The impact of capital structure on firm performance of listed companies in HNX

The results indicate that firm performance, which is measured by return on asset ROA, return on EquityROE and earning per share EPS have negative relationship with short term debt ratio

TABLE OF CONTENTS

ABSTRACT iii

ABBREVIATION iv

LIST OF TABLE v

LIST OF DIAGRAMS vi

CHAPTER 1: INTRODUCTION 1

1.1 Rationale 1

1.2 Research objective: 2

1.3 Research methodology: 2

1.3.1 Research model 2

a Pooled OLS: 3

b Fixed Effects Model: 3

c Random Effects Model: 4

1.3.2 Operational Research Models and Variables 4

a Dependent variables: 4

b Independent variables and its calculations: 6

1.4 Scope of research 10

CHAPTER 2: LITERATURE REVIEW 11

2.1 Conceptual Framework 11

2.1.1 Capital Structure 11

2.1.2 Optimal Capital Structure 12

a Theoretical Framework 12

b Empirical Studies about relationship between Capital Structure and Firm performance 14

CHAPTER 3: RECENT SITUATION OF INDUSTRIAL COMPANIES LISTED IN HNX 18

3.1 Introduction to 112 industrial companies listed in HNX 18

3.1.1 Classification of 112 industrial companies listed in HNX 18

3.1.2 Evaluation of several financial situations 20

3.1.3 Analysis of firm performance 23

3.1.4 Analysis of capital structure 29

CHAPTER 4: EMPIRICAL RESULT 32

4.1 Descriptive statistics 32

4.2 Correlation analysis 33

4.3 Finding and analysis 35

4.3.1 ROA 36

4.3.2 ROE 39

4.3.3 Q Tobin’s 42

CHAPTER 5: DISCUSSION AND RECOMMENDATION 45

5.1 Discussion: 45

5.2 Limitations of the study: 48

5.3 Recommendation: 50

CHAPTER 6: CONCLUSION 51

REFERENCES 51

APPENDIX 54

ABSTRACT

The study investigates the relationship between capital structure and firm performance The investigation has been performed using panel data procedure for a sample of 112 Vietnamese listed companies working in the industrial field

on the HNX during the period of five years from 2010 to 2014 The study uses three performance measures (including return on equity, return on asset, Tobin s Q) as dependent variable The two capital structure measure (including leverage, short term debt) as independent variable Size, inflation ratio, tax expenses and age are control variable

The results indicate that firm performance, which is measured by return on asset (ROA), return on Equity(ROE) and earning per share (EPS) have negative relationship with short term debt ratio (SDTA), leverage (LEVERAGE) as independent variable Q Tobin’s reports that there is no relationship between short term debt (SDTA) as well as leverage (LEVERAGE) and this variable

ABBREVIATION

Pooled OLS Pooled ordinary least square

EBIT Earnings before interest and tax

LIST OF TABLE

Table 1.1: The formula for variables calculation……….… 9

Table 3.1: Classification of 112 industrial companies listed in HNX…….… 19

Table 3.2: Tangible Asset Valuation 2010 – 2014 (VNDbil)… ………23

Table 3.3: Q Tobin’s valuation 2010 – 2014 …… ………28

Table 3.4: Capital structure of companies 2010 - 2014 ……… ……30

Table 4.1: Descriptive statistics data of Dependent Variables 32

Table 4.2: Descriptive statistics data of Independent Variables 33

Table 4.3:Correlation of Return on Assets (ROA) as Dependent variable 34

Table 4.4:Correlation of Return on Equity (ROE) as Dependent variable….…35 Table 4.5: Correlation of Q Tobin’s as Dependent variable ……… ……35

Table 4.6: Result equation for ROA….……… ………37

Table 4.7: Final result equation for ROA….……… 38

Table 4.8: Result equation for ROE….……… ….40

Table 4.9: Final result equation for ROE.……… ….41

Table 4.10: Result equation for Q Tobin's……… ….43

Table 4.11: Final result equation for Q Tobin's… ……… ….44

LIST OF DIAGRAMS

Diagram 3.1: The average of Total Assets in different groups 2010 – 2014 ….21 Diagram 3.2: The average of ROA ratio in different groups 2010 – 2014 ……24 Diagram 3.3: The average of ROE ratio in different groups 2010 – 2014… …26

CHAPTER 1: INTRODUCTION 1.1 Rationale

After the “Doi Moi” economic reform in 1986, Vietnam becomes a oriented market economy that led to the replacement of the centrally-planned economy and the market-based mixed ones Based on this reform, the Vietnamese market can integrate with the global economy Several outstanding events occurred in recent years Vietnam became the WTO’s

socialist-150th official member following the formal approval of the National Assembly of the Socialist Republic of Vietnam in 2007 In November 2010, after attending three negotiations, Vietnam officially joined the TTP negotiation In comparison with WTO, participating in TPP can give a deeper commitment to Vietnam, especially in some special fields that do not contain

in WTO

These events gave a large number of potential developments for Vietnam economy due to market expansion, technology improvement, labor force rising, and international trading efficiency One of the indication is significant growing in the number of new established domestic companies However, the number of companies increase does not have the same meaning with the increase in the effectiveness of business’ operating activities According to the Department of Statistics, only in December 2014, there are

7944 enterprises having difficulty in suspending operation, up to 30.2% from the previous month This figure includes 2088 enterprises having registered for suspending the operation and 5856 decommissioned business pending for closing code or without registered One of the major reasons for poor performance in many Vietnamese businesses is the unreasonable decision in financing capital that is closely related to the mix of debt and equity

As a result, the number of research investigating the impact of capital structure on firm performances is increasing due to the financial problem in business

1 How capital structure impact on industrial firm performance?

2 Suggest optimal structure for industrial companies

1.3 Research methodology:

1.3.1 Research model

Regarding the purpose of the study is quantifying the impact of capital structure

on the performance of industrial listed on HNX, the regression model for panel data has been used The primary reason for using panel data is that this model provides more information, little multicollinearity between the variables, more efficient as well as offers opportunity for controlling unobserved individual and/

or time specific heterogeneity, which may be correlated with the included explanatory variables

We used Pooled OLS, FEM and REM for estimation of the data A balanced panel data set is used which has equal number of observations for each (cross-section) and best model selection, REM versus FEM, Hausman specification test and Breusch-Pagan Lagrange Multiplier test

The general form of Panel Data Model:

Yt = m + β0 + β1 × X1it X2it + + βn * Xnit + ut

Where: i is the ith cross section, and t is the time t

Y: The dependent variable

X: Independent variables

a Pooled OLS:

This is the simplest model that does not consider the difference between the research firm; this model is rarely used The model can be used when the groups to be pooled are relatively similar or homogenous Level differences can be removed by 'mean-centering' (similar to Within-Effects Model) the data across the groups (subtracting the mean or average of each group from observations for the group) The model can be directly run using Ordinary Least Squares on the concatenated groups If the model yields large standard errors (small T-Stats), this could be a warning flag that the groups are not all that homogenous and a more advanced approach

to Random Effects Model may be more appropriate

b Fixed Effects Model:

FEM was developed from the Pooled when adding the difference in the company, and the correlation between the residuals of the model and the independent variables In detail, the model measure differences in intercepts for each group (calculated using a separate dummy variable for each group) The approach is also called "Least Squares Dummy Variable" method for this reason This is an OLS model with dummy variables to control for group differences, assuming constant slopes (coefficients) for independent variables and constant variance across groups Within-Effects Model avoids using dummies by mean-centering all modeled variables, including the dependent, thus increasing degrees of freedom

c Random Effects Model:

This approach leverages the differences in the variance of the error term to model groups together, assuming constant intercept and slopes It means that RAM has some differences in the relationship between the residuals and the independent variables of the model Compared to FEM, REM is more complex to estimate

In this study, the optimal model applied will find by using the Breusch-Pagan Lagrange Multiplier test for random effect and Hausman test between FEM and RAM

d Hausman test Hypothesis:

Ho: Random effects model is appropriate

H1: Fixed effects model is appropriate

1.3.2 Operational Research Models and Variables

In this study is to quantify the impact of the capital structure to the performance

of industrial companies listed on HNX authors use regression models for panel data The dependent variables that are used return on assets (ROA), return on equity (ROE) and Tobins’Q (TOBINSQ) as accounting measures for evaluating the firm performance; and independent variable are the long – term debt ratio (LEVERAGE), short – term debt ratio (SDTA) as capital structure Also is used for variables of firm size (SIZE), firm age (AGE), assets tangibility (TANG), inflation (INF) and tax (TAX) as control variables

a Dependent variables:

Return on assets (ROA) can be seen as an indicator of how profitable a company is relative to its total assets This number indicates the efficiency management in using and allocating the total assets of a company to maximize its net income The assets of the company are comprised of both debt and equity Both of these types of financing are used to fund the operations of the company The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest in net income The figure gives an indication of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will have a lower return on assets ROA for public companies can vary substantially and will be highly dependent on the industry This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company

Return on Equity (ROE) refers to the amount of net income returned as a percentage of shareholders equity ROE measures a corporation's profitability by revealing how much profit a company generates with the money shareholders has invested It is more than a measure of profit; it is

a measure of the efficiency of a firm at generating profits from each unit

of shareholder equity A rising ROE suggests that a company is increasing its ability to generate profit without needing as much capital It also indicates how well a company's management is deploying the shareholders' capital In other words, the higher the ROE, the better Falling ROE is usually a problem Some industries tend to have higher returns on equity than others As a result, comparisons of returns on equity are most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context Tobins’Q ratio devised by James Tobin of Yale University, Nobel laureate

in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement

costs In detail, a low Q (between 0 and 1) means that the cost to replace a firm's assets is greater than the value of its stock This implies that the stock is undervalued Conversely, a high Q (greater than 1) implies that a firm's stock is more expensive than the replacement cost of its assets, which implies that the stock is overvalued This measure of stock valuation is the driving factor behind investment decisions in Tobin's model

b Independent variables and its calculations:

Leverage refers to the amount of long – term debt using to finance firms’ assets, which contributes to the sources of capital Most companies use debt to finance operations The cost of mobilizing capital from long – term debt is interest fee, which always is charged by the lender to the borrower Most of the businesses usually find the way to raise capital by debt because the interest rate often is lower than the dividend paid to stockholders Moreover, interest is a fixed cost (which can be written off against revenue) a loan allows an organization to generate more earnings without a corresponding increase in the equity capital requiring increased dividend payments (which cannot be written off against the earnings) Therefore, a company increases its leverage because it can invest in business operations without increasing its equity A firm with significantly more debt than equity is considered to be highly leveraged However, while high leverage may be beneficial in boom periods, it may cause serious cash flow problems in recessionary periods because there might not be enough sales revenue to cover the interest payments

Shot – term debt ratio (SDTA) indicates the likelihood that a company will

be able to deliver payments on its outstanding short-term liabilities term debt describes liabilities that are due to be paid within one year In this context, short-term debts include liabilities with a repayment time frame of less than one year from initial issue (such as commercial paper)

Short-rather than the sum of all debt payments (final and interim) due within a coming 12-month period Using an accounting metric called a short – term debt ratio, it is possible to gauge whether a company will be able to meet its short-term debt obligations If a company fails to meet its obligation of paying short – term debt at maturity, it will face with much liquidities and financial problems As a result, short – term debt also effect in the firm’s operation

Tangible assets refer to assets in a physical form that include both fixed assets, such as machinery, buildings, and land, and current assets, such as inventory Certain types of assets receive special treatment for accounting purposes For tangible assets with an anticipated useful life of more than one year, a company uses a process called depreciation to allocate part of the asset's expense to each year of its useful life, instead of allocating the entire expense to the year in which the asset is purchased A company needs to buy a tangible asset for the manufacturing activities and making products This component also is an important factor that should be concerned

Firm size is measured by the total assets of the selected firm This variable

is mentioned in this research because the firms with big size have better performance than others in normal way The reason is that they have a good reputation, broaden market that can help them have large number of customers As a result, the sale revenue will increase It can be seen as a commercial advantage of big companies

Age of a company is measured by the number of years since the establishment This variable is collected because of the life cycle’s positive impact A company has long operating time can have high reputation, many customers, and good key stakeholders It can help this company perform better operation than others

Tax (business tax) is stated by corporate tax or company tax on the income

or capital of some types of legal entities that imposed by the national authorities Tax is calculated from the EBT (earning before tax) with the proportion of this amount Tax is the important obligation of every company like debt; however, there are several differences between tax and interest expense Tax is collected after deducting the interest expenses Moreover, the company with negative EBIT (earnings before interests and taxes) or EBT will not have to pay the tax; in contrast, the company has to pay interest expenses in every case even bad performance result

Inflation rate reminds to the rate at which the general level of prices for goods and services is rising; and, subsequently, purchasing power is falling Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum Inflation will make input not only materials price increase but also selling price rise In the case of high inflation occurs, many companies can lose their customers and have much difficulty in their business activities

The table below will illustrate the calculation as well as the unit of measurement for each variable

Variables Formula Units

ROA ROA = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 × 100% Percentage

Table 1.1: The formula for variables calculation

(Source: Collected by the researcher) The model is described as follow:

ROA i,t = c + β 0 × LEVERAGE i,t + β 1 × SDTA i,t + β 2 × SIZE i,t + β 3 × AGE i,t

+ β 4 × TANG i,t + β 5 × INF i,t + β 6 × TAX i,t + u

ROE i,t = c + β 0 × LEVERAGE i,t + β 1 × SDTA i,t + β 2 × SIZE i,t + β 3 × AGE i,t

+ β 4 × TANG i,t + β 5 × INF i,t + β 6 × TAX i,t + u

TOBINSQ i,t = c + β 0 × LEVERAGE i,t + β 1 × SDTA i,t + β 2 × SIZE i,t + β 3 ×

AGE i,t + β 4 × TANG i,t + β 5 × INF i,t + β 6 × TAX i,t + u

In these models:

ROA i,t : return on assets of firm i in year t

ROE i,t : return on equity of firm i in year t

TOBINSQ i,t : Tobins’Q of firm i in year t,

LEVERAGE i,t : leverage ratio of firm i in year t

SDTA i,t : short – term debts ratio of firm i in year t

SIZE i,t : size of firm i in year t

AGE i,t : age or number of activity years of firm i in year t

TANG i,t : total tangible asset of firm i in year t

INF i,t : inflation rate of firm i in year t

TAX i,t : tax paid by firm i in year t

1.4 Scope of research

In term of research scope, this study primarily concentrates on investigating recent decisions in the financing mix of capital among selected enterprises The scope of timing is set during 5 – year period from 2010 to 2014 fiscal year All companies are analyzed through their financial statements that provided by IPA Asset Management Company The data collected from 5 financial years included a statement of profit and loss, statement of financial position and statement of cash flows These financial statements were requested to audit as well as publish in the official website of companies and other stakeholders such as investment companies, security companies

CHAPTER 2: LITERATURE REVIEW

2.1 Conceptual Framework

2.1.1 Capital Structure

According to en.wikipedia.org, – the most famous encyclopedia in the world, capital structure refers to the way a corporation finances its assets through some combination of equity, debt or hybrid securities A firm's capital structure is then the composition or 'structure' of its liabilities Several studies have been conducted to examine the role of debts The first study was carried out by Modigliani and Miller (1958); Modigliani and Miller (MM) Theory illustrates that under certain key assumptions, firms value is unaffected by its capital structure The two professors theorized that the market value of a firm is determined by its earning power and the risk of its underlying assets, and that its value is independent of the way it chooses to finance its investments or distribute dividends The basic MM proposition is based on the following key assumptions:

• No taxes

• No transaction costs

• No bankruptcy costs

• Equivalence in borrowing costs for both companies and investors

• Symmetry of market information, meaning companies, and investors have the same information

• No effect of debt on a company's earnings before interest and taxes

However, this theory was criticized on the ground that the perfect market does not exist in the real world Later on, Modigliani and Miller (1963) introduce taxes into their model and show that the value of a firm increases with more debt due to the tax shield This study is known as Modigliani and Miller's Tradeoff

Theory of Leverage The theory recognizes the tax benefit from interest payments - that is, because interest paid on debt is tax deductible, issuing bonds effectively reduces a company's tax liability Paying dividends on equity, however, does not The thought of another way, the actual rate of interest companies pay on the bonds that they issue is less than the nominal rate of interest because of the tax savings Studies suggest, however, that most companies have less leverage than this theory would suggest is optimal

2.1.2 Optimal Capital Structure

The optimal capital structure indicates the best debt-to-equity ratio for a firm that maximizes its value In a simple way, the optimal capital structure for a company

is the one that proffers a balance between the debt and equity thus minimizing the firm’s cost of capital Theoretically, debt financing usually proffers the lowest cost of capital because of its tax deductibility However, it is seldom the optimal structure for as debt increases; it increases the company’s risk

The effect of different capital structure and differing business risk are reflected

in a firm’s income statement In practice, firms tend to use capital structure, preferred stock and common equity with which the enterprise plans to raise needed funds Since capital structure policy involved a strategic tradeoff between risk and expected a return, the optimal capital structure policy must seek a prudent and informed balance between risk and return The firm must consider its business risk, tax positions, financial flexibility and managerial conservatism

or aggressiveness While these factors are crucial in determining the target capital structure, operating conditions may cause the actual capital structure to differ from the optimal capital structure

a Theoretical Framework

Other theories that have been advanced to explain the capital structure of firms include Pecking Order Theory and Agency Cost Theory These theories will be discussed in turn below

Pecking Order Theory was first suggested by Donaldson in 1961 and it was modified by Myers and Majluf (1984) In corporate finance, Pecking Order Theory postulates that the cost of financing increases with asymmetric information Firms prioritize their sources of financing, first preferring internal financing, and then debt, lastly raising equity as a “last resort” As have been known, financing comes from three sources: internal funds, debt and new equity (equity would mean issuing shares that meant 'bringing external ownership' into the firm) The existence of information asymmetries between the firm and likely finance providers causes the relative costs of finance to vary between those different sources For instance, internal sources of finance where the funds provider is the firm will have more information about the firm’s prospects, risk and value than outsiders investors - debts holders and equity holders in detail; thus, these outsiders investors, will expect a higher rate of return on their investments Furthermore, asymmetric information also affects the choice between internal and external financing and the issue of debt or equity This information favors the issue of debt over equity as the issue of debt signals the boards’ confidence that an investment is profitable and that the current stock price is undervalued The issue of equity would signal a lack of confidence in the board and that they feel the share price is over-valued An issue of equity would, therefore, lead to a drop in share price Therefore, the Pecking Order Theory suggests that: internal financing is used first; when that is depleted, then debt is issued, and when it is no longer sensible to issue any more debt, equity is issue Agency Cost Theory was first developed by Jensen and Meckling (1976) and Myers (1977) This is a theory concerning the relationship between the principals (shareholders) and their agents (firm’s managers) Agency costs are related to the conflicts of interests between these two groups According to the theory, shareholders are the only owners of the firm; thus the task of firm’s directors is

to ensure that shareholders’ interests are maximized More specifically, shareholders wish for management to run the company in a way that increases shareholders’ long-term return and thus maximizes firm’s profit and cash flow

However, the problem is that the interests of the shareholders and managers are never exactly the same Managers, who are decision-makers, tend always to pursue their interests instead of those of the shareholders They may wish to grow the firm in ways that maximize their personal power and wealth, although

it may not be the best interest of shareholders It will lead to the fact that managers may spend the free cash flow available to fulfill his need for personal interests instead of returning it to the shareholders Hence, the agency costs consist of two main parts: first is the cost inherently associated with using an agent (e.g., the risk that agents will use organizational resource for their benefits) The second part of the cost will arise when the principals (shareholders) want to make sure that their agents act in their interests The more the principals want to control managers’ decisions, the higher the cost will be This part of the cost may include costs of techniques used to mitigate the problems that associated with using an agent In some cases, to gather more information on what the agent is doing (e.g., the costs of producing financial statements) or employing mechanisms to align the interests of the agent with those of the principal (e.g compensating executives with equity payment such as stock options)

b Empirical Studies about relationship between Capital Structure and Firm performance

Several studies have been conducted on the relationship between Capital Structure and Firm performance Each study has its perspective and method to examine this relationship In the following part, the author will represent some studies that are directly related to this research

A research paper named “An Empirical Analysis of Capital Structure on Firm’s Performance in Nigeria” was conducted by Taiwo Adewale Muritala It

examined the optimum level of the capital structure through which a firm can increase its financial performance using annual data for ten firms spanning a five-year period This research used ROA as a dependent variable that measured

the firm performance The results from a root test showed that all the variables were non-stationary at level The study hypothesized a negative relationship between capital structure and operational firm performance However, the results from Panel Least Square (PLS) confirmed that asset turnover, size, firm’s age and firm’s asset tangibility are positively related to firm’s performance Findings provided evidence of a negative and significant relationship between asset tangibility and ROA as a measure of performance in the model The implication

of this is that the sampled firms were not able to utilize the fixed asset composition of their total assets judiciously to impact positively on their firm performance Hence, this study recommended that asset tangibility should be a driven factor to capital structure because firms with more tangible assets are less likely to be financially constrained

Another study on the topic “The Effect of Capital Structure on the Performance of Palestinian Financial Institutions” was conducted by two

professional authors in January, 2012 They are Dr Suleiman M Abbadia and

Dr Nour Abu-Rub, who come from the Faculty of Administrative & Financial Science, Arab American University, Jenin, Palestine Different from the above research, this paper focused on a more detailed group of organization – the Financial Institutions only The purpose of the study was finding the relationship between the market efficiency and capital structure of Palestinian financial institutions It established a model to measure the effect of capital structure on the bank efficiency measured by ROE, ROA; and Total deposit to assets, total loans to assets total loans to deposits were used to measure capital structure It is found that leverage has a negative effect on bank profits, an increase in each ROA and Total Deposit to Assets increase bank efficiency Two authors also tested the effect of the above variables on bank market value measured by Tobin's Q It was also found that Leverage has a negative effect on market value of the bank, a positive and strong relationship between market value and ROA and bank deposits to total deposits After analyzing collected data on the variables of the model using OLSQ method

Zeitun and Tian (2007) in their study Capital structure and corporate performance: Evidence from Jordan that investigated the impact of capital

structure on the firm performance for 167 Jordanian companies during 1989 to

2003 The results suggest that capital structure has a negative impact on accounting measures of firm performance evaluation significantly Also, they indicate that short-term debt to total assets ratio (SDTA) has significantly negative impact on the market measure of Jordanian companies’ performance evaluation that was given by Tobin Q ratio

In April, 2013, Mr Ogebe, Ojah Patrick from St Augustine College of

Education, Project TIME Akoka Lagos made a research about The Impact of Capital Structure on Firm Performance in Nigeria This study sought to

investigate the impact of capital structure on firm performance in Nigeria from

2000 to 2010 The author considered the impact of some key macroeconomic variables (gross domestic product and inflation) on firm performance The traditional theory of capital structure was employed to determine the significance

of leverage and macroeconomic variables on firm’s performance Besides, the study made a comparative analysis of the selected firms that are classified as highly and lowly geared firms setting a leverage threshold of above 10% as being highly geared A static panel analysis was used to achieve the objectives of the study Using fixed effect regression estimation model, a relationship was established between performance (proxied by the return on investment) and leverage of the firms over a period of ten years The results provided strong evidence in support of the traditional theory of capital structure which asserts that leverage is a significant determinant of firm performance A significant negative relationship is established between leverage and performance From the findings, he strongly recommended that firms should use more of equity than debt in financing their business activities; this is because in spite of the fact that the value of a business can be enhanced with debt capital, it gets to a point that it becomes detrimental

In Vietnam, there are several studies about the relationship between capital

structure and firm performance In the recently research, namely The impact of

capital structure, size and revenue growth to firm’s performance of Fisheries

companies listed on the Vietnamese Stock Exchange, the author had used the

panel data regression to conduct the relationship among these variables ROE

was represented for dependent variable, which measured firm performance

during the period of 6 years from 2008 to 2013 This research had shown that

among four factors studied; only short-term debt ratio has an impact on the

performance of the firm, the percentage factor for long-term debt while the three

rest factors: the size and growth of firm have no impact on ROE with statistical

significance at the 5% level It can be seen from the statistic model that 15.99%

of the changes in ROE can be explained by short-term debt of the firm

CHAPTER 3: RECENT SITUATION OF INDUSTRIAL COMPANIES LISTED

IN HNX 3.1 Introduction to 112 industrial companies listed in HNX

3.1.1 Classification of 112 industrial companies listed in HNX

According to the Decision number 486 – TCTK/CN, the General Statistic Office had made the rule of classifying industrial companies into several groups In the most general classification method, industrial companies can be categorized into two big groups that contain group A and group B Group A is the manufacturing businesses with the role of producing materials, which is the basis for re – expansion Group B contains the companies producing consumer goods, which will sell for end consumers In the total number of 112 listed companies in this research, there are 72 companies belongs to Group A; and the remaining 42 of Group B

In detail, it also can be divided into a smaller group According to this Decision, the business working on industrial segment also can be classified into 13 different fields of industrial companies However, among 112 observations, they are only classified into seven different groups The table below will describe the classification of these companies into small groups

ID Name of Each Group Numbers of

companies

2 Manufacture of machinery and metal products 27

Table 3.1: Classification of 112 industrial companies listed in HNX

(Source: Collected and classified from the subsector list)

As can be seen from the table, two sectors occupied the highest number of companies in total are Production of construction materials and Manufacture of machinery and metal products, which have 35 and 27 companies respectively The Production of construction materials contains exploration and creation of materials for the basic construction industry For example, they can be the extraction of sand, rocks, erosion and creation of cement, bricks, lime stones, concretes Regarding the Manufacture of machinery and metal products, this sector has a decisive impact on the rehabilitation engineering and technical equipment for the entire national economy It includes two components that are machinery producing, upgrading, and fixing

These two sectors are followed by Food industry with 16 and Ore mining chemical and chemical industry with ten companies Food industry refers to food processing that includes the methods and techniques used to transform raw ingredients into food for human consumption Ore mining chemical and chemical industry state about exploration of ore and chemical products, process

of making fundamental chemical products such as several kinds of acid; and

process of products many chemical products for production and life, such as chemical fertilizers and medical pharmacy

There are six companies belong to Electric power industry, the basic for power production of national economic The sector includes all factories and power production facilities with a total capacity of 5 kW or higher level, and it is frequently activity industry In detail, it contains thermal and hydro power manufacture, and electricity enterprises Prints and publications have similar numbers of companies, which are five businesses working in this field It covers the printing and publishing activities such as book, magazines and several kinds

of handicrafts and sculptures

Fabrics, leather, textiles and coloring have only three businesses; it are described

as a sector of commodity production, which are both material and final good Finally, the Others sector refers to the remaining industrial companies that are not listed above There are 11 companies working in this field

3.1.2 Evaluation of several financial situations

In this study, the researcher wants to measure and evaluate the size of 112 companies that is estimated by the total assets The table below illustrates the average of total assets among eight groups, which are classified in the previous part

Diagram 3.1: The average of Total Assets in different groups 2010 – 2014

(Source: Companies’ Statement of financial position)

It is clear that many sectors had an upward trend in the period of 5 years from

2010 to 2014

The Production of construction materials was the highest figure started without

of many changes in 5 years In this sector, the long – term asset of companies usually occupied a large proportion of the total asset In this item, tangible asset often had biggest value in comparison with other ones because the investment in facilities and machinery requires spending a large amount of money than other

2010 2011 2012 2013 2014

Total Asset (Size)

1 Electric power industry 258,465 269,222 284,235 366,708 360,461

2 Manufacture of machinery

and metal products 370,178 475,270 453,551 461,791 557,342

3 Ore mining chemical and

industries; result in highest figure of total assets Furthermore, several names can

be stated with the huge amount of total assets that lead to the result in the enormous figure They are BCC with 5,609,955 billion, BTS with 4,466,667 billion, QNC with 2,075,446 billion, and HOM with 1,857,569 VNDbil in 2014 according to statistic figure collected from statements of financial position The sector that has notable changes is Prints and publications It began with 82,735 VNDbil in 2010 and did not change much except suddenly reached a peak at 720,023 VNDbil in 2012 The reason for this figure is that ALT had charged approximately 1,532 VNDbil in Goodwill, which led to a dramatical increase in a total asset in 2012

Ore mining chemical and chemical industry had a significant increase from 431,122 billion in 2010 to 687,775 VNDbil in 2014 The biggest proportion occupied in total asset often were short – term debts such as inventory and receivables As a result, the substantial amount changes came from the rise in receivables and inventories The economic characteristics of this sector are hard

to sell immediately after production and with a small quantities, so large orders often be signed, huge amount of inventories usually are put in storage before freighting for buyers Moreover, most of the commercial transactions are credit

or deferred rather than paying by cash directly; as a result, the total amount of receivables also will be great

Regarding food industry, this sector had 15 companies and also had a substantial increase from 471,791 to 589,421 during the period of 5 years Almost all companies in this industry had the upward trend from 2010 to 2014 The highest amount of total asset was DBC with 2,150,204 VNDbil in 2010 and 4,220,362 VNDbil in 2014 Total asset of this company even rose twice time in the period The next part will describe the amount of tangible asset in each industry and its percentage of the total asset

Table 3.2: Tangible Asset Valuation 2010 – 2014 (VNDbil)

(Source: Collected and calculated from the financial statements) Overall, the average of percentage remained the same except for the figure of

2012

The difference was made by a change in the proportion of Prints and publications, which had a significant decrease by 20% between 2011 and 2012 The reason for this reduction is Goodwill estimation of ALT, which are mentioned above It led to an increase in the amount of total asset, in case of tangible asset did not fluctuate significantly, the percentage of the tangible asset

in total asset reduced as a result However, the percentage of other sectors with detail information did not have many differences in proportion among five years Regarding the average of the tangible asset in VNDbil, it increased dramatically from 145,686 billion to 192,015 billion in the 5 – year period

3.1.3 Analysis of firm performance

3.Ore mining chemical and chemical industry

4

Production

of construction materials

5

Fabrics, leather, textiles and coloring

6 Food industry

7 Prints and publications

In the study, there are three important dependent variables chosen to measure and evaluate the performance of 112 industrial companies They are ROA, ROE and Q Tobin’s; ROA will be mentioned first

Diagram 3.2: The average of ROA ratio in different groups 2010 – 2014

(Source: Calculated from companies’ Statement of financial position)

It can be clearly seen from the line graph that most of them had a downtrend in the period of 5 years from 2010 to 2014 except for Fabrics, leather, textiles and coloring

ROA

1 Electric power industry 8.26% 7.61% 9.09% 6.71% 6.99%

2 Manufacture of machinery

and metal products 4.41% 2.17% -0.65% 1.90% 2.47%

3 Ore mining chemical and

Ore mining chemical and chemical industry started at the highest level of 13.9%, followed by Food industry at 11.65% Both of them decreased in 5 years to 7.36% and 8.52% respectively Food industry became the highest proportion of ROA in 2014

There are several negative figures in the table that should be concerned The sector of Production of construction materials had two negative proportions, which are -3.12% in 2012 and -2.59% in 2013 Investigating the statistical information, the researcher had found the reasons In 2012, 15 companies working in this field had the bad result of the operation, which result in negative ROA Several names that had the highest figure can be stated as -46.73% of HHL, -35.58% of TLC, -28.73% of DTC, -16.34% of BHV, and BHC of -11.11% In 2013, ROA had a slight increase in comparison with that in the previous year because of some delisted companies In this year, HHL, TLC, BHC had to delist due to inefficient business activities However, the negative figure still existed as a result of other firm performance such as HPS with -65.71%, BHC with -18.81%, and PPG with -14.54%

Regarding the exception of Fabrics, leather, textiles and coloring, it had a slight increase between 6.36% and 7.49% in the first three years before reducing by more than 2% in 2013 After that, the figure rose dramatically to 7.53% in 2014

Diagram 3.3: The average of ROE ratio in different groups 2010 – 2014

(Source: Calculated from companies’ Statement of financial position) The line graph gives the information about the average of ROE ratio between 8 groups during the period of five years Overall, almost all sectors had decreased percentage as will now be described below

ROE and ROA ratios of Ore mining chemical and chemical industry were similar in the trend and position ROE started at the highest point 24.33% in the line graph, before decreasing sharply to 14.95% in five years This value was followed by two sectors, which are Others and Food industry with 21.61% and 21.31% respectively in 2010 However, they had a different level of decrease

3 Ore mining chemical

and chemical industry 24.33% 19.92% 17.19% 15.19% 14.95%

Others had a significant reduction by approximately 13% from 2010 to 2014; in contrast, Food industry only dropped insufficiently by more than 6% in the same period

Several negative figures should be mentioned Firstly, Production of construction materials had two negative values of ROE in 2012 and 2013 The reason is similar to ROA value, which is bad performance of some companies, namely HHL with -125.29%, BHC with -45.58%, and TLC with -39.10% according to the statistical analysis in 2013 Secondly, Manufacture of machinery and metal products had a negative value of -0.69% in 2012 due to poor performance of TSB with -68.58%, BVG with -44.53%, KSD with -44.12%, and BTH with -27.80% In the next two years, these companies had better performance that led

to the percentage of ROE increased significantly to around 3.2%

It can be clearly seen that ROA and ROE ratios have a strong relationship because both of them illustrate the business activities

The last component used for firm performance evaluation is Q Tobin’s It will be described in the table below

Ore mining chemical

and chemical industry 1.42 1.00 1.13 1.32 1.22 Production of

construction materials 1.17 0.82 0.81 0.89 0.93 Fabrics, leather, textiles

Food industry 1.17 0.92 0.98 1.08 1.26

Prints and publications 0.83 0.59 0.83 0.90 0.94

Table 3.3: Q Tobin’s valuation 2010 – 2014

(Source: Collected and calculated from the financial statements)

To calculation this value, the researcher had to collect the market price and total number of share outstanding of each stock on the final trading day in December from 2010 to 2014 Q Tobin’s can be seen as a measurement of the real value and book value of a company, and it reflects the value of the company is undervalued or overvalued There are two scenarios can occur Firstly, the market can have a negative outlook for this stock as well as this company The negative perspective of investors comes from the poor performance of companies, and they decide buy the stock with low value The second scenario is that the company overvalues its total asset

As can be seen from the table, there are several sectors had high Q Tobin’s ratio, which are Electric power industry, Ore mining chemical and chemical industry, and Food industry Regarding Electric power industry, it had a gradual increase from 0.98 to 1.13 through the 5 – year period Refer to ROA, ROE ratios, which had been described in the previous part, this sector did not have high ROA and ROE without a significant upward trend However, these ratios were quite stable rather than fluctuated among five years Many investors believe that a company with the stability of financial operations is better than others with unpredictable changes Ore mining chemical and chemical industry, Food industry had some differences They had a downward trend during this period; however, these two sectors had good performance in comparison with others

Prints and publications had bad figure especially in 2011 with 0.59 Refers to the performance of this sector, it had a low value of ROA and ROE during the period of 5 years from 2010 to 2014 In 2011, ROA was only 2.88%, and ROE