LV Thạc sỹ_Finacial analysis and reccommendstions for HAANJSC

The qualitative method: Based on the calculations, I would like to draw out commentsand conclusion about the current situation of the company 1.4 Scope of research Due to the resource co

NATIONAL ECONOMICS UNIVERSITY

ADVANCED EDUCATIONAL PROGRAM

BACHELOR THESIS

FINANCIAL ANALYSIS AND RECOMMENDATIONS

FOR HAANJSC

ACKNOWLEDGEMENTS 4

ABBREVIATION 5

LIST OF TABLES 6

LIST OF FIGURES 6

ABSTRACT 7

CHAPTER 1: INTRODUCTION 8

1.1 Rationale 8

1.2 Research objective 8

1.3 Research methodology 9

1.4 Scope of research 9

CHAPTER 2: BACKGROUND KNOWLEDGE ABOUT THE FINANCIAL ANALYSIS 10

2.1 Definition 10

2.2 Necessity of financial analysis 11

2.3 Methods used in the financial analysis 12

2.3.1 Comparative analysis method 12

2.3.2 Sectional analysis method 14

2.3.3 Ratio analysis method 14

2.3.4 Dupont analysis method 15

2.4 Content used in financial analysis 15

2.4.1 Information used in the financial analysis: 15

2.4.2 Main content of the financial business analysis 20

CHAPTER 3: FINANCIAL ANALYSIS TO HAANJSC 33

3.1 Establishment and general description of the company 33

3.1.1 Operation criteria: 33

3.1.2 Aims and ambitions: 33

3.1.3 Organization structure 33

3.1.4 The industry potential competitors 35

3.1.5 Advantages of HaanJSC in the technogical basis 36

3.2 Financial results: 39

3.2.1 The financial analysis of HaanJSC 39

3.2.2 The evaluation and problems for the financial result of HaanJSC 48

CHAPTER 4: RECOMMENDATION 51

4.1 Business orientation of HaanJSC in the near and far future 51

4.2 Recommendation for the company 52

4.2.1 Enhance the competencies in the finance aspects of the personnel 52

4.2.2 Analyze the industry competitor who has the higher financial capacity to assure more liquidity 53

4.2.3 Strengthen the financial result by paying more attention and preparing the financial personnel for the future 53

4.2.4 Expand the relationship with other banks in the Vietnamese banking system to maintain the liquidity 54

4.2.5 The potential illiquidity should be solved by adding more capital through projects or attracted investors 54

CHAPTER 5: CONCLUSION 56

REFERENCES 57

COMMENTS 58

INTERNSHIP REPORT ASSESSMENT 59

This thesis is about the financial analysis of HaanJSC, a company specializing in theinformation technology projects in concern about the payment and money transferencesystem In the time that I do my internship, the report is also in the process of beingcompleted, either with gathering information and analyzing them In the process of having allthe tasks done, I had the very good experience about being helped by a lot of nice people whowithout them there were no chance for me to come up and go along with the complicated,time-consuming tasks that are required to complete the job that I did

I would like to share my very high appreciation and gravity to all these nice people,who come along and helped me so much with the report and also the process of being anintern student at my last year in the university:

Mrs…, MBA who is a very nice lecturer from the Department of InternationalFinance, Faculty of Banking & Finance, National Economics University She is an extremelyhelpful and dedicated in being a supervisor through this particular moment of my internshiptime I had a very restricted time to meet and communicate with her, but in the very eachmoment that I had a chance to do so, she used it very effectively in sharing her knowledgeand ideas about the report which is so useful for me to come up with ideas and implement it

to the complete task for me

Mr …, President of HaanJSC, the company I did my internship A big friend, ahelpful guide and definitely a talented person in the technological sector; those are things that

I first claimed to be in this man He is always available for me when I need professionalguidance and also the outside-of-business talk which helps me to understand more about thedifficulties of the real business environment in Vietnam but keeps a good attitude for me inthe doing anything I have the desire to

Mrs…, member of the Advanced Education Program Office, who spends a great deal

of time helping us to follow the procedure, did save us a lot of time

The Advanced Education Program Manager who raise the credibility and reputation

so that we did have a very enjoyable time with the internship period

I want to also send an appreciation to all of my friends in the class who support mevery much throughout the 4-year learning at the Program.

ABBREVIATION

FIFO: First in first out method (an accounting basis)

LIFO: Last in first out method (an accounting basis)

CAPM: Capital Asset Pricing model (to calculate or estimate the cost of equity of a firm).SMPg: Social Micro Payment gateway (a project of HaanJSC)

LIST OF TABLES

Table 1: The salary system of HaanJSC p29

Table 2: Cursory Balance Sheet of HaanJSC in the 2010 and 2011 p31

Table 3: Cursory Income Statement (In VND million) of HaanJSC in the 2010 and 2011 p32Table 4: Return for the market and HaanJSC p38

LIST OF FIGURES

Figure 1: The Organization Structure of HaanJSC p29

Figure 2: Current ratio and quick ratio of the HaanJSC in 2010 and 2011 p32

Figure 3: Asset turnover ratio of HaanJSC in 2010 and 2011 p33

Figure 4: Financial leverage ratio of the HaanJSC in 2010 and 2011 p34

Figure 5: Gross profit margin ratio and Net profit margin ratio of HaanJSC in 2010 and 2011p35

The beginning part will be about the overall information about the subject, whatcontent is particularly available in this document, why I choose this subject and the range that

I focus on

There will be a background knowledge chapter which explains the backgroundknowledge of the financial analysis process that has significant importance on the subjectsbeing studied in this document In this chapter, the definition of a financial analysis and thesteps that conducting an analysis will be step by step explained clearly It is also as a vitalelement of the background knowledge, the financial statements and the kind of information

we can exploit from them will also be gone over so that the process coming after that canbecome easier and more comfortable for the interpretation

For financial analysis task, there will be a whole chapter for the figures of thecompany to be shown As the study is about the financial situation of the firm, the figures isall taken from the balance sheet provided by the company Having a good look at the figureswill gives us a better view about the progress of the company and how it is should expected

by investor and the society

Along with the financial analysis, it is an irrefutable thing that in all the companythere is something which is not totally good at the moment I would like, after some time inthe company, to try to make some recommendations about the operation and also the business

of the company These recommendations have been discussed with the instructor and he ismore than paying attention to and agrees with me about the problem

CHAPTER 1: INTRODUCTION

1.1 Rationale

I choose to start my second internship in a company that specializes in the electronicprocess of all services available on the market Their orientation from the beginning and willcontinue to be in the future will be to build themselves up into a payment system provider

The society now is really in a depressing state than many of the time in the past Theremay be no other times when the liquidity and cash become the most serious problem to all thepeople and even the nations around the world; there are no exceptions to Vietnam And it isthe financial point of view that every company should pay their very attention to if they want

to maintain the business state and also the vision into the future

HaanJSC is built up with a quite small capital and that is really a big disadvantages inthis world where the financial condition is evaluated very much and harshly like today So,the aim of the company tends to provide the information technology is reasonable becausethey really needs less capital to start The difficulties in this sector lie mainly in the technicalfield But there are no exceptions that financial situation, the capital structure still play a vitalrole in the company So taking care of the financial aspect of the company means they reallycare about their company, their staff, themselves and also the vision they are looking forwardto

In the view of a student specializing in finance, the problem addressed in my thesiswill be to find out about the capital structure of the company by conducting a financialanalysis based on the figures that have been provided by the instructor at the company.Because of the constraint of the resources, I mainly focus on the data and resources thatavailable for the year before of HaanJsc, since it is a very young company and also because

of the nature of the IT sector is the regularly and gradually changing situation in a very shortterm And I also want to know what a small company but has a big vision already has andwhat they should fulfill in order to achieve it

The quantitative method: I collect the data available for me from the company where I

do my internship, to calculate the necessary figures in a formal financial analysis

The qualitative method: Based on the calculations, I would like to draw out commentsand conclusion about the current situation of the company

1.4 Scope of research

Due to the resource constraints, such as human, financial and time resource, my thesiswill then be limited to only about the figures in the most recent year, which is last year, thatare available for me that is already decided by the company The documents will look at somebasic financial aspect of the company along with the evaluation process to consider thefinancial health of the company and to provide some possible solutions for the development

of the company in the aspects of finance (and more if possible)

CHAPTER 2: BACKGROUND KNOWLEDGE ABOUT THE

FINANCIAL ANALYSIS

2.1 Definition

Financial analysis is the process of evaluating the finance performance of a firm tofind out whether they have fulfilled their duties through a very specific period of time Whenlooking at a specific company, the financial analyst will often focus on the income statement,balance sheet, and cash flow statement Past performance of one company needs to beanalyzed very carefully in order to have an overall view and predict the future

Financial analysis of all firms focus on identify and meant to satisfy the followingobjectives:

Prediction of profitability and growth prospects Financial statement analysis helps in

assessing and predicting the earning prospects and growth rates in earning which are used byinvestors while comparing investment alternatives and other users in judging earningpotential of business enterprise

Evaluation of current position The assets and liabilities possessed by firms can easily

revealed facts about the position of them in the industry and also the market

Evaluation of past performance Future performance can be estimated through past

performance All the stake holders, especially investors or creditors, pay their best attention

to sales, cost of good sold, operating expenses, net income, cash flows and many otherfigures

Evaluation of the operational efficiency The analysis process can be used as a mean

to assess the efficiency in the operation of the firm Simply one or some standards is set bythe Board and then the comparisons between that part and the actual performance expressed

in the financial statements will give out the difference and from that facts it is possible tofigure out the level of efficiency of the company

Possibility of bankruptcy and failure Financial statement analysis is an useful tool in

studying the possibility of bankruptcy

2.2 Necessity of financial analysis

As the preceding part, the analysis and interpretation of financial statements is useful

in achieving several objectives:

- The evaluation of past performance

- The assessment of current status

- The prediction of growth prospect

- The efficiency of the company in its operations

Being basically historical in nature, the financial statements are more reliable for thefirst two purposes However, most readers of the financial statements are interested in thefuture, because as many investors have claimed, if properly and relevantly used, it is possible

to see the company’s ability to grow and prosper and the availability of the company to adapt

to varying conditions The analysis of financial statements can provide a basis for projectingfuture and clues about how the company will respond to these future situations

From an internal perspective of the company, analysis of financial statements providesmany advantages to the administration:

- In planning the short and long term, when choosing between alternatives, objectives,policies, procedures and programs

- In an organization, to coordinate the actions of people who work in an organizationwith the goal of better preservation of the tangible assets, technical and human resources,allowing them to detect possible deficiencies in the operations of the different areas of abusiness

- In the integration, in seeking to articulate the elements and human elements andmaterials that show planning and organization as necessary for the proper functioning of theentity

- In the address, to ensure obtaining the results or objectives through the administrator’sauthority exercised directly or by delegating to other factors, to organize, guide and supervisetheir subordinates, providing a firm basis for directing the efforts towards the aims of theentity.

- In the control, to measure and compare the results with those expected, ie if there is abalance between planning and execution

- From an external perspective, allows presenting the situation and possible evolution

of the entity to all external users: credit institutions, shareholders, suppliers, employees,customers, auditors, analysts, government agencies, competitors, investors, etc

Through the analysis of financial statements, we can give out answers to key questions

in the running of the institution:

- Is there an ability to pay short and long term liabilities for the entity?

- Is it excessive inventory investment?

- How much is the working capital account and how it is invested?

- Are fixed assets utilized efficiently?

- Does the performance you get is balanced with the investment?

2.3 Methods used in the financial analysis

The methods introduced below are some basic methods that are used in manydocuments They help the managers and also the potential investors to have a systematicapproach to the financial statements These processes have been proved to be the simplestway to have an overall view about the financial condition of one specific company and aresuitable for decision making process for both the manager, director and the investors whohave an interest

2.3.1 Ratio analysis

Financial ratio analysis is one of the most frequently used tool of assessing andbuilding relationships between different pieces of financial information Information from

the financial statements is used to calculate financial ratios in order to determine some factsabout the firm, each of them will help in a specific way to reveal one specific part of thestatements.

As stated, ratio analysis is one of the most popular financial analysis techniques forcompanies, especially for small companies Each field of the company, including liquidity,profitability, and many others are all considered and assessed very carefully by using thefigures calculated by using this approach

Comparisons are vital parts of the ratio calculation Ratio alone does not really tellanything very significantly about the condition Comparisons are made with the company and

a different one often called benchmark company They are companies that are consideredmost important in the industry and the information source is reliable enough to do the processregarding industry average ratios

2.3.2 Comparative analysis

Analysts can refer the pace, development trend of the economic result for a purpose ofdescribing the movement in each criterion One of the most popular, flexible in the financialanalysis and frequently appeared in the first step of analysis process is comparative analysis.The information must reflected the same meaning of economic substance, consistency withcalculation method and measurement unit and collected in the same length of time period foranalysts use to compare Comparative analysis includes three main methods: horizontalanalysis method, vertical analysis and cross-sectional analysis

Horizontal Analysis

Methods of financial statement analysis generally involve comparing certaininformation Horizontal financial analysis can be used to compare a business entity overdifferent months or defined periods within a fiscal year The horizontal analysis comparesspecific items over a number of accounting periods For example, to analyze the overallperformance of business or a particular project, we can compar revenue generated overdifferent months of a year

An accountant can follow one of the two given below methods to conduct a horizontalfinancial analysis:

The first method is dollar analysis The amounts in absolute dollars of various itemsare compared for an entity over different periods of time This helps analyze the spendingtrend of a business Also, it helps analyze the effects of external factors like rise in prices overbusiness expenditures

Percentage analysis is based on the change in different items over different periods oftime calculated in terms of percentage By using this type of analysis, analysts can comparethe performance between a small business and a large business in the same industry.

Vertical Analysis

This type of analysis is of great significance in carrying out the decision makingprocess By comparing the analyses of several periods to one another, the users expand uponvertical analysis.This method compares several items to one certain item in the sameaccounting period In other words, this is the procedure of comparing different figures ofseparate entities to one specific figure of an entity for one specific period of time

Cross-Sectional analysis method

When investor, analyst or portfolio managers conduct on a company in relation to thatcompany's industry or industry peers, they are using cross-sectional analysis method Theanalysis compares one company against the industry it operates within, or directly againstcertain competitors within the same industry, in an attempt to discover the best of the breed

The users who use cross-sectional analysis seeks to evaluate the target company'sefficiency in these areas in order to make the best investment choice among a group ofcompetitors or the industry as a whole To do this, the analysts identify comparative metrics,the valuation, debt-load, future outlook and/or operational efficiency of the target company

When using comparative metrics, the analyst must be careful to consider how theywill be affectted by the unique operating characteristics of the company

2.3.3 Sectional analysis method

In this method, the research events, the economic results is divided and aggregatedinto a great number of group bases on the specific criteria Normally, criteria can be timeperiod, location, business scope or constituent part of the targeted analysis By dint of thisaction, analyst may analyze the target object throughout the interval period of time, scope,which indicates the exact causes for results, identifies the obvious factors to create therecommendations to exploit the strengths ad restrict the weaknesses

2.3.4 Dupont analysis

The idea of this method is the separation of a synthetic indicator of economicperformance ratio into lots of ratios which have the cause and effect relationship It allowsanalysts to analyze the level of effect of the composition ratios on the synthetic ratio.Therefore, analysts can find the factors, the causes leading to good and bad scenario in each

of the business activities, and then can find out the strengths and weaknesses in businessoperation

2.4 Content used in financial analysis

2.4 Content used in financial analysis

2.4.1 Information in the financial analysis:

Information used in the financial analysis process can be obtained from varioussources The sources of the information decide the reliability of the results because theydecide the complete and accurate level of the information Here are some of them:

2.4.1.1 Information from the inside of the company:

Mainly, the information from the inside of the company can be related to as thefinancial statements In any company the financial statements is the most important sources

of financial data They are the Income Statement, Balance Sheet and the Cash flowStatement

Income statement:

Income statement (also referred to as profit and loss statement (P&L) and some more

terms) is a company's financial statement that indicates how the revenue (money from thesales process) become net income through the calculation process (all revenues and expenseshave been taken into account) The revenues, the cost and expenses are reported on thisdocument, including write-offs (e.g., depreciation and amortization of various assets) andtaxes Showing the money made or lost by the company during the period is the main purpose

of this document

In contrary to the balance sheet, this financial statement represents the figures in aperiod of time Investors, creditors and managers benefits from this statement by the financialperformance of the company, especially the way they do the sales process and how the costsare strictly or not controlled After that, the future performance, and the ability to generatecash is also the usefull information that should be appeared on the list

The Income Statement, though, have some limitations:

The lacks of items that might be relevant but cannot be measured in the process arenot reported (e.g brand recognition and loyalty)

Some numbers depend on accounting methods used (e.g FIFO or LIFO accountingmethod to measure inventory level)and also some numbers depend on judgments andestimates (e.g depreciation expense depends on estimated useful life and salvage value).

Balance sheet:

In accounting, a balance sheet or statement of financial position is a summary of thefinancial balances of a company There is always a specific point in time when all theaccounts in the balance sheet are shown on the documents Because of that very own features,

a balance sheet is also known as a "snapshot of a company's financial condition" It is also theonly statement in the four ones which represents the financial information in a single point intime of a business' calendar year

A balance sheet basically has three parts: assets, liabilities and stockholders’ equity.The assets categories are always listed in the beginning and typically in order of liquidity,followed by the liabilities The difference between the assets and the liabilities is the equity orthe net worth capital of the company or the net assets The accounting equation in this pointrequires that the net worth must equal assets minus liabilities

In accounting, assets are economic resources Anything possessed by the company,

either tangible or intangible, which is capable of producing value and having positiveeconomic value is considered an asset In other words, assets represent ownership of valuethat can be converted into the most liquid asset, known as cash (cash itself is also considered

an asset) The balance sheet consists of the monetary value of all the assets belonging to thefirm There is one noticeable thing about the two main categories of the assets, tangible andintangible assets Tangible assets category can be sub-categorized into several ones, forexample the current assets and fixed assets Current assets include cash and cash equivalent,prepayment, account receivable, inventory, while fixed assets include such items as buildingsand equipment, land, plant Intangible assets are nonphysical resources and rights that givethe firm some advantages such as monopoly advantage in the market Some good examples

of intangible assets are goodwill, copyrights, trademarks, patents and computer programs

A liability is an obligation of an entity arising from past transactions or events, any

business agreement that can possibly raise the transfer or use of assets, provision of services

or other yielding of economic benefits in the future Based on the concept, we can point outsome of the characteristics of the liability:

The payable borrowing from individuals or banks for business improvements orpersonal income in short or long time;

A duty or responsibility to others that entails settlement by future transfer or use ofassets, provision of services, or other transaction yielding an economic benefit, at a specified

or determinable date, on occurrence of a specified event, or on demand

Liabilities have a place in a balance sheet and are usually divided into two categories.The first thing is current liabilities – the current liabilities are expected to be liquidated within

a year Some of the common current liabilities are payables such as wages, accounts, taxes,and accounts payables, unearned revenue when adjusting entries, portions of long-term bonds

to be paid this year Long-term liabilities are all the liabilities that are expected not to beliquidated within a year Issued notes payables, long-term bonds, pension obligations, long-term leases are some of the most frequently met sub-categories

In accounting and finance, equity is the residual claim or interest of the investors in

assets minuses the liability If liability exceeds assets, negative equity occurs In theaccounting area, shareholders' equity (or stockholders' equity) represents the remaininginterest in assets of a company, spread among individual shareholders of common orpreferred stock

The owners of the business use their own money to finance the start-up operations ofthe company This at the same time creates a liability on the business as the capital becausethe business is separated from its owners The accounting equation is sum of liabilities andassets and it is somewhat can be considered as the businesses itself After liabilities have beentaken into account for the positive remainder is marked the owner's interest in the business

In the bankruptcy, the liquidation process can be understood easier by using theconcept in this definition At first, all the secured creditors are paid against proceeds fromassets The following is the creditors, in priority sequence, have the next claim/right on theproceeds The last or residual claim against assets, paid only after all other creditors are paid

is the owner of the company It is obvious that in the situation when the creditors cannot gettheir money back, the owners cannot do that also Stockholder or ownership equity is alsoknown as risk capital or liable capital

We can point out some of the features of the balance sheet:

All the value in the balance sheet are monetary indicated So, it is possible forcalculating the value of the business at a point in time The final result is the overall financialcondition of the company is therefore easier to get.

A specific in time, mostly the last day of the accounting period, is always the time thatall the figures in the balance sheet are shown There are the last year and current year number

on the statement which helps a lot to look at and estimate the volatility of the assets betweenthe two accounting period

Through the balance sheet, in addition to the basic accounting equation (Assets =Liability + Equity), investors and managers can calculate all the existing assets and capitalstructure Therefore, balance sheet accounting is an important document for study evaluatedthe situation and overall business results, level of capital use and the economic outlook,financial enterprises

Cash flow statement

A cash flow statement is a financial statement in which the information of the flow ofcash, in or out, of the business is shown It shows us how changes in the account in otherstatements affect cash and cash equivalents, in some activities like operating, investing andfinancing activities The statement captures both the current operating results and theaccompanying changes in the balance sheet This kind of document is mostly used todetermine the short-term viability of a company International Accounting Standard 7 (IAS7), is the International Accounting Standard that deals with cash flow statements The cashflow statement is a very good indicator for a firm's liquidity

In comparisons, the balance sheet is an overview of a firm's financial resources andobligations at a specific point in time, and the income statement summarizes a firm's financialtransactions over a period of time At the same time, the cash flow statement show onlyinformation about only inflows and outflows of cash and cash equivalent; all the other onesthat affect other accounts is minor and not mentioned in this document It can be depreciation

or write-offs on bad debts or credit losses for some references So, one conclusion here is thatthe cash flow statement is a cash basis report on three types of the firms’ activities: operating,investing and financing activities Non-cash activities are usually declared in footnotes

The liquidity and solvency of a firm are the main aspects that the statement providesinformation about It also give out the company’s ability to change cash flows in future

circumstances provide additional information for evaluating changes in assets, liabilities andequity improve the comparability of different firms' operating performance by eliminating theeffects of different accounting methods indicate the amount, timing and probability of futurecash flows The cash flow statement excludes allocations which might be got from otheraccounting methods, such as different timeframes for depreciating fixed assets.

Notes and disclosures attached with financial statements are also useful source ofinformation They support and detail the information in the basic financial statements.Sometimes the basic financial statements are just too long to be detailed and in that situation,the notes and disclosures follow up in the reports as an additional source for the individualwho wants to look at some figures only in the statements These documents consist of thefeatures of the business operation, accounting period, the currency used in accounting, theitems that are clearer explained for the larger category in the basic financial statements

2.4.2 External information

It is not only the information within the company that matters but also the informationfrom other outside sources, such as from independent auditing agency, business partners, orthe credit institutions that have had relationships with the firms before

With the combination of internal and external information, stakeholders of thecompany can have a good foundation about the company in which they have interest in,either to make a decision of investment, or a decision in the management field

2.4.2 Main content of the financial analysis

2.4.2.1 Income statement

This is one of the very first steps towards the financial results of the company Theincome statements of any public company can be easily obtained by going to the investorssection in the official website of the company The report usually comes in the form of anannually and quarterly

Every professional investors will get this report and analyze it right after Anytime areport go into the website, that means they have updated themselves with the latestinformation, the latest business results, about what they earn, what they spend and also what

is the last piece of the cake that is remaining in the company after doing all the businesstransaction and have the result in the last period of time

The net income, as closest to the name of the report itself, is the first important thingthat anybody should look at when reading an income statement This is the bottom line ofalmost every firm, whether they do make money or not, whether they spent more or less thanwhat they earn In the first case, the managers should look again at what they did in order tosee if anything goes wrong while the investors should be careful when decide whether to risktheir money in the company The second case, the expenses are well managed and controlledand does not exceed the revenue, the first thing about that company is that they achieve thebottom line and somehow deserve compliments and investment although there are so manymore things to consider in this company.

Revenues

The first figure in the list is look like the income of an individual This is the amountthat the company earns as they make their sales and transactions, before any calculations ofthe cost The revenues often comes at the very first place in the document and there is oftenjust one number that shows the amount that we need to make sure that we take care of inassessing the value of the firm

Something about this revenue figures is what direction they go and the speed of theprocess, over a period and during the period If the company always increases its revenues at

a reasonable rate and continuously in the period of time, there are good things about thecompany at the ability to generate money from the transactions I have to emphasize that thething searched for by most investors and also the wants of all the managers is a stable andcontinuous growth trend of the company, not a temporarily sky rocket increase but then staystill for the rest of their life A sustainable increase is the best criteria

Expenses

This general heading composes some of the costs Here are some of the frequent items

in the list, mostly seen and also all costs for many companies

Costs of Goods Sold

The goods or services have to be purchased or produced to be taken into the market.And that kind of cost is the cost of goods sold How much the company spend to buy andhow much they have to spend to produce the goods or services are the main idea of thisfigures

Operational Expenses

After having the money in and with minuses of the cost of goods sold, the companyhave to spend as a sequence to pay for a very large number of operational costs like salariesfor the staff, research and development, advertising costs, and many others.

One of the “virtual” things that we need to take care of in reading the financialstatements is the amortization and depreciation expens Some kind of fixed assets worn outfor a specific period of time, and the company has to prepare for the problem Therefore, thiscost like appear to lower what the company can earn in order to reserve a “fund” to plan forreserving and replacing worn out assets This is the place where the accountants can use theirskills to transform the process Because different accounting standards and regulations allowthe use of different suggested and maximal amortization rates, accountants often find someroom for manipulation of the overall company's result (profit or loss) by setting theamortization and depreciation numbers to suit their needs They might be hiding some profit

in good years if they use maximal amortization rates and use the inverse approach in badtimes

Especially important with the company in the field of technology or medication is thecost for research and development This is the part that some big investors always do not likevery much because the process of research and development should be done all over again tokeep the company on track and maintain their market position

Financial Expenses

Interests and taxes are the most important factors in this kind of expenses In thestructure, if high level of debts was found, it is true that a high level of interest expenses inthe analysis It is also common that with a high level of debt, the tax is influenced a lot sincedebt and interest is a tax deductible account and it is sometimes are influenced by theaccountants as their wants

Earnings

Earnings are simply results of a calculation Revenues minus expenses, which is all itreally is There are some possible things that can happen in the formula The first is that therevenues are higher than expenses, which means the company is making profit And thesecond possibility is the total opposite when the company's expenses are higher thanrevenues; in this case they suffer from the loss or negative profit

The earnings in the financial and accounting point of view are various depending onwhat cost we involve in the calculations Below listed some important ones:

Gross Profit

Gross profit is the largest item in the earnings list It is calculated by subtracting theCOGS from the revenues In percentage terms, it is known as gross margin In one industry,the companies with the highest gross profits should be considered as the good ones becausethey do not have to spend much on the goods for sales and therefore have plenty of money tosupport another area Like elsewhere in income statement analysis, trend is important factor

If it is shown on the statement that the gross margin is decreasing, it is surely not a good sign,especially in the kind of business where it is difficult for the company operating to passexpenses onto customers

Operating Profit

This earning often stays at the second position in the list of the earnings It can beestimated by taking the preceding gross profits and minus the operating expenses Theexpenses here are very carefully managed and they have to be in some relationship with thecompany operations In percentage terms, it is known as operating margin This figure canhigher as a result of efficiency in the operation of the overall business or the fact that therevenues comes up with a higher speed than costs The thing that needs consideration aboutthis number is to compare it between companies in the same industry and again, research thetrend

Net profit

This which is also known as the net income is the final earnings, simply the salesrevenues minus all kinds of expenses on the list Many people just consider looking at the netprofit figures as they scan through a bunch of the available companies because this answerthe final but very easy question “Can the firm earn money for me”?

2.4.2.2 Balance sheet

Capital can be represented by assets A very important task of an analyst is to payenough attention to the operation and lines of business in order to estimate the allocation ofthe asset The level of asset convergence is shown all in the structural asset This can beeasily imagined as at the first period and after the company or the business has come intooperations, the capital invested will make a gradual switch from the fixed and long-term

asset to the small and short term ones The enterprise that does business on factories, whichmeans manufacturers of the products, the fixed asset can be a great proportion in the assetstructure People should based on specific condition to make a distinct conclusion in theasset structure of any firms or enterprises to find out whether a relevant one is used in thecompany.

There are two parts that make up the capital They are known as liability and equity.The sequence that is frequently used is coming from the horizontal analysis method toobserve the fluctuation in the structure of the capital resource to watching each type of capitalresource changes through time Through that process, a scale of reasonable level of capitalstructure should be built up and hopefully, they can find out the facts about the level of riskwhich the creditors or current investors of the companies are facing

Business operations always demand current assets that are in some specific minimum

level to maintain their operations That amount of current asset is known as the permanent working capital It is easy to understand because regardless of some special point in time or

some extra marketing plans, the company still needs to manage to produce or transfer someproducts or services It can be listed here as raw materials, bank balance, and a lot more thanthat Of course this level does not stay the same all the time In some beginning stage of thebusiness life cycle, the permanent working capital will be risingas the level and the scale ofthe company expand continuously; on the other hand for a down side business the level ofpermanent working capital will be decreasing At last, the level of this kind of capital needs

to be addressed although they are not fixed at one level Long term funds should be thefinancing part of this kind of permanent capital when it goes to the investment

The temporary or varying working capital is another vital part of the capital

investment structures and the noticeable about this is it varies with the volume of operations.The level of this working capital is changing from time to time and should always be higherthan the level of the permanent or fixed working capital One examples can be contributedhere is the business time fluctuations During business time or on-season, it is critical thatmore working capital is needed to serve for more production/sales As seasons vary,temporary working capital requirement moves up and down This kind of capital can beobtained through short term sources of funds like current liabilities This level of currentliabilities is also going up and down with quite tight correspondence with the level oftemporary working capital

2.4.2.3 Financial ratios analysis

Financial ratios are among the most important techniques in indicating a firm'sperformance and financial situation Analysts use financial ratios to analyze trends andcompare the firm's financials to those of other firms In some cases, ratio analysis even canhelp predict future bankruptcy Most ratios can be calculated from information provided bythe financial statements

Using the financial ratios can be an useful tools if we can classify the information thatthey bring to us Here are the common classifications:

 Financial leverage ratios

 Liquidity ratios

 Profitability ratios

 Asset turnover ratios

Financial Leverage Ratios

Financial leverage ratios provide an overview of the long-term solvency of the firm Itseems that these ratios and the liquidity ratios have the same factors of considering which isthe ability to pay off the debts But while the liquidity ratios are concerned with short-termassets and liabilities, financial leverage ratios is responsible for providing information aboutthe extent to which the firm is using long term debt

The debt ratio is defined as total debt divided by total assets:

(Equation 1.7)

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

(Equation 1.8)All these preceding formulas are presenting the ratio base on the classification oflong-term leases and of some items as long-term debt or equity

The ability of the firm to earn to cover the interest payment on its debt is represented

by the times interest earned ratio:

(Equation 1.9)EBIT = Earnings Before Interest and Taxes

Liquidity Ratios

Liquidity ratios provide information about a firm's ability to meet its short-term

financial obligations Whether short-term liabilities are extended or not depends so much onthis criteria Two frequently-used liquidity ratios are the current ratio (or working capitalratio) and the quick ratio

The current ratio is the ratio of current assets to current liabilities:

(Equation 1.1)Short-term creditors prefer a high current ratio because of the low risk presentedthrough the ratios Shareholders may prefer a lower current ratio so that more of the firm'sassets are working to grow the business There are no fixed and acceptable levels of the ratiofor every firm and industry For example, firms in cyclical industries may maintain a highercurrent ratio in order to remain solvent during downturns

One limitation of the current ratio is that the inventory may include many items thatare difficult to liquidate quickly The quick ratio is an alternative measure of liquidity thatdoes not include inventory in the current assets Its formula is calculated as:

(Equation 1.2)The current assets used in the quick ratio are cash, accounts receivable, and notesreceivable These assets essentially are current assets less inventory, which are considered the

liquid and short term representative assets The quick ratio often is referred to as the acid test.

The cash ratio is the most conservative liquidity ratio in the three that are presented

here It excludes all current assets except the most liquid: cash and cash equivalents The cashratio is defined as follows:

(Equation 1.3)

Asset Turnover Ratios

Asset turnover ratios measures the level how efficiently the firm utilizes its assets.They sometimes are known as asset utilization ratios, efficiency ratios, or asset management

ratios The most common ratios are receivables turnover and inventory turnover.

Receivables turnover is an figures in which the speed of the process of collecting itsaccounts receivables:

(Equation 1.4)The receivables turnover often is reported in terms of the number of days that thereceivables account exist before they are collected This number is referred to as the

collection period It is the accounts receivable balance divided by the average daily of credit

sales (used in a 365 years):

(Equation 1.5)

Another major asset turnover ratio is inventory turnover It is the cost of goods old in

a time period divided by the average inventory level during that period:

(Equation 1.6)

Profitability Ratios

Profitability ratios offer several different measures of the success of the firm atgenerating profits

The gross profit margin is the percentage point that gross profit accounts for in the

elements of the sales The gross profit margin considers the firm's cost of goods sold only It

is defined as follows:

(Equation 1.10)

Return on equity measures the profits earned for each dollar invested in the firm's

equity Return on equity is defined as follows:

(Equation 1.11)2.4.2.4 Cash flow statement analysis

Cash flow statement analysis will show how much money was earned andspent by a company in a specific time, usually a quarter or a year It might look likerevealing the same information as income statement and confuse ones who is trying tochoose a measurement But there is an important difference between them which isrelated to accrual accounting Revenues and expenses in income statement are bookedwhen they occur while they are not in cash flow statement The key is that in mostcases the time when they are book is not the same point of time as cash changeshands Also, income statement includes some titles which are not booked in cash flowstatement

You can think of final net cash from operations as the "true" company's profit,

to simplify cash flow statement analysis understanding The net profit reported in theincome statement doesn't necessary mean any increase in the balance sheet at the end

of the accounting period

Cash flow from operating activities

This section of cash flow statement analysis is related to the cash that comes infrom sales of the company's goods and services minus the cash spent for producing itsselling products You should look for those companies which are producing positivecash flow from operations Of course, there is a difference between companies among

industries; for example the high tech and IT sector, negative cash flow fromoperations in the earlier stages of company's growth is known to produce

Figures from cash flow statement are often used as a preview signal of thefuture net income Interesting information for investors is the dynamic of the gapwidening or narrowing gap is signaling speeding or slowing cost bookings between

cash flow from operations and net income for the last few periods

Cash flow from investing activities

They are new equipment and other investment related with company's ongoingprimary business, also acquisitions and investments on financial markets

One of the most important parts of analyzing investing figures is to comparedepreciation and re-invested capital in ongoing business in a specific period Sinceover a longer period of time artificially high cash inflows are not sustainable re-investments should be at least equal (preferable higher) than depreciation,

Cash flow from financing activities

Cash flow from financing activities can be related to cash inflows out ofprimary (new emission) stocks of bonds selling or of additional borrowings submitted

by banks on one side, while cash outflows can represent paying back a bank loan,dividend payments or buying back its own common stocks

2.4.2.5 The cost of capital

From an investor's point of view "the shareholder's required return on aportfolio of all the company's existing securities" The cost of capital is used toevaluate new projects of a company It is the minimum return that investors expect forproviding capital to the company, thus setting a benchmark that a new project has tomeet It is a term used in the field of financial investment to refer to the cost of acompany's funds (both debt and equity)

For an investment to be worthwhile, the expected return on capital must begreater than the cost of capital If a project is of similar risk to a company's averagebusiness activities A company's securities typically include both debt and equity; onemust therefore calculate both the cost of debt and the cost of equity to determine acompany's cost of capital

Since equity does not pay a set return to its investors, the cost of equity is morechallenging to calculate Similar to the cost of debt, the cost of equity is broadlydefined as the risk-weighted projected return which is largely unknown required byinvestors The cost of equity is therefore inferred by comparing the investment toother investments (comparable) with similar risk profiles to determine the "market"cost of equity

The cost of debt is relatively simple to calculate, as it is composed of the rate ofinterest paid In practice, the interest-rate paid by the company which itselfincorporates a probable rate of default (and amount of recovery given default), can bemodeled as the risk-free rate plus a risk component (risk premium) For companieswith similar risk or credit ratings, the interest rate is largely exogenous (not linked tothe company's activities)

Also considering whether markets are fully integrated or segmented (if fullyintegrated, there would be no need for a local The most popular equation isthe CAPM formula (below), although articles such as Stulz 1995 question the validity

of using a local CAPM versus an international CAPM

The cost of capital is the rate of return that capital could be expected to earn in

an alternative investment of equivalent risk It is reasonable to use the company'saverage cost of capital as a basis for the evaluation However, a rate of return largerthan the cost of capital is usually required

A discount rate for a project's projected cash flows can be defined by theweighted-average cost of capital (WACC) This WACC can be calculated afterdetermining cost of debt and cost of equity

 The cost of equity