HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME CASES OF CONSTRUCTION COMPANIES

17 2.1 Financial statements – the important accounting information sources for investors to calculate accounting ratios.. Useful financial ratios can be refer as special and efficient to

HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME

CASES OF CONSTRUCTION COMPANIES

BY NGUYEN THI KIM THOA

E0600117

BARCHELOR OF BUSINESS (ACCOUNTING) HONS

HELP UNIVERITY COLLEGE

28 MARCH 2011

DECLARATION OF ORIGINALITY AND WORD COUNT

I hereby declare that this graduation project is based on my original work except for quotations and citations which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at Help

University College or other institutions The word count is 11828 words

NGUYEN THI KIM THOA

28th March 2011

ACKNOWLEDGEMENT

This project may not be efficient without the helping, support and encouragement of many people I wish to send this opportunity to thank all people who have helped me during the time of conducting this project

First of all, I would like to express my deep gratitude to my supervisor Dr Le Van Lien, International School, Vietnam National University Hanoi who has kindly helped and supported me in doing this research process I also would like to express my thank to Ms Sumathi , Help University College, who initiated the project and give so much instruction and support to this thesis

Additionally, I would like to thank all investors of 2 companies are Thanh Cuong Co., Ltd and Construction, Bridges and Roads No 17 JSC who participated in this survey in order to conduct this project I also would like to extend my special thanks to managers, accountants, my friends, and other people who have help me to carry out the survey I want to thank them for all their support, interest and valuable hints

Last but not least, I would like to express my deep appreciation to my family who

provided and supported me much in commentary which is very important for completing this project, made for me any chances to conduct this subject in any spare time

NGUYEN THI KIM THOA

HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME

CASES OF CONSTRUCTION COMPANIES

Accounting ratios are values of the relationships between 2 related accounts that appear

in the financial statements such as: income statement, balance sheet, cash flows

statement, and changes in equity They present a company condition in the previous time, and predict by how the company will operate in the future This research works to

evaluate the values of accounting ratios to make investment decisions By conducting of standard financial statements, calculating of accounting ratios and comparing these ratios

in variety of companies are a burning issue and crucial mission to investors As Vietnam

is a developing and urbanizing country, it is a benefit condition for construction industry

to grow This project aims to discover definitions of accounting or financing ratios also the calculations of these accounting, and then it shows how of accounting ratios affect on investor’s decision making The results of the study provide evidence to measure ratios and lastly it show out some recommendations and suggestions in applying accounting ratios in investment decisions to investors

TABLE OF CONTENTS

DECLARATION OF ORGINALITY AND WORD COUNT 1

ACKNOWLEDGEMENT 2

ABSTRACT………3

TABLE OF CONTENTS 4

LIST OF FIGURES 7

LIST OF TABLES 8

LIST OF ABBREVIATIONS 9

CHAPTER 1: INTRODUCTION 11

1.1 Research background 11

1.2 Problem statement 12

1.3 Objective and scope of the research 14

1.3.1 Objective 14

1.3.2 Scope 14

1.4 Research method 14

1.5 Struture of research……… ………15

CHAPTER 2: LITERATURE REVIEW 17

2.1 Financial statements – the important accounting information sources for investors to calculate accounting ratios 18

2.1.1 Balance sheet 19

2.1.2 Income statement 20

2.1.3 Cash flow statement 20

2.1.4 Statement of changes in equity 21

2.2 Value-relevance Literature: definitions of accounting ratios……….21

2.2.1 Liquidity ratios 22

2.2.1.1 Current ratio 22

2.2.1.2 Quick ratio 23

2.2.2.Profitability ratios 23

2.2.2.1 Gross profit magin 24

2.2.2.2 Net operating profit magin 24

2.2.2.3 Return on asset ratio 25

2.2.3 Activity ratio 25

2.2.3.1 Inventory turnover ratio 26

2.2.3.2 Account receivable turnover ratio 26

2.2.3.3 total asset turnover ratio 26

2.2.4 Debt ratio 27

2.2.4.1 Debt ratio 27

2.2.4.2 Debt to equity ratio 28

2.3 Disclosure of SWOT model analysis in using of accounting ratios 28

2.4 The importance and impacts of accounting ratios on making investment decision process 30

2.5 Disadvantges of using accounting ratios to mesure efficiency of the company 31

2.5.1 Impact of inflation……… ……….31

2.5.2: Window Dressing……… ………31

2.5.3 Product Line diversification… ………31

2.5.4 Differences in Accounting Policies……… ………32

CHAPTER 3: RESEARCH AND METHODLOGY 33

3.1 Aims of project……… 34

3.2 Research Methodology……… 35

3.3 Data sources, which includes……… 36

3.3.1 Primary data……… 36

3.3.2 Secondary data………36

3.4 Limitation……… 37

CHAPTER 4: CASE STUDY ANALYSIS …39

4.1 Introduction of 2 example companies……….39

4.1.1 Thanh Cuong Limited Company……… ……39

4.1.2 Introduction of Construction, Bridges and Roads No 17 Joint Stock Company………40

4.1.3 The management strutures of Thanh Cuong Co.,Ltd and XDCD 17 JSC… … 41

4.2 Presentation and explanation of the 2 companies’ development and financial statements……… 43

4.3 The facilities and developments of these 2 example companies………44

4.3.1.: Thanh Cuong Co., Ltd……… ………44

4.3.2 Construction, bridges and roads No 17, Joint Stock Company………44

4.4 The using of accounting method in conducting financial statements of these 2 companies……… 45

4.5 Missions of these 2 companies in the future……… ………45

4.6 Calculations of these 2 companies’ ratios……… …45

4.7 The attitude of investors to 2 example companies in investment……….… 56

CHAPTER 5: CONCLUSION AND RECOMMENDATION 58

5.1 Findings……… 58

5.2 Conclusion……… …59

5.3 Recommendation for computing the accounting ratio of Thanh Cuong Co., Ltd , XDCD 17 JSC……….,,,.60

REFERENCES……… ………,,, 61

APPENDIXES……… 64

APPENDIX A: ……….66

APPENDIX 1.A Translation of the above data in the picture 1.A into English……… 69

APPENDIX 2.A Translation of the above data in the picture 2.A into English 74

APPENDIX B……… 76

APPENDIX 1.B Translation of the above data in the picture 1.B into English… 77 APPENDIX 2.B Translation of the above data in the picture 2.B into English…81 APPENDIX 3.B Translation of the above data in the picture 3.B into English…85

LIST OF FIGURES, DIAGRAM, AND IMAGES

Figure 1 Financial statement 19

Figure 2 SWOT analysis model 29

Figure 3 Structure of management team in both example company 41

Diagram 1 Investment decisions of 10 investors in these 2 example companies 57

Image 1 64

Image 2 65

Picture 1.A The balance sheet of Thanh Cuong Co., Ltd as at 31 December, 2009 (data in Vietnamese language 66

Picture 2.A Income statement of Thanh Cuong Co., Ltd for the year ended 31st Decenber 2009( the data in Vietnamese language ) 72

Picture 1.B The data about fianance of Construction, Bridges and Roads No 17, JSC (in Vietnamese language) 76

Picture 2.B The balance sheet of XDCD 17 as at 31 December, 2009 (data in Vietnamese language) 79

Picture 3.B Income statement of XDCD 17 for the year ended 31st Decenber 2009( the data in Vietnamese language) 84

LIST OF TABLES

Table 1 46

Table 2 47

Table 3 48

Table 4 49

Table 5 50

Table 6 51

Table 7 52

Table 8 53

Table 9 54

Table 10 55

LIST OF ABBREVIATIONS

FDI Foreign direct investment

SOE Statement of Changes in owners’ equity (SOE)

EAT Earnings after taxes

XDCD 17 JSC Construction, Bridges and Roads No 17 Joint Stock Company

C.R Current ratio

QR Quick Ratio

GPMR Gross profit margin ratio

NOPR Net operating profit

ROAR Return on asset ratio

ITR Inventory ratio

ARTR Account receivable turnover ratio

TATR Total assets turnover ratio

D.R Debt ratio

DTER Debt to equity ratio

After event of joining the World Trade Organization (WTO) in 2007, Vietnam has

become increasingly opened and attractive economy It attracts more both foreign and domestic investors from all industries, especially construction fields To this industry, Vietnam’s economy becomes emerging market 2 years since joining WTO, the biggest advantage to the Real Estate and Construction Industry is FDI that has been rapidly increasing In the context of Vietnam that had been being in process of pushing up

modernize, because domestic capital resource had limited, rapidly increasing of FDI in Real Estate and Construction Industry has had significant role in urbanizing and

upgrading Infrastructure Today, many foreign investors and domestic investors are attracted by this industry because of its revenues and profits But the biggest problem to these investors is almost reflected by the question: how to make the best decisions in investment in order to maximize benefit and profit in this industry? One the best solution

is applying accounting ratios analysis to make decisions in the construction industry

An accounting ratio or financial ratio is a relative magnitude of two mathematical values that are chosen and got from financial statements of an organization Accounting or financial ratios may be used by company’s owners, managers, shareholders, investors, and a business’ creditors In the context of stocks market, financial ratios are used to

compare the efficiency and weaknesses among the variety of firms If stocks in an

organization are listed and traded in a financial market, the stock’s price in the market will be used in certain financial or accounting ratios

In general, many areas of an organization are reflected by accounting ratios, these results

of ratios are inherent parts of the financial statement analysis A business’s performance

is affected so much by these key factors; it can interpret financial information and

position of the company Moreover, these ratios also help investors know more about how the business is performing As a result, it is easier for investors to make best

decisions whether investing in or not in the company

In accounting, there are 3 methods of comparison ratios that are: comparisons of

accounting ratios between businesses, between different financial time periods of an entity, and between a significant firms and its industry average in which the firms

belongs to

Hence, if investors make decisions without accounting ratios analysis, it is very risky to invest in a new project Useful financial ratios can be refer as special and efficient tools

to many professional investors, managers, researchers, accountants on many approaches

of investment; it can help users having information to estimate potential, efficient

business as well as its risk in the future to make economic decisions

1.2 Problem statements

Accounting ratios calculations and attitude of investors in investment decisions making are the crucial aims of this project It will show the advantages and disadvantage of using

accounting ratios analysis to an organization, as well as their function on the decision of investors, users of financial statements, etc

To know how accounting ratios affecting an investor’s decision, let examine the role of accounting ratios to investor’s making decisions and establishing best strategies in doing business

Accounting ratios or financial ratios firstly provide information of a company about its: assets ( both current and noncurrent assets), liabilities (both long term and short term loan), owner’s equity, revenues or sales, income, expenses, profits or losses, cash flows, ability to pay debt, etc

Accounting ratios are known as a type of original information that is provided to

investors in construction industry Using accounting ratios is known as an indication to know how a business is performing In doing business, especially in supplying

construction materials firms, accounting or financial ratios are mostly important and effective tools in financial analysis of the market that help financial analysts know

voltage market, investors implement plans and make better decisions, managers and sellers apply suitable sale strategies that improve profitability, liquidity, financial

structure, leverage, etc In general, accounting ratios reflect mostly a business

performance in previous time, but they can predict, and show out lead indications of latent bad points to investors in the future For example, applying S.W.O.T analysis in consideration of comparative ratios analysis between 2 companies in supplying

construction materials industry that are Thanh Cuong co, Ltd, and XDCD 17 , JSC will help investors figure out quantity of these 2 companies From it, investors can evaluate

financial position of these companies Moreover, they can understand the risks they may

be facing in the future when investing in business

Therefore, accounting ratios are reliable information and mathematic figures where users and investors can lay their belief in making investment decision

1.3 Objectives and Scope of the Research:

1.3.1 Objectives:

 Consider whether accounting ratios analysis affects the investor’s decision

or not?

 The result of the use of accounting ratios analysis by investors in business

 Suggest some solutions to improve accounting ratios analysis that

investors take into this research to make investment decisions

1.3.2 Scope:

 Place involves to conduct this project ( 2 companies in construction

industry )

 Thanh Cuong Co., Ltd

 Construction, bridges, and roads, Joint Stock Company

 Object of the project: Investors

 Time period to do this project: From 28th October 2010 to 16 March 2011

1.4 Research method

Researches methods are used in this thesis are based on the practical research and investigation

 The author operates the survey of 10 investors (lenders) of the 2

companies: Thanh Cuong co., Ltd, and Construction, bridges, and roads, Joint Stock Company The surveys from different areas of accounting ratios that contain the information and evidence could help the investors of the 2 companies to make the best decision in investment This research follows qualitative method and literature method in which the data is collected from different areas of accounting ratios of examples companies

By analyzing of accounting ratios and publishing they to investors in these

2 companies, the investors could know the frequency of the accounting or financial ratios’ usage to have right decisions in doing business not only in these firms but also having a new look on investments in the construction industry

1.5 Structure of the research

There are five chapters that are as follow:

 Chapter 1: Introduction

 Chapter 2: Literature review

 Chapter 3: Research and methodology

 Chapter 4: Case study analysis

 Chapter 5: Conclusion and recommendation

Each chapter in the research has linked to another remain chapters in order to express the main point of view that the researcher want to present

The first chapter and the third chapter will conduct the background of problem to start up the main points of this project

The second chapter will face up with the theories, definitions, and formulas of financial statements, accounting ratios, SWOT analysis model, strong points, and weak points of accounting ratios

Chapter 4 will tell about some real and example cases that are played as a role of

applying literatures and formulas in calculations of accounting ratios that appear in chapter 2

And the last chapter will consist of the findings, conclusion, and recommendation after examining some example cases linked to the theories and definitions

CHAPTER 2: LITERATURE REVIEW

This chapter will present some definitions of accounting ratios By understanding

financial ratios or accounting ratios can help the investors know what kind and how much

of accounting ratios level they need to make efficient decisions in investment After that, SWOT model will be applied to evaluate advantages and disadvantages of using

accounting ratios

2.1 Financial statements – the important accounting information sources for investors to calculate accounting ratios

To investors, one of important things in decision making process is existence of quality information Significant number of this information comes from accounting information systems and from financial statements For almost companies, financial statements provide realistic and objective picture of realistic business condition In an organization,

if financial statements are understandable, in which accuracy is ensured Financial statements are always created and interpreted as a basis of comparisons Financial

statements as a main function of decision making, it is understandable that different users must know how to “read” those statements “Reading” contents of financial

statements provide whole number of different instruments and analyses procedures for understanding business After that, the process of accounting ratios analysis will be conducted that is based on the basis of the financial statements and financial information

in order to evaluate of the business’ wealth

Economic and political backgrounds around the world are not the same among

governments; this leads to that the national accounting standards are different among countries Decision No 15/2006 20th March 2006 of the Minister of Finance of Vietnam dictated financial reporting system of business containing both annual financial

statements and interim financial statements To construction industry, the Decision No.48/2006 14th September 2006 of the Minister of Finance of Vietnam has prescribed in recent years Under Vietnam Accounting Standards, the most significant financial

statements that should take into account when examining the entire entity quality are: balance sheet, income statement or profit and loss account, cash flow statement, and changes in owner’s equity statement These financial statements will be illustrated by the following figure:

FINANCIAL STATEMENTS

BALANCE

SHEET

INCOME STATEMENTS

CASH FLOWS STATEMENTS

CHANGE IN OWNERS

Figure 1: Financial statements

2.1.1 The balance sheet

The balance sheet of a company is one of the extremely essential and fundamental

financial statements that is conducted annually or financial time period to present the company’s financial position This statement consists of basic elements are: assets, liabilities, and owner equity This structure is very important that reflects the correlation and interdependence of assets, liabilities and capital By reading and understanding this financial statement, users including investors can examine and measure the future scenes

and future prediction Moreover, this statement serves users to have knowledge about an organization’s liability for tax authorities, employees, internal also external investors, banks, suppliers, and etc In this statement, an accounting standard must be followed is that total assets equals to liabilities plus owner’s equity

2.1.2 Income statement

Income statement or profit and loss account represents business' performance for a particular moment of time period Basic elements of an organization’s income statement are: revenues, expenses and the difference between revenues and expenses that can be profit or loss In some context, the income statement is the loveliest statement that

attracts investors in making the investment decision By analyzing and understanding accounting data comes from this statement, investors can get the financial information about revenue, cost of goods sold, interest, expenses, gross profit, net profit etc that are used to calculate the accounting ratios as a tool to draw up the financial situation as well

as the quality of an organization

2.1.3 Cash flow statement

Cash flow statement presents cash into or out of a company "Cash" is used here in the term of not only cash in hand but also cash transactions of bank deposits or cash

equivalents This change of cash amount is usually measured during a specified, finite period of time By conducting of cash flow statement, investors can use this data for calculating other areas that give information on the business' value and situation In Vietnam, cash flow statement is conducted under Vietnamese Accounting Standards called No 24 (VAS 24).Cash flow statement includes accounting data related to three

main activities that are: operating activities cash flows, financial activities cash flows, and investing activities cash flow

2.1.4 Statement of Changes in owners’ equity (SOE):

The statement of changes in owners’ equity (SOE) can be referred to the statement of changes in retained earnings, or the statement of changes in capital stock This financial statement has some important aspects in common with the profit and loss account or the income statement because it shows all transaction which refers to profit or loss for

particular time period This statement consists of two main parts that explained by words: paid-in capital and retained earnings

2.2 Value-relevance Literature: definitions of accounting ratios

A financial ratio or accounting ratio is a measurement that indicates condition of a

business, for example the ratio between the annual sale or revenue and inventory or between its net sales and its average total assets The main source of these ratios is from the company's profit & loss account or income statement and balance sheet that contain all kinds of accounting data belonging to that business These accounting ratios really help to bring those details to light and identify the financial strengths and weaknesses of the company to mark up business’ strategies in the future

The process of examining accounting ratios will show the significant relationship with full meaning among individual values in the financial statements of business From the analyzing of ratios, investors will know how to compare these ratios in order to consider the results of business activities to make better investment option in relation to the entire

economy, industry sector, the main competitors in range of the industry, and the previous performance of the business they are taking into Mention to this research; let concern to

4 accounting ratios such as: liquidity ratios, profitability ratios, activity ratios, and debt ratios

2.2.1 Liquidity ratios

Liquidity ratios are accounting or financial ratios that reflect condition of a firm's ability

to fulfill its short-term loans, financial debts or liabilities (current liabilities) The

expanding interim credit to the firm is interested in liquidity ratio particularly Two common ratios in liquidity ratios that the project want to share are current ratio (or

working capital ratio) and the quick ratio

2.2.1.1: Current ratio (Working Capital Ratio)

With:

 Current Assets equal to net of contingent liabilities on notes receivable

 And Current Liabilities equal to all debt due within one year of statement data

Mostly a higher current ratio of a company could reduce short-term creditors’ risk , thus almost investors tend to invest in the firm that has a higher current ratio compare

to the other one in the same industry In converse, shareholders are interested in the

company that has a lower current ratio than another one in order to make sure that the firm’s assets are used efficiently to make the business develop

2.2.1.2: Acid-test ratio (Quick ratio)

The current assets sometime refer to a disadvantage of a company because its inventories may are some items that have low liquidated ability and ambiguous liquidation values, for example banks or investors is not much interested in inventory of the company when make investment Therefore, the acid test ratio or the quick ratio is the best solution to measure liquidity of a company without inventory in the current assets This ratio can be calculated by following formula:

2.2.2: Profitability ratios:

In the financial statement of a company, profitability ratios are closely linked with

income ratios, which focus on the overall quality of management and control relating to the returns generated on revenues and investment These measurements present the success of a business in creating profit This thesis concentrates in 3 different

measurements of accounting ratios are: Gross profit margin on net sales, net operating profit, and return on assets ratio

2.2.2.1 Gross Profit margin on Net Sales ratio:

This ratio can be called with different names like gross profit ratio or gross margin Gross profit margin can be talked as the first measurement for a business Without doing well at this benchmark, there is no point looking at any other thing This is a significant and important ratio because it evaluates both the efficiency and pricing policy of a business, it also tells about profit which is the final destination of all the strategies and decisions of a company, and it is computed by the below formula:

= Gross Profit margin on Net Sales Ratio Net Sales - Cost of Goods Sold

Net Sales

2.2.2.2 Net Operating Profit Ratio

The net operating profit ratio is computed as:

EAT

= Net Profit on Net Sales Ratio

Net Sales

The Net Profit on Net Sales Ratio provides a primary assessment of net profits related to investment Once your basic expenses are covered, profits will rise disproportionately greater than sales above the break-even point of operations

2.2.2.3 Return on assets ratio:

After conducting financial statement of a firm, this ratio is a measure efficiency of the firm's assets that are being used to earn profits It is defined as:

A company's pricing strategy and its cost controlling are measured by the net profit ratio, thus differences in competitive strategy and product mix among businesses leading the profit margin is different But the comparison among businesses has little efficiency, the net profit margin ratio is mostly applied for internal comparison

2.2.3 Activity ratios:

Activity ratios present business sales per another account of asset In these ratios, the most common asset accounts used are inventory, accounts receivable, and total assets The efficiency of a firm in using its resources is reflected by the activity ratios “Since most companies invest heavily in accounts receivable or inventory, these accounts are used in the denominator of the most popular activity ratios” The activity ratios consist of

3 common ratios: inventory turnover, account receivable turnover, and total assets

turnover that are marked below:

2.2.3.1 Inventory turnover ratio

If a business wants to be more profitable and benefit, it must be manage and control its inventory efficiently The best measure of a business’ inventory usage is the inventory turnover ratio or inventory utilization ratio, which is calculated by the computation

Inventory Turnover ratio =

Total Annual Sales or Cost of Goods Sold

─────────────────────────────── Inventory Cost

In this ratio, using of cost of goods sold in the numerator is a more accurate indicator of inventory turnover ratio, and shows a more direct comparison with other companies Because sale prices are different among companies, which would lead to overstate the actual inventory turnover

2.2.3.2 Account receivable turnover ratio

Accounts receivable is the total amount of money due to an organization that will be received in the future for products or services sold to customers on an open credit

account Hence, the accounts receivable turnover ratio shows how and ability quickly an organization can collects that amount is owed to it It is computed by the formula:

Accounts Receivable Turnover ratio = Total Credit Sales

────────────────

Accounts Receivable

2.2.3.3 Total asset turnover ratio

This accounting ratio measures the return on each currency invested in assets of a

business It is computed by the net sales divided by the average total assets

Where:

Average Total Assets =

Assets at Beginning of Year + Assets at End of Year

Average Total Assets

2.2.4 Debt ratios or financial leverage ratios:

Debt ratios or financial leverage ratios focus on the ability of a firm to pay its long-tem liability These ratios are distinguished considerably with liquidity ratios which mostly concern with the assets and the short-term liabilities of a company while debt ratios refer

to the aspects of the company’s using its capacity to focus on long-term debt It includes some following ratios such as:

2.2.4.1 Debt ratio

Debt Ratio is an accounting ratio that refers to the portion of a firm's assets, which are had by debt This ratio is started up by the total debt including current debt plus non current debt divided by the total assets containing current assets plus non current assets

2.2.4.2 Debt- to- equity ratio

The debt-to-equity ratio is calculated by the total debt divided by the total equity:

2.3 Disclosure of SWOT model analysis in using of accounting ratios

SWOT model analysis is a model with the sum of Strengths, Weaknesses, Opportunities and Threats This model sometime is considered as a very important tool for auditing the overall goal position of a business and its environment When a company has indentified the key strategic issues, they feed into business objectives, particularly marketing and accounting objectives SWOT analysis can be applied in relation with other tools for audit and analysis

Implementing SWOT model in accounting ratios examining, all of the strengths and weakness of each accounting ratio have been appreciated in details In a new investment

or new business project, investors use this model to judge the efficiency and quality of the organizations that they are taking care Analyzing of accounting ratios follow SWOT model will help investors easier to see the importance and value of accounting

information in the business’ financial statement to make the best choice in investments The SWOT analysis model is illustrated by the following figure:

Figure 2: SWOT analysis model

Let’s check and apply SWOT analysis for accounting ratios:

- Low cost

- Different of accounting policies, capital sizes, etc among companies

- enable to deal with the changes of business over time period

-Changes in technology, prices

of goods sold, etc Thus it is leading the little meaning of

- Easy to understand financial statements

comparison

-More understanding about the efficiency and risky of business in the future

- Rapidly increasing prices in conducting financial statements and accounting ratios

- To make a better decision

in investment - Increasing competition

Figure3: applying SWOT analysis model in accounting ratios

2.4 The importance and impacts of accounting ratios on making investment decision process

To investors, accounting ratios are highly essential profit tools in financial analysis that help investors implement plans to improve the business liquidity, profitability, financial structure, financial leverage, and interest coverage In fact, accounting ratios present

mostly on past operations, but they can also predict and provide lead indications of potential risk in investments in the future

2.5 Disadvantages of using accounting ratios to measure efficiency of the company:

To business, using accounting ratios may consist of some weak points that are:

2.5.1 Impact of Inflation

The first bad point of using accounting ratios as criteria to make decision is the impact of inflation in the market In conducting of financial statements, accounting ratios reflect mathematic figures in a specific period of time In fact, these data are affected much by inflation so accounting ratios may not present exactly If there is occurring of inflation, Return on Capital Employed or the Return on Assets of a company may be very high because of less investment in fixed assets Ratios may not depict the true condition of a firm in such circumstance of currency market For example, fixed assets are always measured at historical cost while earnings are measured in current currency terms

2.5.2: Window Dressing

The window dressing is mentioned as disadvantage to approach of accounting ratios, because these ratios reflect the position of a business performance at a specific point of time For instance, an organization can make year-end adjustments in order to result in favorable ratios such as: current ratio, operating profit ratio, debt-equity ratio, and so on Thus, it is not exactly to accounting ratios in this case

2.5.3 Product Line diversification

The third weakness of accounting ratios is product line diversification It means that detailed ratios for different products, divisions, market segments etc may not be available

to the users in order to make a judgment “For example, loss in one product may be set off by substantial profits in another product line But, the overall net profit ratio may be favorable”

2.5.4 Differences in Accounting Policies:

The last weak point of accounting ratios that this thesis wants to show out is differences

in accounting policies Why these distinguish are causing of disadvantages to accounting ratios because different companies follow different accounting policies for instance applying different rate and methods of depreciation to assets “Straight-jacket comparison

of ratios may lead to misleading results”

CHAPTER 3: RESEARCH AND METHODLOGY

This chapter consists of 4 elements, they are:

3.1 Aims of the project

The studies and literature of this thesis focus on the topic of financial statements,

calculations of some accounting ratios, and the role of these ratios on making a suitable investment decision to investors that have been mentioned in chapter 2 Based on these discussions, computing of accounting ratios of some business involved to this thesis has deeply affected on the investors’ decision By this, the researcher wants to compare the accounting ratios analysis to answer some following questions:

Whether calculation of some accounting ratios can be one of the elements that play the role in making the decisions to investors?

What are the results of these alternatives on the decision making process after

comparing of accounting ratios between 2 example companies?

Some suitable accounting ratios might be considered?

Why is the accounting ratios analysis and calculation essential to the company?

In fact, investors’ decision can be the same or different depending on their information and their capability to invest to the business Their choices are depended by many aspects such as accounting standards, accounting information, business sectors, industry sectors, policies of a country, and so on When the company declares or publics its financial statements and accounting ratios, investors will know about efficiency as well as bad quality, or opportunities as well as risks that the company will face in the future or in the next investments Thus investors will have more reliability to decide whether to invest to new project of the business or not

Since the essential functions of accounting ratios are more and more crucial and

significant value to the investors, this part is conducted with the aim that this can support investors evaluate the efficiency and values of using accounting ratios information in investment and in doing business

3.2 Research methodology

Coming from the usage and declare the calculation of accounting ratios from financial statements analysis of Vietnam construction companies, the research will show and evaluate the usage and apply also the roles of the accounting or financial ratios from the financial statements analysis of a firm A research can be carried out by many ways; however this project applies two methods to emphasize the role of using accounting ratios to investors that are qualitative study and literature study These 2 methods merely are the best choices to implement in this case because they relate to theories as well as definitions of some accounting ratios, after that the thesis will apply these theories and definitions to some real cases of 2 companies: Thanh Cuong co,, Ltd, and Constructions, Bridges and Roads No 17, JSC Hence, value relevance of accounting ratios of financial statements analysis in making decision to investors could be measured clearly

In this project, data and accounting information got from qualitative study and literature study are analyzed to assess the usefulness and efficiency of each example accounting ratio calculation to investors in order to make the best decision at a real company in investments

3.3 Data sources

To complete this thesis, the process of collecting data and accounting information to conduct financial statements and accounting ratios is an important and essential part Data of accounting ratios is collected for this project can be categorized into two

elements: the primary data and the secondary data

3.3.1 Primary data:

In some circumstances, primary data is applied as efficient data source because by using

it, the researcher can collect data by distributing self-administered questionnaire to

investors in investments Primary data is collected and got directly from surveys,

interviews, or questionnaires Thus, when the research process mentions to quantitative study, it is very useful and efficient to use primary data to conduct However, this project implements qualitative study and literature study so the secondary data is smarter

solution

3.3.2 Secondary data:

Secondary data is data that are declared by an organization different from the one that originally collected and published the data This data can be selected from newspaper, magazines, websites, etc In this project, the secondary data is collected from accounting information of the 2 example companies After conducting this project, both author and readers can get a lot of knowledge about accounting ratios that are also basic linked to accounting field and financial field from different viewpoint of different researchers around the world The author also uses information source via the internet to conduct this

3.4 Limitations

This part depicts some limitations of this research that are considered:

 The first limitation of this project is limitation in categories of accounting ratios This thesis only focuses on four accounting ratios about: liquidity, profitability, activity, and debts ratios Therefore, this project cannot express all aspects, functions also disadvantages of other accounting ratios that are not mentioned

 The second limitation in this study is that most of analysis on this research depended on some points of view of the 2 construction companies’ investors in the field of selling construction materials so it can be aggressive and difficult for other investors to implement these ratios in the whole industry

 Although using secondary data from the 2 example businesses brings many advantages, it is also the major limitation Because in aim at making the company’s performance looks lighter in different contexts of banking or taxing, the data of financial statement may be used a lot of times with different data Therefore, it is not accuracy in using of the exactly financial statements because

of their accounting information’s truth

 Furthermore, this project does not show the minimum and maximum values of these accounting ratios Therefore, reader and investors cannot clarify whether the investors had made the best alternatives to investment decisions

 Besides, this work process is designed under a tight college timetable and

working pressure Hence, it is not a perfect and standardized research to investors and users

 Finally sometime the cause of lacking of knowledge about accounting ratios of investors who are mentioned to do this research, some investors did not show their attitude to this survey or even they refuse to use their spare time to present decisions, and some other investors answer that they are willing to accept to make decision in investment continuously as a fate in doing business

CHAPTER 4: CASE STUDY ANALYSIS

This chapter refers the 2 example companies to clarify the theories and literature are : Thanh Cuong Company Limited, and Constructions, Bridges, and Roads No 17 Joint Stock Company This chapter includes a background of the 2 companies as well as its implement of accounting ratios to impress investors The calculation of accounting ratios

in the 2 businesses is also done by this chapter to make comparison between efficiency of investments and operation Finally, the investment decisions of 10 investors in 2 example companies will be depicted by a diagram

4.1 Introduction of the 2 example companies:

4.1.1 Introduction of Thanh Cuong co., Ltd

Name of the company: THANH CUONG COMPANY LIMITED

Abbreviation: THANH CUONG CO., LTD

Date of establishment: 25th December, 2008

Head office: Ben Pha Chem, Hong Ngu, Thuy Phuong, Tu Liem, Hanoi, Vietnam Tel: 84-4 38385011

Fax: 84-4 37578475

Email: thanhcuong.co.ltd@gmail.com

Tax code: 0103133192

Account number: 3100.201.010.801 Bank of Vietnam Agriculture and Rural

development – Tuliem Branch

Business sectors: