Luận văn thạc sĩ phân tích tài chính công ty cổ phần x20 e

Internal corporate information Financial statement system of the Company refer to extremely importantinformation since financial statements are used to synthesize the financial situation

PHÂN TÍCH TÀI CHÍNH TẠI CÔNG TY

CỔ PHẦN MAY X20 FOREWORDS

Necessity of the research thesis

During the business operation and production, the business control,determining strengths, weakness, and potentials of the business in order to developtimely solutions to exploit such potentials and strengths of X20 Joint-stockCompany, and to overcome weakness aiming at maximizing the corporate values isthe top and regular task of financial managers To implement this task, financialmanagers utilizes very useful tool as corporate financial analysis

X20 Joint-stock Company is a company with financial potentials andprestige in garment and textile industry However, business results have not beenreally effective What are the reasons of this situation? What are the strengths notexploited and promoted by X20 Joint-stock Company? This requires the application

of financial analysing tool in order to advise managers of X20 Joint-stock Company

to adopt effective measures to improve business efficiency in order to increase theshare price of X20 Joint-stock Company in the market

From such reality, the author chooses the research thesis “Financial analysis

of X20 Joint-stock Company”.

The researching objectives of the thesis

The thesis aims at three basic goals as follows:

- Firstly, systematically studying the basis of arguments on corporate

financial analysis including concept and objectives of corporate financial analysis,the materials used in analysis, method and content of corporate financial analysis

- Secondly, carrying out comprehensive financial analysis of X20 Joint-stock

Company in the period of 2009 – 2011 on the aspects including asset and capital

rivals in order to point out strengths and limitations about financial situation and itscauses.

- Thirdly, basing on developing orientations of X20 Joint-stock Company

and the causes to limitations in financial situation of X20 Joint-stock Company, theauthor proposes practical solutions for management board of X20 Joint-stockCompany to improve business efficiency of the Company

Subject and scope of research

The thesis focuses on researching argument system and financial analysissituation of X20 Joint-stock Company with comparison with rivals in the industry.The period of financial research and evaluation of X20 Joint-stock Company isfrom 2009 to 2011

- Evaluating and forecasting analysis about the needs, developing trends ofthe market and corporate

Scientific and practical meaning of the research thesis

Scientifically, the thesis focuses on the research of argument basis oncorporate financial analysis, especially systematic introduction about analyticalmethods and content of financial analysis

Practically, the thesis applies financial analysis arguments and methods inpractice of X20 Joint-stock Company to determine strengths and limitations, causes

of financial limitations in order to consult Management Board of X20 Joint-stockCompany in management of business operations in the future.

Structure of the thesis

In addition to the forewords, conclusion, list of reference, the main content ofthe thesis is divided into three chapters:

Chapter 1: General theory about corporate financial analysis

Chapter 2: Financial analysis of X20 Joint-stock Company

Chapter 3: Solutions to improve financial management effectiveness in X20Joint-stock Company

CHAPTER 1:

GENERAL THEORY ABOUT CORPORATE FINANCIAL ANALYSIS 1.1 CONCEPT, OBJECTIVES, MATERIALS AND METHODS OF CORPORATE FINACNIAL ANALYSIS

1.1.1 Concept of corporate financial analysis

Financial analysis is a new concept since it is mainly developed in the 20thcentury Financial analysis may be defined as a collection of methods permitting theevaluation on financial situation in the past and at present, facilitating the decisionmaking by the management board and accurate assessment of other corporates

In the last decades, the invention of new tools and development of newconcepts help to screen financial analysis

First of all, we will study the concept of financial analysis, its objectives;followed by the standardization of information needs and analytical tools to be used

Financial analysis appeared in late 19th century, and has been developedcontinuously and rapidly due to various reasons as follows:

- Increasing corporate management need

- Development of financial market

- Establishment of national and multi-national groups

- Wide application of information technology and computer

Financial analysis is based on accounts of the corporates The harmoniouscombination of accounts eases the comparison between corporates and economicorganizations.

Currently, financial analysis is becoming essential to corporates so that theycan understand their strengths, weakness in order to adopt measures to promotetheir strengths in parallel with the determination of causes to ineffective operation

to have proper improving methods

Human being activities are activities of awareness Therefore, as conductingany activities, irrespectively of simple or complicated, any individual ororganization base on their awareness of objectives, natures, trends, and developingmodes of the objects and phenomena In economic management, awareness,decision and action constitute a dialectical triad of scientific management, in whichawareness is the basis, and premise of decision-making, while organization is theone to carry out the decision Awareness determines decision; therefore, properawareness will lead to proper decision, and expected action On the contrary,improper awareness will lead to improper decision

The most common concept is that: Financial analysis is the consideration,

research of objects, phenomena in the organic, dialectical relationship between the items constituting such objects and phenomena With such meaning, analysis is an important tool to be aware of the natures, properties, and development modes of the researched objects and phenomena.

Therefore, corporate financial analysis is a tool to be aware of issues related

to corporate finance However, there are many subjects caring about and usingeconomic, financial information of the corporate in various aspects and objectives

1.1.2 Objectives of corporate financial analysis

The information presented in the financial statement firstly serves the people

of direct interests (contributories, creditors, investment partners, clients,employees…), then corporate leaders (Board of Directors, Management Board…),and finally people of indirect interests (tax agencies, financial agencies, statistics

agencies…) However, the data mentioned in financial statements fail to fully show

up the contents required by users For examples, investors need to know theprofitability of assets, and the capital they have or will invest as well as the possiblesafety (risk) in the future, the augmentation in share values…

Therefore, they have to use analytical technique to present more about mainrelationship mentioned in financial statement to satisfy the needs of concernedpeople

The most valuable information to users of financial statement is what willhappen in the future By comparing, evaluating, and analyzing trends, analysis offinancial statement aims at main objectives as follows:

Firstly, to fully, timely and honestly provide financial information to

shareholders, creditors, investors, management board of Company to help them tomake proper decisions in the future

Secondly, to make true evaluation on situation of company in the reporting

period regarding capital, assets, level, rate and effectiveness of capital and assetutilization to understand the problems and their causes to propose proper measures

in the planning period

Thirdly, to provide information about fund raising, modes of fund raising,

loaning policy with the goal to increase profit, share value; and keep safety forinvestment capital

Financial analysis in various modes aims at serving various users such asmanagers, current shareholders, or people desiring to become shareholders of thecorporate, financial analyst, people is participating in corporate operations,corporate creditors including banks, financial institutions, bill buyers, or bill sellersvia bidding

Different users will make decisions basing on different purposes Financialanalysis by different user groups have to satisfy specialty issues of each group ofdirect or indirect interests

a Groups of direct interests:

Financial analysis to managers

Financial analyzing activities in corporate are called as internal financialanalysis, which is different from external financial analysis conducted by analystsoutside the enterprise Thank to comprehensive information and clear knowledgeabout the enterprise, internal financial analysts have much more advantages toconduct the best financial analysis.

Corporate financial analysis has various objectives:

- To create regular evaluating cycles about the past business operations; tocarry out financial balancing, profitability, solvency, financial risks of theenterprise

- To orient decisions made by Board of Directors as well as financialmanager such as investment, funding, profit allocation

- To act as basis to implement financial forecasts; profit, investment, cashbudget planning

- Finally, financial analysis is a tool to control activities of the enterprise.Financial analysis highlights the importance of financial forecast, and acts asbasis for managers to clarify the financial policy in particular, and policies of theenterprise in general

Financial analysis to investors

Shareholders as individuals or enterprises have direct concerns about thecalculation of corporate values since they contribute their capital to the corporatesand have to take risks

Shareholder income is allocated dividend and added value of investmentcapital These two factors are affected by anticipated profit of the enterprise Inreality, investors often evaluate profitability of the enterprise Individualshareholders of large companies in general must base on specialists (financialanalysts) They specialize on researching economic-financial information, clarifycorporate developing prospects, and evaluate shares in the financial markets

Financial analysis experts utilize two methods to evaluate enterprises andestimate share value as follows:

- Analysis basing on the research on financial statement, profitability, risk

to be mentioned in this thesis

- Graph analysis bases on evolvement graphs of share price and transactionvolume

b Group of indirect interests

Financial analysis to creditors

If financial analysis is developed in banks when they want to ensure thesolvency of customers, financial analysis is used by lending, advancing, or selling

on credit enterprises

Financial analysis is for other long-term debts with short-term loans

- In term of short-term loans, creditors pay special care about quick solvency

of the enterprises, which means the enterprise ability to response to due debts

- In term of long-term loans, creditors must be sure about the solvency andprofitability of the enterprises since the solvency and interest will depend on thisprofitability

Analyzing technique varies by nature and term of the loan; however, creditorare, irrespective of long-term or short-term loan, concerned about financial structurerepresenting the risk level of borrowing enterprises

- Regarding investors, creditor financial analysis helps them evaluate thesolvency, profitability to make decision whether they should invest in or lendsuch enterprise

Above analysis shows that corporate financial analysis is an useful tool used

to determine economic value; evaluate strength, weakness of the enterprise; find outobjective and subjective causes helping each subject to make option and decision inline with the objectives of their concern Therefore, corporate financial analysis is

an crucial activity to all enterprise in the current market economy and internationaleconomic integration

1.1.3 Materials used in analysis

Enterprise-related information source is varied Some information isobligatory and open; some only for shareholders Many information is announced

by financial organizations or Economic - Financial newspapers The informationmay come from the enterprise or externally

1.1.3.1 Internal corporate information

Financial statement system of the Company refer to extremely importantinformation since financial statements are used to synthesize the financial situation

of the Company for a specific period of time They must summarize a relativelyhigh volume of information and be presented properly in a specific form andparticular principle in order to provide users with true view about the financialpower, solvency, risk, business-production outputs in the reporting period so thatthe Company can propose useful measures to promote the development of theCompany They are also valuable information helping securities investors to makeright investment decisions

Documents used for analysis are financial statement of the Company, ofwhich the most important and crucial is the balance sheet and business result report

a- Balance sheet

Balance sheet is a combined financial statement generally reflexing all assets

of the Company in two manners including capital and capital constituting source ofCompany at the reporting time Therefore, balance sheet aims at describe financialpower of the Company by presenting the things owned by the Company and thoseowed by the Company at a specific time Balance sheet is regarded as a snapshotsince it is developed at the end of an accounting period This is the weak point ofbalance sheet when we use its data in financial analysis

In structure, balance sheet is divided in to two parts in the balancingprinciple that asset is equal to capital source

In both asset and capital source component, high liquidity is located on thetop of the table and decreased as moving downwards Therefore, in the assetcomponent, short-term assets are located upper, while long-term assets lower The

same is applied to the capital source component, which is listed by order andpayment request First are short-term debts (with maturity of less than 1 year),followed by medium and short term debts, and finally owned capital All assetsmust be funded by a particular sponsorship such as loan or equity capital Eachcomponent has its specific economic and legal meanings.

Grasping economic and legal aspects of data mentioned on the balance sheethelps us to understand meaning of analytical ratios to be mentioned in the followingpart

- Assets reflect the value of all existing properties under the management and

use right of X20 Joint-stock Company at the time of reporting

- In economic aspect, data mentioned in assets reflect scale and structure of

existing property types of X20 Joint-stock Company at the reporting time in theform of money capital, receivables, inventories, fixed assets Basing on this, it ispossible to make overall evaluation on asset scale, operation nature, and asset usinglevel of X20 Joint-stock Company

- In legal aspect, data mentioned in the assets show the existing properties

under the management and use of X20 Joint-stock Company

- The asset reflects the forming sources of existing assets of X20 Joint-stock

Company at the time of reporting

- In economic aspect, data in the Capital Source show the capital structure

invested and mobilized in production and business of X20 Joint-stock Company.This enables the general evaluation on financial capacity and initiative of X20 Joint-stock Company

- In legal aspect, data mentioned in the Capital Source show the legal

responsibilities of X20 Joint-stock Company to creditors regarding payable debts, toclients regarding payables, to the owners regarding invested capital, to the Stateregarding payable amounts, to employees regarding payables

b- Business result report: if balance sheet is regarded as a snapshot reflexing

the assets, capital, capital sources, debts of the company at the reporting time, businessresult report is considered as a slow movie about the general business situation and

combined information about the business patterns of the company in the period;indicate whether they generate profit or loss; and describe the use of capital potentials,labour, techniques, and business management experience of the company It is afinancial statement concerned by financial analysts since it provides data about thebusiness operations carried out by the company in the period It is also used as ainstruction to forecast the operations of the company in the future.

Business result report indicates the profitability or loss in the period Thereport is prepared using the principle that it must reflect each type of revenue(revenue from business operation, service supply, financial activities, otherincomes), and the costs used to get such revenues The difference between revenueand cost constitutes the profit

The content of business result report may be varied by period depending onthe management requirements, but has to reflect the basic items such as revenue,cost price, selling expenses, and business management expenses …

c- Cash flow statement: Cash flow statement is one of important documents

in the financial statement, the necessary document used and understood bymanagers This report specifies the reasons why the cash and money equivalentsvary in the accounting period Especially, this report indicates all changes in money

by three activities including business, investment and finance The use of cash flowstatement enables managers to follow the cash flow out and in to help theenterprises to calculate the solvency for the due debts Cash flow statement does notcarry out calculations such as income statement Any non-monetary transaction willnot be reflected in the cash flow statement However, net income mentioned in thetop of cash flow statement similar to the last line of the income statement is theprofit of X20 Joint-stock Company By series of adjustments, cash flow statementexplains the income into cash

d- Notes to financial statement: Notes to financial statement are a integral

part of financial statement used by the enterprise to report or analyze datainformation mentioned in the balance sheet, Business result report, Cash flowstatement as well as other necessary information upon the request of specific

accounting standards Notes to financial statement can mention other information ifthe enterprise see necessary for the honest and rational presentation of financialstatement.

Therefore, it can be seen that above financial statements clearly indicatefinancial situation of an enterprise Despite being presented separately, financialstatement sheets have close connection with each other

e- Additional accounting and financial information

Financial analysis requires information about business situation of theenterprise:

- Account books

- Funding plan

- Market share held domestically and foreignly

- Diversification of business operation

- Commercial policy

- Short-term, medium-term, long-term prospects

This information is mentioned in financial statement, specially studied; andannounces financial ideas and reports of the enterprise Information is relativelyabundant, the problem is how the users choose and analyze them to developforecasts necessary for decisions by managers

1.1.3.2 External information

a General information

The information is related to business opportunities, which means the generaleconomic situation at a specific proposed time The regression or growth has stronginfluence on the business results In favorable opportunity, activities of theenterprise are expanded; profit of company as well as securities price in the stockmarket varies in the same direction with activities General Statistics Office ofVietnam, Organization of Economic Cooperation and Development (OECD)regularly announce information related to general opportunities Moreover, thesurveys periodically carried out by General Statistics Office of Vietnam provide

monthly results on prospects in industry and commerce, which are surveys aboutexpenses, orders, market demand forecasts

In corporate financial analysis, the most important thing is learn the periodicappearance of opportunities, which means growth is normally followed byregression, and vice versa

b Information by economic sectors

In the border of the sector, the research locates the development of theenterprise in the connection with general activities of the business lines Thecharacteristics of business sector are related to:

- The properties of the products

- The applied technical procedures

- Heavy or light industrial structure and their influence on profitability,reserve capital rotation, funding vehicles…

- The developing space of economic cycles

Researches by sector clearly show the enterprises where they are in the generaldevelopment of the industry by comparing their effectiveness with other enterprises

in the sector, and learning from strong enterprises

In general, to carry out the most accurate corporate financial analysis, it isnecessary to add internal factors such as business structure, line of business,products, technological procedures, employee capacity, management level ofcorporate managers…; external factors such as socio-political system, economicgrowth, scientific and technical progress, monetary policy, tax policy…

1.1.4 Corporate financial analysis method

Corporate financial analysis method refers to the manners, techniques toevaluate the financial situation of the enterprise in the past, at present; and forecastthe future To conduct corporate financial analysis, we should use various methods

in the method system of corporate financial analysis Some main methodscommonly used in practice are mentioned below

1.1.4.1 Comparative method

This is a method commonly used in economic analysis in general andcorporate financial analysis in particular The use of this method needs to ensurefollowing contents:

Comparative conditions:

- Ensuring the existence of at least two quantities for comparison

- The quantities must ensure the comparability It is the integration in economiccontent, calculating method, time, and measurement units

How to determine the principal for comparison: Depending on the analyticalpurpose to determine principal for comparison:

-As determining the development trend and speed of original analyticalindicators, comparative principal is determined as the numeric value of analyticalindicators of the previous period or a series of previous periods

- As evaluating the implementation of proposed goals, tasks, comparativeprincipal is the planning numeric value of analytical indicators

- As determining position of the enterprise, comparative principal is determined

as average value of the sector or analytical indicators of rivals

Comparative techniques: Normally, they use two basic comparative methods asfollows:

- Comparison of absolute number refers to the determination of differencebetween values of indicators in the analytical period with those in the principalperiod The comparative results indicate the variation in absolute number ofanalytical indicators

- Comparison in relative number refers to the determination of increasing(decreasing) ratio of analytical indicators between actual period with principalperiod in order to evaluate the development rate or structure of these indicators

In addition, they utilize analytical techniques in longitudinal direction andhorizontal direction In which:

Longitudinal analytical technique is the consideration and determination of ratio

of each indicator in the general to see the importance of each indicator

Horizontal analytical technique is the quantitative comparison on one indicator.

In reality, this is the application of comparative method in term of absolute andrelative numbers regarding information collected after the processing and design inthe form of table

In corporate financial analysis, financial coefficients are normally determined

by directly dividing one norm by another to see the specific influence of eachcomponent norm on the norm to be analyzed In addition to above methods, theyalso use ratio method as a highly practical method in analyzing financialcoefficients of the enterprise Financial ratios are divided into typical ratio groupsreflecting basic contents by each operating goal of the enterprise They are ratiogroups on solvency, capital structure, operating capacity and profitability

1.1.4.4 The method on analyzing the interactive connection between financial coefficients

The return on equity of an enterprise is the combined result of a series ofmethods and management decisions by the enterprise To understand therelationship between the capital use and product consumption to the rate of return

of the enterprise, they develop an indicator system to analyze such impact Dupont

is the first company in the United State to establish and analyze the interactive

relationship between financial coefficients This method carries high practicalmeaning The main relationships considered in Dupont method include:

- The interactive relationship between after-tax rate of return above businesscapital with capital efficiency and rate of return

- Interactive relationships with rate of return above owned capital

In addition to above basic methods, in corporate financial analysis, they alsouse some other methods such as graph method, recurrent correlation method, linearplanning method, econometrics method …

Therefore, to have proper evaluation on financial situation of an enterprise, it

is necessary to clearly identify the analytical objectives and select proper analyticalmethods in combination with the use of various methods to generate adequate andaccurate conclusions

1.2 CONTENT OF CORPORATE FINANCIAL ANALYSIS

1.2.1 Financial analysis by typical financial index

Different companies different financial coefficients Even one company hasdifferent financial index at different periods of time Therefore, financial indexesare considered as the most typical representation of the financial situation of thecompany in a particular period of time

1.2.1.1 Operating capacity index

Capital effectiveness is always integrated with the existence anddevelopment of an enterprise Therefore, the analysis of operating capacity indexindicates the highest effective utilization of resources with the lowest expenditure

in inventory is low but still effective, avoiding inactive capital and vice versa

However, the evaluation on this index must be combined with theconsideration of sector, line of business For example, if the Company trades infruits, fresh foods, the high turnover is a good sign; which is reverse for wineproduction.

From inventory turnover, we can calculate the average days for oneinventory turnover.

Number of days for an

360 days

Number of inventory turnover

b Receivables turnover:

Receivables turnover

Net revenue (2)Average balance of receivables

This index reflects the speed of converting receivables into cash The higherturnover indicates quicker recovery of receivables; therefore, capital is notappropriated by enterprise or invested in receivables Small turnover shows that theenterprise has high level of capital appropriation, resulting in lack of capital forproduction and business, requiring the enterprise to mobilize external capital andpay interests for such mobilized capital

From receivables turnover, analysts can determine the average collectionperiod The average collection period shows the days of a receivables turnover.Longer receivables turnover leads to shorter collection period and vice versa.

= Average balance of receivables x 360 (3) Net revenue

Long average collection period implies that the high level of capitalappropriation in payment, and slow payback capacity The consideration of thisindex requires the understanding of enterprise’s credit policy to clients, businessstrategy in the near future

c Working capital turnover:

Working capital turnover

=

Net revenue (4) Average working capital

This index shows how many dongs of net revenue can be generated from theuse of one dong of working capital in the period, which means that it measure theeffectiveness of working capital in the enterprise The higher this coefficient is, thehigher the working capital effectiveness is This is because of rapid goodsconsumption, low level of inventory, low level of receivables…, decrease inexpenditures and increase in profit On the contrary, low coefficient implies highvolume of inventory, high cash balance, failure in collecting receivables…,resulting in the need to review financial situation of the enterprise to proposecorrection measure

While working capital turnover reflects the number of working capitalrotation, working capital turnover period shows the days of a working capitalturnover.

Working capital turnover

360 days (5)Number of working capital turnoverThis index indicates the days of a working capital turnover, as an inverse ofworking capital turnover

Therefore, low index is a good sign Long working capital turnover periodmeans working capital inactiveness, appropriation, resulting in low profitabilityfrom working capital

d Fixed capital turnover:

This index is used to measure the fixed capital effectiveness, which meanshow many dongs of net revenue can be generated from the use of one dong of fixedcapital in the period The consideration of this index requires the consideration of

fixed asset structure It is necessary to think carefully before investing in new fixedassets or evaluate whether the depreciation of old fixed assets is proper.

Fixed capital

Net revenue (6)

Average fixed capital

g Capital turnover:

This index says how many monetary units generated by suing one monetary

unit of capital or how many turnovers the capital of the enterprise can be used in aperiod This index can be used to evaluate capital management level of theenterprise The higher the ratio is, the higher the profit, the competitiveness, theprestige of the enterprise in the market are

Net revenue (7) Average capital

1.2.1.2 Profitability index group

For investors, this index is extremely important since it is attached to theireconomic interests It is a basis to measure business results in a particular periodand foundation for investors, managers to make financial decisions in the future

a Return on sales (ROS):

This index indicates how many dongs of profit can be generated from one dong of net revenue in the period.

Profit (8) Net revenue

(Profit in above formula is the pre-tax or after-tax profit)

b Return on assets (ROA):

ROA tells how many pre-tax and after-tax profit and EBIT were generated

from the use of one unit of asset

ROA gives an idea as to how effective and efficient management is at usingits assets to generate earnings.

c Return on investment (ROI):

This index is used to evaluate efficiency of an investment or to reflect howmany monetary units of after-tax profit can be generated from one monetary unit ofinvestment The higher the index is, the more effective the enterprise operation is

ROI

After-tax profit (10) Average investment

DuPont formula reflects the relationship between investment profitability,return on sales and capital turnover as follows:

ROI = After-tax profit x Net revenue

Net revenue Average investment

= Return on sales x Capital turnover

* Note: Some materials call ROA as economic profitability ratio or basic profitability ratio of the asset, while profitability ratio of the assets is calculated like ROI

d Return on equity (ROE):

Equity includes capital of preferred shareholders and ordinary equity It isdetermined by the difference between the total assets with the total payable debts.Total profit after paying all obligations to the state is considered as shareholder

(11)

income Therefore, the equity earning index evaluates the ability to ensure allcontributing partners to the Company.

Return on equity (ROE) =

After-tax profit (12) Average equity

To explain the factors with impact on earnings of each equity unit, analystsimplement above formula as follows:

capital x Gain on revenue x

1

1 - debt coefficient ( 13)

e Rate of return of common stocks:

Equity capital is the capital held by common shareholders and determined bythe difference between equity and preferred capital The earnings of equity capital isthe remaining of after-tax profit after paying all dividends for preferred stocks Rate

of return of commons stock indicates the payback rate created to commonshareholders by the Company

This is an index measuring the success of the Company Investors oftencompare this index with interest rate on the capital market When Company createsrate of return higher than the profitability in the market, the investment in theCompany is recommended.

Rate of return of common

After-tax profit - Preferred gains Average equity capital (14)

g Earning per share (EPS):

This index is of concern by investors since it is the basis to pay dividend and

to increase market price of common stocks

This index is calculated by taking dividing the number of circulatingcommon stocks by the remaining amount after paying dividend of preferred stocks.

Earnings of a

common stock =

Earnings of common stocks Number of circulating common stocks (15)

1.2.1.3 Growth rate index group

Dividend rate = Dividend per common stock

Earnings per common stock (16)Therefore, return on re-investment (k) is determined as follows:

k = 1 – dividend rate

b Sustainable growth (g):

This rate evaluates the growth potential of equity (the capital of common

shareholders) through profit accrual; therefore, it is possible to consider this ratio as

to reflect sustainable growth potential: growth gained from retained profit

Sustainable growth (g) = Re-investment profit Equity (beginning of the year) (17) Growth potential analysis is an important content in financial analysissince it enables managers to see the factors with impacts on growth of an enterprise

in order to set future operations to gain higher growth

Growth potential contains various indicators for measurement includingrevenue growth rate, earning rate, operating capital growth rate, equity growthrate In which, equity growth rate is the most concerned index To determineequity growth rate, they use following formula:

g: equity growth

E : equity

We have:

g = (E1 – E0)/E0 = Re-investment earning /E0

= ROE0 x return on re-investment

g = rate on revenue x capital turnover x 1/ (1-debt coefficient) x return onre-investment

We can develop the growth diagram showing the factors of impact fromabove formula:

Diagram 1.1: Dupont analysis

Therefore, the integration of data to above diagram enables financialmanagers to clearly understand what factor is focused in the last growth rate Thishelps them to understand the need to use a combination of proper financial policiessuch as asset investment policy, funding policy, dividend policy to gain high growthrate in the future With current and future conditions of the enterprise, the enterpriseneeds to determine the key factors to be exploited

g: expected growth

Return on equity (ROE) Retained rate of

profit

Nhân với

Return on revenue

Capital turnover Multiplied by

After-tax profit dividing Net revenue

Net revenue dividing Total assets Net revenue subtracti

ng expenditures Total

Cost price Sales &

management cost

Loan interest Income tax

cash Short-term stock

receivables Inventory

Current assets Fixed assets

Assets on equity Return on

investment (ROI) Multiplied by

1.2.1.4 Financial and asset structure indicator group

a Debt coefficient: this coefficient indicates how many units of debts are

required for one unit of operating capital.

Total assetsThis coefficient is used as profit lever by Company managers High debtcoefficient tells high financial risk and possible insolvency of the Company

b Self-financing coefficient:

Self-financing

Equity sourceTotal capitalSelf-financing

coefficient

= 1 - Debt coefficient

This coefficient shows the independence or dependence of Company oncreditors as well as self-financing capacity on its business operations It is themeasurement of shareholder capital ratio against total capital currently managed andused by the Company (indicating pressure or binding of loans) The higher thecoefficient is, the safer the debs are

of each company Most of capital in production companies is used in long-termassets; while that of commercial companies in short-term assets Long-term assetinvestment coefficient tells the importance of long-term assets in total assets of thecompany; shows the ability to equip technical and material facilities, technological

(22)

(23)(24)

(25)

(26)

procedure, producing capacity, development direction, and competitiveness

compared with other enterprises

In addition, they also compare the ratio of capital used in long-term assets

and short-term assets.

Asset structure

= Total short-term assets

Total long-term assets This coefficient is always completed by the Company; however, it is different

for different units and at different period of times Normally, asset structure of the

industry is used as the comparative reference

1.2.1.5 Solvency indicator group

a General solvency coefficient:

general solvency

= Total assets (28) coefficient Long-term and short-term debts

In which, total assets comprise of all short-term assets and long-term assets

serving production and business operations

Short-term debts refer to the debts with maturity of less than one year

Long-term debts refer to the debts with maturity of more than one year

This coefficient shows the relationship between total assets managed or used

by the company and the total payable debts (short-term and long-term debts),

reflecting how many monetary units of assets are used to guarantee one monetary

unit of debt If this coefficient is smaller than 1, total assets are less valuable then

total debts; therefore, total existing assets of the Company are not enough to pay all

debts This shows that the company is subject to insolvency and possible

bankruptcy However, too high coefficient requires re-consideration, since the use

of financial lever by Company is ineffective

b Temporary solvency coefficient:

Temporary solvency (short-term debt solvency) is the relationship between

short-term assets and short-term debts This coefficient shows the assurance of

short-term assets to short-term debts Short-term debts are the debts to be paid

within this year; therefore, the Company have to use the assets those are convertible

(27)

to money for payment Therefore, among the total assets managed and used by theCompany, only short-term assets are convertible into money within one year

c Quick solvency coefficient:

It is the measurement about the mobilization of assets with quickconvertibility into money to pay short-term debts requested by creditors As weknow, only short-term assets have the highest liquidity among the total assets.However, the convertibility of goods capital is low, quick solvency is not dependent

on the sales of goods, materials; and determined by following formula:

Quick solvency = Short-term assets – Goods capital

coefficient Total short-term debts

In general, if this coefficient is small, Company will lose prestige to partners,face with difficult solvency, and possibly risk selling assets at cheap price to paydebts Too high coefficient reflects high level of cash in hand, reduction in capitaleffectiveness Like temporary solvency, the value of this coefficient depends on line

of business, payment schedule of debts payable during the period

1.2.2 Comparative financial statement analysis

(30)

(31)

To evaluate financial situation of a company, investors can also carry outhorizontal comparative analysis (horizontal comparison) and longitudinal analysis(comparison by ratio of indicators) Financial statements in comparative form willspecify the movement, trends in order to provide investors with valuableinformation to predict financial operating results in the future.

Horizontal analysis is the comparison between the values at the end of theperiod and in the beginning of the period regarding each indicator, by absolute andrelative numbers (%), helping investors to be aware of increase and decrease ofeach indicator and nature of main factors impacting profit and financial status of thecompany so that they can draw necessary conclusions serving investment decisionmaking

Horizontal analysis is calculated by absolute number and relative numberusing following formula:

Increase (decrease) = figure at the end of the period – the figure in thebeginning of the period (of the same indicator)

period Longitudinal analysis refers to the comparison of ratio of each indicatoragainst the total, helping analysts to have overview and awareness of variation Forexample, longitudinal analysis of business result reports tells that if the cost priceincreases at higher rate than revenue, such increase is not effective Or it is possible

to compare ratio of enterprise management cost against revenue of this year topropose management strategy of this cost

1.2.3 Analysis of capital source and use

The analysis mentioned above fails to answer the question that where capitalcomes from and what purpose it is used Only analysis of capital source variationcan be able to answer this question

(32)1

The capital source and use analysis tells whether company has advantage ordifficulty in capital In the meanwhile, investors, creditors will be aware of whatthe company is doing with their capital Information from the analysis providesinvestors with information about strengths and weakness during the capitalmobilization and use so that they can make investment decision

To develop capital source and use variable table, they usually combine thechanges in items mentioned in the Balance sheet between the open date and theclosing date Each change of each item in the Balance sheet is located in capitalsource or use variable column in following principle:

- Increase in payable debts, equity source; decrease in assets of enterpriseshow the variation of the capital source

- Increasing assets of enterprises, decrease in debts and equity are located oncapital use column

1.2.4 Analysis of working capital funding source

Working capital source of an enterprise is divided into two parts:

+ The part ensuring regular and stable business operation of the enterprisecalled as regular working capital source

+ The part meeting the need of increase or decrease by business cycle ofenterprise called as temporary working capital

The type of assets with turnover of less than one year is called as short-termassets (working assets) Fixed assets and long-term investment are called as long-term assets, since they have payback period of more than one year

To form these two types of assets, there are two capital sources includinglong-term capital source and short-term capital source Equity source is a long-termcapital source (regular capital source) Long-term debts have maturity of more than

1 year, and are a part of long-term capital source (regular capital source) On thecontrary, short-term debts have maturity of less than one year called as short-termcapital source Other debts depending on each type can be considered as short-term

or long-term capital source

Long-term capital source is firstly used to form long-term assets Theremaining of long-term capital (if any) and short-term capital source are used toform short-term assets The difference between long-term capital source and long-term assets is called as regular working capital source The safety of short-termassets depends on the scale of regular working capital source.

This distinguish aims at determine what capital source is used to fundworking capital of the enterprise To facilitate approach, we can understand thatregular working capital source (or net working capital - NWC) is long-term capitalsource funding working capital need of the enterprise

To evaluate the funding manner of the enterprise, they determine regularworking capital source of the enterprise There are two ways to calculate regularworking capital source:

+ Regular working capital source = Long-term capital source – Long-termassets

+ Regular working capital source = short-term assets – Short-term payabledebts

- Long-term

termassets

short

-Short-termcapitalsource

From above determination, we can evaluate the working capital funding ofthe enterprise There are three possible cases:

- Case 1: As short-term assets are more valuable than short-term payable

debts, which means that regular working capital source has equivalent value In thiscase, there is stability in business operations of the enterprise since there is one part

of regular working capital source to fund working assets used in businessoperations

- Case 2: If current assets are less valuable than short-term payable debts,

regular working capital source will get negative value This is a bad sign forenterprise in industrial or construction sector In special case, if regular working

capital source < 0 (meaning that enterprise forms long-term assets by short-termcapital source), it is a sign of capital misuse, imbalanced payment, paymentcoefficient of short-term debts < 1

- Case 3: If current assets is equal to short-term payable debts, or regular

capital source equal to value of long-term assets, regular working capital source willget zero value This funding show that only long-term assets are funded by long-term capital source, while current assets by short-term capital source This case cannot create stability in business and production of the enterprise, especially thesectors with slow capital turnover

General assessment: One enterprise has different current asset funding atdifferent period of time However, above analysis helps us to evaluate the currentassets funding of the enterprises in order to make proper adjustments

1.2.5 Analysis of lever system in enterprise

In physics, lever has the effect that only small force required to move a bigobject In economics, lever is explained by a small increase in output (or revenue)required to achieve a big increase in gain One of levers commonly used byenterprises is business lever and financial lever

1.2.5.1 Business lever

Business lever is the combination between invariable cost and volatile costs

in business operation Business lever will be large in the enterprises with invariablecosts higher than volatile costs, and vice versa With high business lever, only asmall change in consumption output is required to lead to big change in profit,which means that corporate profit is sensitive to the market in the variation ofrevenue

Business lever reflects the risk rate in business

Business lever exists at available output in formula:

Business lever

EBIT rate (41)

Consuming output changing rate

Therefore, business lever is the changing rate in earnings before interest andtax due to the change in consuming output.

We can establish formula to measure business lever as follows:

)(

0

0

(42)Therefore, business lever focuses on the fixed costs; and is in proportion withfixed costs

Business lever is a tool used by managers to increase profit In modernlyequipped enterprises, if fixed costs are high, variable costs small, the break-evenoutput is high Once break-even point is passed, the lever is powerful Therefore,only a small change in output results in high increase in profit

We have the formula measuring the impact of business lever on profitincrease as follows:

EBIT increasing rate

consuming outputThe definition of business lever provides business managers with a tool toanticipate profit If corporate revenue increases and revenue passes the break-evenpoint, it is only needed to increase by a small ratio of revenue to gain a highincrease in profit

It is necessary to know that business lever is like “two-blade knife” since itdepends on fixed costs However, above break-even point and with the same output,the higher the fixed cost is, the more serious the loss is

This explains why enterprises have to try to achieve break-even output.Passing break-even point, business lever is always positive and has good influence

on profit increase

1.2.5.2 Financial lever

a Definition and content of financial lever

Financial lever refers to the relationship between debt capital and total existingcapital Sometimes, they call it as debt coefficient Through debt coefficient, they candetermine the funding rate of owners against the loan debts It has an specialimportant and is considered as a financial policy of an enterprise

If :

E is equity

D total debt

V the total capital currently used by the business (V = E + D)

Debt coefficient Hv is determined as follows:

V D

To measure profitability of equity, they utilize return on equity

ROE is called as return on equity

P is net profit (after-tax profit)

We have :

E P

This indicator reflects the net profit of one equity unit

Since V = D + E  E = V - DTherefore:

C

H ROI V

D ROI V

D

V V

P D V

P E

P ROE

(45)

Above formula says that if net profit from one capital unit is constant, thehigher the debt coefficient is (the higher loan capital), the higher the net profit fromone equity unit is Therefore, they also called HV as financial lever that is used tomaximize the earning of one equity unit

Like business lever, financial lever is like “Double-edged sword” If the totalasset is unable to generate a return on profit high enough to compensate for loaninterest, the return on equity will decrease This is because the profit generated fromequity must be used to make up for the shortage of payable loan interest Therefore,earning of one equity unit will remain little compared with the amount they shouldhave been get The fact is proved as follows:

EBIT is called as earnings before interest and tax, the return on assets (ROA)

is :

V ROA EBIT

V

EBIT

- r: loan interest; D x r: payable interest

- t% : corporate income tax rate

We change the formula as follows:

E

t r D EBIT E

P ROE (   )(1 %)

E

r D E D ROA t

E

r D ROAxV

- If ROA is higher than r, net income of one equity unit will be equal to ROAand increased by one unit (after-tax) In this case, financial lever is called aspositive.

If ROA is higher than r, net income of one equity unit will be equal to ROA

and depreciated by one value of (ROA r)

However, financial lever is both a positive tool for maximizing net proft per

an equity unit, and the tool restricting such increase The success or failure depends

on the wise or wrong selection of financial mechanism

b Financial lever

Financial lever is the evaluation on loan policy in business operation Sinceinterest is constant in the variation of output, financial lever will be powerful inenterprises with high debt ratio and small in those with lose debt ratio Indebtedenterprises (zero debt ratio) do not have financial lever Therefore, financial leverfocuses on debt ratio If financial lever is high, only small change in EBIT canincrease a higher ROE, which means that the equity is sensitive to EBIT

Therefore, financial lever is defined as the changing ratio between ROEarisen from the change in EBIT.

Financial lever (DFL) =

Changing ratio on REO

Changing ratio in EBITWhereas:

)(

0 0

(47)

It is necessary to note that if EBIT is not high enough to pay interest, ROE(return on equity) will be decreased If EBIT is high enough to pay interest, only aslight increase in output can result in big variation in ROE.

1.2.5.3 Combination between business lever and financial lever

Business lever shows the relationship between invariable costs and volatilecosts Business lever will be very high in the enterprises with invariable costs higherthan volatile costs However, business lever only has impact on EBIT since debtratio impose no effect on the scale of business lever

Financial lever only depends on debt coefficient rather than structure ofinvariable costs and volatile costs of the enterprise Therefore, financial lever affectsafter-tax profit Upon the termination of business lever effect, the impact of financiallever will replace to maximize ROE as the revenue changes So they can combinebusiness lever and financial lever into a general lever.

)(1

)(

)()

(

)(

0

0 0

0 0

0

(48)From above formula, we can have some comments as follows:

One decision on investing fixed assets and funding such investment by loancapital (bond, bank loan…) will enable the determination of revenue variationimpact on profit of owners

1.3 SOME COMMENTS IN FINANCIAL ANALYSIS

In analysing financial statement, Company must be careful about what theyobtained through financial ratios The calculating results mentioned above hardlyprovide us with answer but proper questions The most valuable information tofinancial investors is what will happy in the future, which means that financialratios will guide investors to perceive future developing trends of the Company.Although financial analysis is a right way to get reliable information prior toinvestment decision, it still contains possible mistakes

Firstly: If we use financial ratios separately, we may possibly introduce a

wrong evaluation For example, even when Return on Revenue (ROR) of Company

A is very low (2.55%), we can not say that investment in its shares is ineffective.Company has successfully used financial lever by loan policy and preferred stockissue; therefore, Return on Equity (ROE) of common stock reaches 18.2% Theanalysis of financial ratios is highly effective with the synchronous use of financialratios to create the clearest picture about the company.

Secondly: There are many multi-sector companies; therefore, their financial

ratios carry little meanings and restricted using value As a result, financial ratio ismore meaningful in small and mono-sector companies

Thirdly: The documents used for analysis are financial statements, while data

mentioned in financial statements are historical and static They tell about an event

in a particular period On the other hand, the data on books are different from themarket value

Fourthly: Accounting principles sometimes hide defects or exaggerate the

achievement from their actual values Managers can even make use of accountingprinciples to develop financial statements to have financial ratios as they desire Ifthe company evaluates inventories by various methods or accelerated depreciation,the profit of the first year will become small or nearly zero Therefore, financialratios are never considered as an end but the guidance for future

Fifthly: It is necessary to be careful in comparing financial ratios with other

companies The average ratio of the sector can not be used as a standard to achievesince each company has its own characteristics and properties in term oftechnologies, investment, financial policy, product structure, business strategies…,and especially the difference in point of view about financial ratios For instance,5/1 is a proper ratio between long-term assets and short-term assets in a Locomotive– Tram company, but improper in a commercial company Therefore, we shouldchoose companies of the same sector, scale to make comparison that is only forreference

Sixthly: Finally is the impact of inflation since inflation can deprive financial

information recognized on financial statements, making financial ratios notobjective factors reflecting financial situation of the company

However, by analysis of typical financial analysis, capital source and usevariation, investors can evaluate much about potentials, weakness, developing

trends, operating effectiveness, profit… of the company to make wise investmentdecision.

CHAPTER 2 ANALYSIS OF FINANCIAL SITUATION IN X20 JOINT-STOCK

COMPANY

2.1 GENERAL ABOUT X20 JOINT-STOCK COMPANY

- Company name: X20 JOINT-STOCK COMPANY

- Mode of ownership: joint-stock company

- Head office: No 35 Phan Dinh Giot, Phuong Liet – Thanh Xuan - Hanoi

- Real chartered capital: 172,500,000,000 dongs

- Number of shares: 17,250,000 shares

- Producing and trading in garments, garment equipment, textile products;

- Producing and trading in textile products, dyeing; trading in materials,chemicals, equipment serving textile and dying industry;

- Importing materials, equipment serving the manufacturing of productspermitted to produce by the Company;

- Exporting products manufactured by the Company;

2.1.1 Formation and development

“Tailor-made factory”, X20 for short, - the forerunner of X20 Joint-stock Company

- was established on 18 February 1957 In December 1962, General LogisticsDepartment assigned tasks for X20 in accordance with regulations of NationalDefence Enterprises In April 1968, The General Logistics Department issuedDecision No 136/QD to rank five light industries for X20

On 12 May 1992, X 20 was converted into Garment Company 20 GarmentCompany 20 established Textile factory In July 7, 1996, and fabric textile factory inlate 1997 Now, the Company carries out two main manufacturing sectors includingtextile and garment

On 17 March 1998, the Minister of National Defence Ministry issued Decision No.319/1998/QĐ-QP on changing name of Company in to Company 20 In quarter IV

of 2001, Company 20 received factory 198, factory 199 of Company 198 under

Joint Chiefs of Staff and My Dinh Factory of Company 28 under GeneralDepartment of Logistics In Quarter III of 2003, Company received factory 20B,20C from Lam Hong Company – Military Zone IV and Binh Minh garment factoryfrom Viet Bac Company – Military Zone I.

On 01 July 2005, Ministry of National Defence issued Decision No BQP on capitalizing Company 20 under General Department of Logistics On 28December 2007, Ministry of National Defence issued Decision No 3967/QĐ-BQP

1360/QĐ-on approving the c1360/QĐ-onversi1360/QĐ-on of Company 20 under General Department of Logisticsinto a joint-stock Company On 01 January 2009, the company officially started itsoperation in the mode of joint-stock company with the new name as X20 Joint-stockCompany

After 50 years of operation, the Company is honoured to be rewarded with thetitle of Labor Hero in 1989 and 2001 Products of the company are sold in thedomestic market and many other countries in the world such as Germany, England,France, the Netherlands, America, Japan, Spain, Argentina, Switzerland, Canada,South Korea… The products of the company has been awarded with many prizes asgolden medals, silver medals, Diplomatic of Merit at industrial product fairs,Vietnam Fashion Fair; repeatedly won international prizes for quality, technique,commercial reputation Quality management system of the Company is awardedwith ISO 9001/2000 by BVQI Organization from the United Kingdom, and ISO9001/2000 by QUACERT of Vietnam

The company is the most company for military garment products of the militarylogistics sector Moreover, the Company is a reliable and prestigious partner withvarious products including military suits, office suits, motorbike race clothing,jackets, suits…The Company is willing to join in cooperation, developmentinvestment, joint-venture with other enterprises, domestic as well as foreignpartners in the principle of equality and mutual interest

2.1.1.1 Lines of business

According to the business and tax registration certificate No 0100109339issued by Hanoi Department of Planning and Investment on 17 May 2010 , X20Joint-stock Company has following tasks:

- Manufacturing, trading in textile, dyeing, garment products; accessories andmaterials for textile, dyeing and garment industry;

- Trading in machineries, equipment, spare parts for textile, garment and dyeingindustry;

- Management and technical consulting service in textile, garment and dyeingindustry;

- Trading in fuels, chemicals, colouring agents for manufacturing and consumption;

- Trading in supermarket, outlet system; carrying out business in real estates;

- Labour training service for textile, dyeing and garment industry; labour supply;

- Importing-exporting products traded by the Company …

With the tasks mentioned above, X20 Joint-stock Company supplies the mainproducts as follows:

- Dress uniform, clothes serving National Defence;

- Shirts, vests, office clothing;

- Export clothing: jackets, motor race suits…;

- Cloth, socks, towers…

2.1.1.2 Advantage, difficulties, and development trends

- Advantage: In spite of being a joint stock company, X20 Joint-stock Company has

the main political tasks as to manufacturing and equipping military clothes, militaryequipment for the army Annually, the Company is assigned to produce militarygarment products with high quantity and value by Military Supply Department–General Department of Logistics under Ministry of National Defence This helpsthe Company avoid the job burden for employees On the other hand, the Companyare modern equipped with advanced machineries and skilful staff, contributing tothe increase of labour yield, the decrease of cost, and capacity to accept big orders

- Difficulties: In accordance with economic experts, 2011 is the year of difficulties

for garment and textile industry The main markets of Vietnam’s garment andtextile sector as America and EU are facing with high level of public debts withoutany sign of recovery The most noticeable risk is that we fail to create materialsource for manufacturing of the industry, which requires the import of 90% Thisshows that Vietnam garment and textile sector completely depends on importmaterials Therefore, the input material prices go up and down all the times Forexample, the price of cotton – fibre – fabric increased continuously in 2010, ofwhich the cotton price at the end of the year increased by 40% compared with thebeginning of the year This figures are 90-100%, and 137% for fibres and someother materials respectively In this situation, domestic cloth market is subject tovarious factors such as salary, petrol, electricity, living price… resulting in increase

in producing cost, sharp decrease in products for national defence sector This is thecause to the difficulties in seeking orders and arranging production for thecompanies in the Textile sector, which has direct impact on business and productionactivities of the enterprises

Due to the world economic regression, public expenditure crisis in Europe, thenumber of export orders to European countries dropped dramatically in the quarter

3 and 4 of 2011, resulting in client pressure on processing price In order to ensurejobs for some member units, the Company had to sign many orders requiringcomplicated technologies with the unit price and profit rate much lower than thebeginning of the year

The work volume in 2011 increased compared with the plan The inspection onmistakes of some key officers by inspectors of the Ministry of National Defence andGeneral Department of Logistics imposed influence on spirit of staffs in theCompany as well as the management of member units

The labour in garment sector was subject to continuous drop in 2011 in Hanoi;therefore, the Company had to adjust capacity and arrange production of some