DEBTS AND PROFITABILITY AN EXAMINATION OF MANUFACTURING FIRMS LISTED ON VIETNAM STOCK EXCHANGE

Specifically, it is aimed at: examining the relationship between Short-term debt, Long-term debt, Total debts, and Net Profit Margin NM and Return on Equity ROE.. In a study of listed fi

International School of Business

-

TRUONG HANH DUYEN

DEBTS AND PROFITABILITY

AN EXAMINATION OF MANUFACTURING FIRMS LISTED

ON VIETNAM STOCK EXCHANGE

SUPERVISOR: Dr PHAM QUOC HUNG

Ho Chi Minh City – Year 2012

Acknowledgement

I would like to gratefully acknowledge the enthusiastic supervision of Dr Pham Quoc

Hung during this work I thank Prof Nguyen Dinh Tho for the technical discussions on

the spectral response model, optical measurements and relevant discussions Staff of

International School of Business (ISB) – University of Economy Ho Chi Minh is thanked

for numerous supports I am grateful to all my friends and classmates from Mbus 1 – ISB

for sharing science materials and knowledge during the years I study there and for their

continued moral support there after From the staff, Mr Duong Minh Toan and Mr Ho

Sze Ming are especially thanked for their care and attention Finally, I am forever

indebted to my husband for his understanding, endless patience and encouragement when

it was most required

Abstract

The ability of companies in determining suitable financial policies to make investment

opportunities is one of the most principal factors for the companies’ growth and

progression Adopting a debt policy or a capital structure is considered as a momentous

decision that influences the companies’ value The determination of a company’s capital

structure constitutes a difficult decision, one that involves several and antagonistic

factors, such as risk and profitability That decision becomes even more difficult, in times

when the economic environment in which the company operates presents a high degree of

instability Therefore, the choice among the ideal proportion of debt and other resources

can affect the value of the company, as much as the return rates can In this study, I tried

to examine the influence of debts from Vietnam manufacturing firms regarding the factor

profitability The necessary data, which are used in this work are the 3 consecutive years’

financial reports provided by the 200 respective firms The Ordinary Least Squares

(OLS) method was employed in the estimation of a function relating the net margin and

return on the equity (ROE) with the indexes of long-term, short-term and total debts, and

also with the total of owner’s equity The results indicate that short-term debt presents a

negative impact on net margin The study recommends that managers should be careful

while using short term debts as a source of finance

CHAPTER 1: INTRODUCTION

This chapter includes three sections The first section introduces Vietnam Context in

recent years, which is also the background of the research The second is some briefs of

manufacturing firms in Vietnam and its vital role in the whole economy, thus the research

is to focus on this sector The third section goes straightly to research objective as a

conclusion for two sections above and an opening for following chapters

1.1 Vietnam Context:

Vietnam’s transition, from a centrally planned economy to a market economy and from

an extremely poor country to a lower-middle-income country in less than 20 years, is

now a case study in many development textbooks But Vietnam’s other transition, to

becoming an industrialized and modern economy by 2020, has barely begun The latest

Socio-Economic Development Strategy (2011-2020) goes on to identify the country’s

key priorities to meet this ambitious target: stabilize the economy, build world-class

infrastructure, create a skilled labor force, and strengthen market-based institutions

Meeting these aspirations will not be easy The country has experienced bouts of

macroeconomic turbulence in recent years: double-digit inflation, depreciating currency,

capital flight, and loss of international reserves eroding investor confidence Rapid

growth has revealed new structural problems The quality and sustainability of growth

remain a source of concern, given the resource-intensive pattern of growth, high levels of

environmental degradation, lack of diversification and value addition in exports, and the

declining contribution of productivity to growth Vietnam’s competitiveness is under

threat because power generation has not kept pace with demand, logistical costs and real

estate prices have climbed, and skill shortages are becoming more widespread

Until a few years ago, Vietnam was one of the world's hottest emerging markets Now it

faces an urgent task: fix a beleaguered banking system or watch its economy continue to

slip behind faster-growing neighbors Piles of bad loans following the financial crisis

have dragged down growth in Vietnam and left banks weakened and reluctant to lend,

lending interest rate sometimes climbed up to exceedingly 21% per annually in crisis

period Economists warn that Vietnam has entered a dangerous cycle where banks,

saddled with bad debts, are unwilling to lend, making it harder for businesses to invest

That feeds into slower growth, which in turn makes it harder for companies to pay back

loans, again harming the banks In a report of government in July 2012, from early 2012

Vietnam recorded about 30,000 of firms are in financials difficulties, temporarily

stopping business and declaring bankruptcy

1.2 Manufacturing firms in Vietnam:

Vietnam’s manufacturing sector grew at a compound annual growth rate (CAGR) of

9.3 percent from 2005 to 2010, and labor productivity in the sector increased at

3.1 percent a year Because this sector accounts for around 30 percent of overall GDP,

this rapid growth made a substantial contribution to Vietnam’s expansion during this

period Within manufacturing, some subsectors performed especially well Motor vehicle

production grew at an annual rate of 16 percent during these five years, ready-made

clothes by 12.9 percent, and electrical equipment by 12.0 percent

The manufacturing industry plays a vital role in Vietnam’s economy by providing

employment opportunities and accelerating its growth Simultaneously, liberalization,

removal of investment restrictions, and semi-privatization of the economy have greatly

boosted the country's industrial growth rate The main manufacturing sectors in Vietnam

are textiles and garments, food and beverages and leather and wood The Government has

implemented various programs to transform Vietnam’s economic structure from

agriculture-driven to industry-driven and reduce its import dependency The development

of export processing and industrial zones is just one of the initiatives that bolstered the

country's industrial growth The Government has also offered incentives to investors in

social sectors such as health and education However, since liberalization, the

Governments share in the overall industrial investment has been declining, thereby

enabling higher participation of private and foreign companies

Financial and R&D (research and development) support, as well as the allotment of land

in industrial zones, are likely to encourage stakeholders in the manufacturing industry to

increase their investments While sectors such as textiles, leather, food and beverages,

automobiles, chemicals and energy were resilient even during the economic downturn, a

booming food processing sector, an unsaturated pharmaceuticals market and a dynamic

garments sector are expected to add value to the industrial production in Vietnam The

Government has retained the majority of the stake in energy, finance, banking and

telecom and shielded the agriculture, food and automobiles sectors from international

competition Higher private and foreign investment had enhanced the growth rate of

sectors such as transportation, real estate, communication and mining However, the

country does not permit foreign investments in national defense, security, and health and

it places conditional restrictions on investments in telecommunications, postal network

and airports The Vietnamese Governments initiatives and specific incentives for the

industrial sector are likely to increase exports and drive the economic growth

Liberalization and the removal of various restrictions generating sector-specific

investment opportunities are expected to attract more private and foreign participants to

manufacturing industry

Overall, with an aim to become industrialized country by 2020, Vietnam’s manufacturing

industry has been undergoing major changes as a result of government initiatives, WTO

commitments and industrial liberalization Industrial development strategy for the period

2011-2020 to focus on the development of Textiles, Leather, Chemicals, Agro

processing, Electronics, Automotive, Information and Communications technologies are

expected benefit from the industrial development strategy Due to improving business

climate, increased trade and investment cooperation, low labor cost and Vietnam is

expected to emerge as a major manufacturing hub in the ASEAN region Hence, the

vitalization of firms in this industry is very important for the growth of country During

crisis period, many firms in sector have been badly affected resulted from high leverage

in capital structure The companies, well overcome such bad cycle of economy, generally

do not only well prepare for business operation to maintain profitability, but also less

involve in debts by optimal capital structure

1.3 Research Objective:

Which the relationship between debts and profitability? Does the fiscal benefit makes

debt more attractive than other funding resource? Does the risk associated to the increase

of the debt can, or should, be taken by the firm? Should the financing decisions of the

firms follow a single pattern, irrespective of the country where it operates? Those are

frequently asked questions that are significantly present in the processes related to

decision of capital structure of any firms

Decisions of that type tend to become even more difficult when the economic conditions

of the country where the firm operates already are typically more uncertain In the

Vietnamese case, specifically, the presence of two aggravating factors is observed: first is

the high interest rates practiced in the financial market, and second is the instability of the

economy before the international conjuncture Those two factors play distinct roles;

however, they produce similar effects under the scope of uncertainty

Any firm finances its operation and investment by either debt or equity and mostly both

The firms might like to raise finance from their internal resources, instead of the bank

loans and debt issues Thus the external equity financing is their last option Conversely,

many organizations use debt financing to reduce their cost of capital so that they can

lower the “Weighted Average Cost of Capital (WACC)P0F

1

P

” as it will allow the firms to have wider extent of acceptance for capital budgeting options

There’s many argument on the relationship of leverage (ratios of debts in asset structure)

and business performance before As a point of departure, the Modigliani and Miller

(M&M) (1958) stated: With perfect capital markets and no taxes or information

asymmetry, debt financing has no effect on value However, in a subsequent paper,

M&M (1963) eased the conditions and showed that under capital market imperfection

where interest expenses are tax deductible, firm value will increase with higher financial

leverage Later, Miller (1977), elaborated a new revision, analyzing the subject of the

taxes paid by the investors, concluding that the corporate tax benefits of debt are reduced

by the tax penalty due to personal taxation Models based on impact of tax, suggest that

profitable companies should have more debts However, increasing debt results in an

increased probability of bankruptcy Hence, the optimal capital structure represents a

level of leverage that balances bankruptcy costs and benefits of debt finance

1

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted All capital sources - common stock, preferred stock,

bonds and any other long-term debt - are included in a WACC calculation All else equal, the WACC of a firm increases as the beta and rate of return on

equity increases, as an increase in WACC notes a decrease in valuation and a higher risk

Since all firms’ managers try to get the optimal capital structure with least possible cost,

this led in 1984 for the pecking order theory to emerge The theory began from Myers

(1984) states that there is no optimal capital structure for a firm, according to this theory,

since there is asymmetric information between managers and shareholders Therefore to

minimize this asymmetric information, firms prioritize their sources of finance (from

internal financing to equity) according to the principle of least effort or of least

resistance, retained earnings are better than debt and debt is better than equity But there

is another suggestion for case of asymmetric information; managers, directly involve in

daily operations of business, thus could master detailed positions of businesses and what

are actually being happened in the firms; whilst shareholders mainly rely on the reports

from managers, and could be disguised by the beautiful and vivid wordings of those

reports Hence, to make manager be more responsible for their jobs, the firm owners

prefer to get more debts rather than equity; repayment obligation of debts and interest

occurred push managers work harder to get more profitability in the bottom line of

income reports

Due to the importance of the issue and the impact of the financial structure or choice of

funding sources on the performance of companies, there are many previous studies and

various researches lead us to verify the relationship between capital structures or debts

and the performance of companies in different markets generally, but not many for

emerging markets and particularly for Vietnam financial market which is characterized as

small and unstable Furthermore, management of capital structures in Vietnam is

typically different from others due to components such as high cost of debt, unstable

policy and political issues of a social republic country

Unlike previous studies, this paper focuses deeply in the relationship between debts and

profitability of listed manufacturing firms on Vietnam Stock Exchange Specifically, it is

aimed at: examining the relationship between Short-term debt, Long-term debt, Total

debts, and Net Profit Margin (NM) and Return on Equity (ROE) This study will be

significant to managers and shareholders in deciding proportion of debts and each debt

types to finance their operations and to maximize firm value which then contributes to the

economic development of Vietnam

1.4 Research structure:

This thesis comprises five chapters

Chapter 1: “Introduction” generally introduces the subject area interest with defined

problems, research questions, research objectives, and sources of information to be

collected for the research

Chapter 2: “Literature Review” summarizes concepts and theories relating to debts,

profitability and the relationship between them From such reviews, basic theories for

studying will be synthesized to develop an initial research model and hypotheses used for

the research

Chapter 3: “Research Methodology” introduces the approach method of this research

through four sub-sessions including research design, variables definition, samples

collection and method of data analysis

Chapter 4: “Empirical Results & Discussion” reports the analysis results and meaningful

figures

Chapter 5: “Implications & Conclusions” discusses the implications of the results and

findings in session four, limitations are also drawn; based on which conclusions and

recommendations are provided

Some appendix for detailed outputs from SPSS will be put at last papers for references

CHAPTER 2: LITERATURE REVIEW

In this chapter, theoretical background and review on previous studies are presented,

including 5 sections The first and second section is some popular definitions of debts and

profitability The third presents the relationship of debts and profitability The forth is

theoretical framework, whilst the last describes the hypotheses development for this

research

2.1 The concept of debts:

There are various measures of debts, which can be classified as accounting based

measures, market-value measures and quasi-market value measures Since market values

of leverage may be difficult to obtain, accounting based measures are often applied as

proxies The use of debt, or a loan, in business operation is to increase sales and profit

Companies have to be careful with their use of financial leverage as too much can lead to

serious financial problems and even bankruptcy

Debt includes the firm's current liabilities which are the obligations the firm intends to

pay off in one year or less, generally seen as current liabilities in balance sheet like short

term bank loan, accounts payables and accruals Debt also includes long-term debt which

has a maturity of more than one year such as mortgages, long-term loans for other

purposes or even long-term prepaid amounts etc, and recorded in non-current liabilities of

balance sheet

The debt ratio compares a company's total debt to its total assets, which is used to gain a

general idea as to the amount of leverage being used by a company Total debts might be

replaced by short term or long term debts in the ratio or total assets might be replaced by

current or non current assets to get different views of how debts fund the firms’ assets,

the portion of debts in constitution of assets The lower the percentage, the less leverage a

company is using and the stronger its equity position In general, the higher the ratio, the

more risk that company is considered to have taken on, but could be compensated by

higher return

Another measure of a company's financial leverage is calculated by dividing its total

liabilities by stockholders' equity indicates what proportion of equity and debt the

company is using to finance its assets, called debt to equity ratio Sometimes

only interest-bearing, short-term or long-term debt is used instead of total liabilities in the

calculation

Rajan & Zingales (1995) suggest that the choice of measure should be based on the

objective of the analysis In their view, the ratio of total debt to capital, where capital is

defined as total debt plus equity i.e ratio of total debts to total assets can be seen as the

best accounting based proxy for leverage

2.2 The concept of profitability:

Profitability ratios are a class of financial metrics that are used to assess a business's

ability to generate earnings as compared to its expenses and other relevant costs incurred

during a specific period of time For most of these ratios, having a higher value relative to

a competitor's ratio e.g comparison between company A and company B or the same

ratio from a previous period or comparison profit of year 2010 with year 2011 is

indicative that the company is doing well

Every firm is most concerned with its profitability One of the most frequently used tools

of financial ratio analysis is profitability ratios which are used to determine the

company's bottom line and return to its investors Profitability measures are important to

company managers and owners alike Any business has outside investors who have put

their own money into the company; the primary owner certainly has to show profitability

to those equity investors Popularly, listed firms have to publicly announce the business

performance periodically

Profitability ratios show a company's overall efficiency and performance We can divide

profitability ratios into two types: margin ratios and return ratios Ratios that show

margins represent the firm's ability to translate sales dollars into profits at various stages

of measurement Ratios that show returns represent the firm's ability to measure the

overall efficiency of the firm in generating returns for its shareholders

Margin Ratios:

• Gross Profit Margin looks at how well a company controls the cost of

its inventory and the manufacturing of its products and subsequently passes on the

costs to its customers

• Operating Profit Margin is a measure of overall operating efficiency, incorporating all

of the expenses of ordinary, daily business activity

• Net Profit Margin shows how much of each sales dollar shows up as net income after

all expenses are paid For shareholders and investors, this ratio might be the most

important, as it give them a tough view of how well their businesses are at the last

• Cash Flow Margin is an important ratio as it expresses the relationship between cash

generated from operations and sales; measures the ability of a firm to translate sales

into cash

Returns Ratios:

• Return on Assets (also called Return on Investment) measures the efficiency with

which the company is managing its investment in assets and using them to generate

profit

• Return on Equity is perhaps the most important of all the financial ratios to investors

in the company It measures the return on the money the investors have put into the

company

• Cash Return on Assets ratio is generally used only in more advanced profitability

ratio analysis It is used as a comparison to return on assets since it is a cash

comparison to this ratio as return on assets is stated on an accrual basis

Grout and Zalewska (2006) indicated some other measures of profitability including NPV

(net present value), IRR (internal rate of return), ARR (accounting rate of return), ROS

(return on sales), and concluded that IRR and ARR can be used to identify whether a

company is earning an excess return Although in the context of the ARR the necessary

adjustments to asset values are not usually made, at least in principle, the ARR is able to

identify excess returns and will be exactly equal to the IRR in some cases However these

measures are more suitable to measure returns of project rather than normal business

operations, thus they will not be focused in this study

2.3 Relationship between debts and profitability:

Studies showed contradictory results about the relationship between debts in capital

structure and firms performance (profitability)

In a study of listed firms in Ghana Stock Exchange (GSE) during a five-year period, Abor

(2005) examined the relationship between capital structure and profitability, and found

that Short-term and Total Debt are positively related with firm's ROE, whereas

Long-term Debt is negatively related with firm's ROE Then in 2007, Abor’s research on small

and medium-sized enterprises in Ghana and South Africa again indicated that long-term

and total debt level is negatively related with performance

Similarly, Arbabiyan and Safari (2009) investigated the effects of capital structure on

profitability by using 100 Iranian listed firms from 2001 to 2007 and found that Short

term debts and Total debts are positively related to profitability proxy by ROE which

indicate a negative relation between Long term debts and ROE

While examining the relationship between capital structure and performance of 167

Jordan firms during 1989 - 2003, Zeitun and Tian (2007) found that capital structure have

a significant and negative impact on the firm’s performance measures in both the

accounting and market measures, debt level is negatively related with performance It

means higher debts causes lower profits

In a similar study on microfinance institutions in sub-Saharan Africa, Coleman (2007)

found that high leverage is positively related with performance proxy by ROA and ROE

Husnan (2001) described that the use of debt statistically significant to the change in the

value of non-multinational companies’ ROE, while it is not significant to the

multinational companies

However, the research made by Harjanti and Tandelilin (2007) to all manufacturing

companies listed in Jakarta Stock Exchange from 2000 to 2004 indicated that profitability

which was proxy by ROE, basic earning power (BEP), and gross profit ratio had negative

significance to leverage

Based on Ebaid (2009) research, capital structure choice decision, in general terms, has

weak-to-no influence on the financial performance of listed firms from 1997 to 2005 in

Egypt as one of emerging or transition economies By using three accounting-based

measurements of financial performance which are return on assets (ROA), return on

equity (ROE), and Gross Margin, the empirical tests come with the result that capital

structure (particularly Short term debts and Total debts) have a negative impact on an

organization’s performance which is measured by ROA Apart from that, capital structure

(including short-term debt, long-term debt and total debt) have no significant impact on

an organization’s performance which is measured by ROE and Gross margin

Jensen and Meckling (1976) argued that the conflict between shareholders and lenders

has the effect of shifting risk from shareholders to lenders and of appropriating wealth in

their favor as they take on risky investment projects (asset substitution) Hence,

shareholders, and managers as their agents, are prompted to take on more borrowing to

finance risky projects Lenders receive interest and principal if projects succeed, and

shareholders appropriate the residual income; however, it is the lender who incurs the

loss if the project fails Shareholders, though, while enjoying increased wealth in good

periods, tend to ignore a decline in profitability in bad times This is due to the fact that

unfavorable consequences are passed onto lenders because of shareholders' limited

liability status Therefore, the oligopolistic firms, in contrast to firms in competitive

markets, would employ higher levels of debt to produce more when opportunities to earn

higher profits arise In corporate finance, the agency costs theory supports the use of high

debts, and it is consistent with the prediction of the output maximization hypothesis

Valeriu and Nimalathasan (2010) pointed out capital structure and its impact on

profitability: a study of listed manufacturing companies in Sri Lanka The result shows

that debt to equity ratio is positively and strongly associated to all profitability ratios

(gross profit ratio; operating profit ratio; and net profit ratio) except return on capital

employed and return on investment (ROI)

Pratheepkanth (2011) tested the relationship of capital structure (ratios of debt and equity

over fund) with financial performance of firms listed on Sri Lanka Stock Exchange from

2005 – 2009, indicated that there is a weak positive relationship between gross profit and

capital structure and at the same time, there is a negative relationship between net profit

and capital structure

Luper and Isaac (2012) examined the impact of capital structure on the performance of

manufacturing companies in Nigeria The annual financial statements of 15

manufacturing companies listed on the Nigerian Stock Exchange were used for this study

which covers a period of five years from 2005-2009 Multiple regression analysis was

applied on performance indicators such as Return on Asset (ROA) and Profit Margin

(PM) as well as Short-term debt to Total assets (STDTA), Long term debt to Total assets

(LTDTA) and Total debt to Equity (TDE) as capital structure variables The results show

that there is a negative and insignificant relationship between STDTA and LTDTA, and

ROA and PM; while TDE is positively related with ROA and negatively related with PM

STDTA is significant using ROA while LTDTA is significant using PM The work

concludes that statistically, capital structure is not a major determinant of firm

performance

Nour (2012) investigated the impact of capital structure on firm performance The study

used fifth performance measures (including return on equity – ROE, return on assets -

ROA, earning per share - EPS, market value of equity to the book value of equity -

MBVR and Tobin’s Q) as dependent variables and four capital structure measures

(including short term debt to total assets - SDTA, long term debt to total assets – LDTA

and total debt to total assets - TDTA, and total debt to total equity - TDTE) as

independent variable The investigation is performed using panel data procedure for a

sample of 28 listed companies the Palestinian Stock Exchange (PSE) over the period of

2006 - 2010 The results showed that firm’s capital structure had a positive impact on the

firm’s performance measures, in both the accounting and market’s measures, and

statistically significant with TDTA except MBVR was significant with TDTA and with

SDTA Finally, the study findings suggest equations to determine the impact of the

various debts on the firm performance

A study of Nima, Mohammad, Saeed, & Zeinab (2012) examined the relationship

between capital structure and firm performance of Tehran Stock Exchange Companies is

investigated between the years 2006 to 2011 The study uses three performance measures

(including Gross Profit Margin, Return on Assets and Tobin’s Q) as dependent variable

and three capital structures (including long term debt short term debt and total debt ratios)

as independent variable The study reported a significant relationship between dependent

and independent variable, except long term debts with gross profit margin

2.4 Theoretical Framework:

The theoretical framework is constructed subsequent to the literature review Derived

from the literature surveyed, the following theoretical framework is designed to facilitate

the research It depicts the relationship between profitability and its explanatory

variables

Variables used for the analysis include profitability and leverage ratios Dependent

variable in this study is profitability, which is measured by profit ratios including return

on equity (ROE) and net margin ratio (NM) The independent variables, which are the

explanatory variables, are measured by ratios of short-term debt to total assets (SDTA),

long-term debt to total assets (LDTA), total debts to total assets (TDTA) and total debts

to total equity (TDSE)

2.5 Hypotheses Development:

From literature review above, we see there are many different arguments on relationship

between debts and profitability, or different debt types cause different relationship The

object of this study is to indentify the impact of respective debt types to the profitability

of manufacturing firms listed on Vietnam Stock Exchange If the debts influence the

firm's profitability, the correlation between debt and firm's profitability can be expected

Hypotheses for this study are developed based on the literature review and the actual

concepts in Vietnam financial market

As a result of a rapid growth but bad control in the past, Vietnam faced the crisis with

high inflation (double digits) and weakened banking system The increase in key interest

rates resulted in a sharp decrease in money market and credit growth; high cost of capital

also slowed down both domestic production and consumption In the market, race in

mobilization and breaking cap interest rates happened popularly and frequently Though

the state bank require commercial banks to comply with the cap rates, but exceeding cap

interest rates still exist Liquidity troubles in banking system also affected lending

capacity of banks; it’s really difficult and costly for firms to source funds for business

operation Consequently, lending rate sometime climbed up to 25% per annual, an

unimaginable rate in any other markets

Compared to ideal return on investment/ equity ranging from 10% - 20% or net profit

margin of around 5%, sourcing fund from external is the last options of business owners/

managements Bearing such high interest rate absolutely deteriorates profitability So, we

argue that debts influences profitability negatively Thus, the hypotheses are:

• HR 1 R: There’s negative relationship between Short-term Debt and Net Margin

• HR 2 R: There’s negative relationship between Long-term Debt and Net Margin

• HR 3 R: There’s negative relationship between Total Debt and Net Margin

• HR 4 R: There’s negative relationship between Short-term Debt and ROE

• HR 5 R: There’s negative relationship between Long-term Debt and ROE

• HR 6 R: There’s negative relationship between Total Debt and ROE

From the hypothesis recruited, 2 models for dependent variables to be described as

• NM = βR 0 R−R RβR 1 RSDTAR R −R RβR 2 R LDTAR R− βR 3 RTDTA − βR 4 RTDSER R+R RεR i

• ROE = αR 0 R−R RαR 1 RSDTAR R −R RαR 2 R LDTAR R− αR 3 RTDTA − αR 4 RTDSER R+R RεR j

CHAPTER 3: RESEARCH METHODOLOGY

Chapter 2 reviewed literature and proposes hypotheses and research model Chapter 3

will present how the research was implemented It discusses the methodology used to

identify the impact of debts and profitability of listed manufacturing firms in Vietnam It

outlines the research design adopted, identification of variables, sampling method and

procedure of data analysis

3.1 Research Design:

This research work adopted an ex-post facto design (also called Causal Comparative

Research) and used data from financial statements of manufacturing companies listed on

the Vietnam Stock Exchange from 2009 - 2011 This type of design was used because of

the availability of audited financial statements of the sampled companies Audited

financial statements are reliable as auditors certify them

In this experimental research, the impact of debts on profitability was tested through

regression model

Figure 3.1: Research Process Inflow Chart

3.2 Variables Definition:

The idea of writing this research was to know the impact of the use of debt to companies’

profitability However, if the data collected from audited reports of different firms with

different size, debt and profit of these firms can not be compared directly To make data

in every sample corresponding to each other, the ratios of debts and profitability was used

instead of raw figures of debts and return amount

(1) Ratio of Short – Term Debts to Total Assets (SDTA)

(2) Ratio of Long – Term Debts to Total Assets (LDTA)

(4) Ratio of Total Debts to Shareholder’s equity (TDSE)

Define research problem

Review concepts and theories

Review previous research findings Formulate hypotheses

Dependent variables:

Return on equity (ROE) measures the rate of return on the ownership interest

(shareholders' equity) of the common stock owners It measures a firm's efficiency at

generating profits from every unit of shareholders' equity (also known as net assets or

assets minus liabilities) ROE shows how well a company uses investment funds to

generate earnings growth

ROE = Net income/ Shareholder’s Equity

Net margin (NM), the ratio of net profits to revenues for a company or business segment,

typically shows how much of each dollar earned by the company is translated into profits

NM = Net income/ Revenue

Both ROE and NM have numerator is net income Net income stands in the bottom line

of income statement, is the profit after being deducted by all costs and popularly denoted

as net profit after tax (NPAT)

Independent variables:

SDTA = short - term debt (current liabilities) to total assets The portion of debt

that is payable within one year This data falls under current liabilities on the company balance sheet;

LDTA = long - term debt (fixed/ non - current liabilities) to total assets: Liabilities

those are due to be repaid after more than one year This is inclusive of bonds and long-term loans;

TDTA = total debt (total liabilities) to total assets: It is the combined amount of

current liabilities and long-term liabilities It can be found on the balance sheet as "Total Liabilities”; and

TDSE = total debt (total liabilities) to total equity

3.3 Samples Collection:

This research paper investigates the relationship between debts in various types including

short term debts, long term debts and total debts and the firms’ profitability including