2010 to 2011, receivables turnover tend to stay the same as the difference is just some percentage point between the two The rise from merely above 12 times to nearly 14 times in inventory turnover tends to declare a more effective sales strategy with higher speed of inventory to go out But since the company’s inventory level is not very high (one of the main reasons is because they are an information technology service provider), these ratio does not imply anything too significantly about the situation of the company.
Figure 3: Asset turnover ratio of HaanJSC in 2010 and 2011
*Source: Balance sheet of HaanJSC in 2010 and 2011
On the other hand, HaanJSC had the same amount of the receivables turnover ratio from 2010 to 2011, showing that the company maintains an acceptable number of times to collect receivables in the period of one year Although a higher receivables turnover ratio is better for the company, this is for sure that they are not going to experience any difficulties in maintaining their operations since four times collect receivables per year is a good figures for them to do.
The graph (Figure 6) illustrated the changes in the debt ratio and debt to equity ratio of HaanJSC during the period between 2010 and 2011 Clear rise with the same pattern was observed in both of debt ratio and debt to equity ratio The two ratio increase at the same time shows a downside of the company but in a planned and expected manner by the company at that moment Although two ratios increased, the absolute value of them was still in the acceptable interval Therefore, HaanJSC doesn’t have to face too much risks and has the favorable condition to continue doing business with a high level of certainty.
Figure 4: Financial leverage ratio of the HaanJSC in 2010 and 2011
*Source: Balance sheet of HaanJSC in 2010 and 2011
The graph (Figure 7) shows the changes in the gross profit margin and net profit margin of HaanJSC through the period from 2010 to 2011 During the period from 2010 to
2011, HaanJSc, as all the figures we have gone through in this document, show a negative cases of doing business With the gross profit margin slightly decline by nearly 3% from44.97% in 2010 to 43.01% in 2011, the net profit margin also saw the same trend of merely
1% decrease The two declines of the margin were also expected by the company and they have prepared themselves to move on with a new year with more aims and ambitions. However, there is one special thing we can see at the ratio here is the big proportion of the gross profit and also the difference between the gross profit and the net profit on the calculation basis of the revenue On the first thing, high gross profit margin tends to show a very efficient management of costs of goods sold, but in his case it is by virtue of the nature of a information technology service provider with very limited amount of cost of goods sold. The second thing may be more questionable This may comes up a question about other expenses that the company has incurred during the period If you look at the salary level at HaanJSC, you may see that they spend a lot on keeping their staff receiving a high level of attractive treatment to keep them stay But in the long term, the managers will have to consider letting them know all the long vision and have some agreement on retaining the necessary capital for another level of progress of the company as a whole That is a question that the manager should answer themselves in a serious manner.
Figure 5: Gross profit margin ratio and Net profit margin ratio of HaanJSC in 2010 and 2011
*Source: Balance sheet of HaanJSC in 2010 and 2011
In the current environment The company stays very healthy in the short run financially, and looking from these results only, they are good with the liquidity aspect.
Figure 2: Current ratio and quick ratio of the HaanJSC in 2010 and 2011
*Source: Balance sheet of HaanJSC in 2010 and 2011
A slight decline was seen in both two ratios declare a negative trend in the operation. The current ratio was still very high though, in 2010 and 2011 with over and then under 10 times respectively, the quick ratio being after subtracting the inventory from the current ratio was also nearly to the number 10 in 2010 and come down to more than 8 in 2011 From this figures we can see that the inventory does not make up noticeable proportion in the current asset of HaanJSC, so it seems that HaanJSC is truly a standard information technology service provider with low inventory level and also low level of the current liabilities.
The level of cash ratio and net working capital can also be a good measure of liquidity The cash ratio and the net working capital is 6.19 times and 7,629 (million VND) respectively These show a very good performance of the company in the terms of a small one They use very well the operating process and the neat structure of a small firm to ensure the high level of current liability As the scale of the company move larger and larger, they should be aware of more incurred long term assets and liabilities in order to maintain this healthy state.
The cost of capital is also a very important number to show the way the company doing the funding process in order to get their capital to do their business.
The cost of capital comprises of two components:
- The first one is the cost of debt.
- The second one is the cost of equity.
Since they are the only sources of funding in this company, the cost of capital will only be of these two figures.
Calculate the cost of debt
The cost of debt in the company is simply the effective rate that they are now bearing on their debt HaanJSC have a quite stable amount of debt in their capital, which accounts for 30% of all their capital that they are now possessing This is a very difficult times for the financial world, and it affects the companies as the lending rate for business in Vietnam was so high that anybody comes here for a plan to do business would shake their head, even my international professors that arrive in Vietnam to be the instructors in my class say the same things In this year 2012, the lending rate for some business sectors was reduced to the cap of 15%, which is still an extraordinarily high one compared to the world Borrowing anything from the banking system in Vietnam today is a situation that not many people can think of as a good source.
HaanJSC realizes this problem, and at the same time they had the very fortune to have a source of debt which agrees on an exceptional low rate of return as 1.1% a month, which can be interpreted as 13.2% a year approximately This is an extremely advantages of HaanJSC to have such a good source of debt to engage in the business funding process that they are now going through After accounting for the corporate tax rate, which is newly down to 25% (source: http://nif.mof.gov.vn), we can calculate the after-tax cost of debt for HaanJSC as: 13.2% (1-0.25) = 9.9%.
Calculate the cost of equity
The cost of equity of HaanJSC is calculated using the CAPM model which has the following formula:
E s : The expected return for a security
R f : The expected risk-free return in that market (government bond yield) β s : The sensitivity to market risk for the security
R M : The historical return of the stock market/ equity market
(R M -R f ) : The risk premium of market assets over risk free assets.
The risk-free return in our market is the government bond yield right now is 12.1%.
To calculate the market return for stock price, we use the VNIndex as the standard figures VNIndex figures will be collected on the first day of the month and the last of that month for the beta calculation For the market return, we just use the first day of the year with the last day.
The VNIndex tables and HaanJSC monthly return will be listed respectively:
Table 4: Return for the market and HaanJSC
VNI Jan Feb Mar Apr Thu Jun Jul Aug Sep Oct Nov Dec
HaanJSC Jan Feb Mar Apr Thu Jun Jul Aug Sep Oct Nov Dec
*Source: HaanJSC return figures and hsx.vn
The sensitivity of HaanJSC stock to the market calculated by using the Microsoft Excel software sees the result of 0.08, which means the HaanJSc stocks tend to varies very little according to the market (in which I use the VNIndex as the reference for the market).
The market return in a year is -31.15% (I also use the VNIndex as the reference for the market).
So, the cost of equity for HaanJSC using the CAPM model is calculated as:
3.2.2.3 The weighted average cost of capital:
After all, the cost of capital for HaanJSC is:
As the company is still not public yet, we use the book value of the debt and equity sources of funding to allocate the weight to the amount of funding sources.
The cost of capital is at the level of slightly higher than 9%, which is a truly good rate in the business community But if HaanJSC is trying to expand their business scale to serve as a payment system provider, they should be aware of the possible IPO, so that the market value will be the decisive factor and more than that because it is not possible for doing business as a large scale but still keep the mind of a small one