Solutions for improving Ngoc Khanh auto service and trading limited company’s financial situation

Luận văn bằng tiếng anh chuyên ngành tài chính doanh nghiệp Học viện tài chính. Đề tài: Giải pháp cải thiện tình hình tài chính tại công ty TNHH kinh doanh và dịch vụ ô tô Hyundai Ngọc Khánh. Tài liệu hỗ trợ tốt cho các bạn chuyên ngành tài chính kế toán quản trị kinh doanh tại Học viện tài chính và các trường đại học trên toàn quốc.

Đề tài Solutions for improving Ngoc Khanh Auto Service and Trading

Limited Company’s financial situation

LIST OF TABLES

Table 2.1: Declare the amount and value of modern car repair machinery ofthe company at 31/12/2017 39Table 2.2: summary of labor organization by level of Ngoc Khanh trading &service Co.,LTD 40Table 2.3: Capital structure in Ngoc Khanh company in 2015-2017 42Table 2.4:Changes in the capital structure of Ngoc Khanh company in 2015-2017 45Table 2.5: Structure of funds in Ngoc Khanh company in the period of 2015-2017 50Table 2.6: Asset structure ratio in Ngoc Khanh company in 2015-2017 51Table 2.7: The change in asset structure in Ngoc Khanh company in full stage2015-2017 53Table 2.8: The situation of Ngoc Khanh operating result from 2015-2017 58Table 2.9: The cash flow situation of Ngoc Khanh company from 2015-2017 62Table 2.10: the sources and uses of cash of Ngoc Khanh company from 2016-2017 63Table 2.11: The debt situation in Ngoc Khanh company from 2015 to 2017 65Table 2.12: Solvency ratio of Ngoc Khanh company at 31/12/2017 and

31/12/2016 67Table 2.13: Asset utilisation efficiency ratio in Ngoc Khanh company in

2016, 2017 69Table 2.14: Profitability ratios of Ngoc Khanh company in 2016,2017 73

Table 2.15: Dupont identify of ROA of Ngoc Khanh company from 2017 76Table 2.16: Dupont identify of ROE of Ngoc Khanh company from 2015-2017 77Table 3.1: Some target of Ngoc Khanh company in 2018 91

2015-LIST OF FIGURES

Figure 2.1: Business process of the company 34Figure 2.2 Board of NGOCKHANH AUTO CO.,LTD 36Figure 2.3: Chart of accounting apparatus of the company 38Firgue 2.4: Debt ratio of Ngoc Khanh company compared to the industry average in the period of 2014-2017 41Firgue 2.5 Debt ratio of the automobile industry in 31/12/2017 42Firgue 2.6: Equity ratio of Ngoc Khanh company compared to the industry average in the period of 2014-2017 43Figure 2.7: Identify NWC (net working capital) of Ngoc Khanh company at 31/12/2016: 49Figure 2.8: Identify NWC (net working capital) of Ngoc Khanh company at 31/12/2017: 49Firgue 2.9: Factor analysis affecting DUPONT in 2017 78Figure 3.1: Total car sales from 2013 to 2017 of Vietnam market 86

TABLE OF CONTENTS

DECLARATION i

LIST OF TABLES ii

LIST OF FIGURES iii

TABLE OF CONTENTS iv

THE PREFACE 1

1 Research problem 1

2 Purpose and thesis questions 2

3 Scope of reseach 2

4 Methodology 2

5 Thesis structure 3

CHAPTER 1: THEORIES OF FIRM’S FINANCIAL SITUATION 4

1.1 Corporate finance and financial management 4

1.1.1.Corporate finance and financial decisions 4

1.1.1.1 Definition of corporate finance 4

1.1.1.2 The financial decisions 5

1.1.2 Financial management 8

1.1.2.1 Definition and content of financial management 8

1.1.2.2 The role of financial management 8

1.2 Firm’s financial situation 10

1.2.1 Definition of Firm’s financial situation 10

1.2.2 Contents of firm’s financial situation 12

1.2.2.1 The firm’s capital structure and finacing policy 12

1.2.2.2 The firm’s current asset structure 15

1.2.2.3 The firm’s operating result 16

1.2.2.4 The firm’s cash flows 20

1.2.2.5 The firm’s debt management and solvency 21

1.2.2.6 The firm’s asset utilisation efficiency 24

1.2.2.7 The firm’s profitability (ROS, BEP, ROA, ROE) 25

1.2.3 Factors impact financial situation 29

CHAPTER 2: FINANCIAL SITUATION IN NGOC KHANH AUTO SERVICE AND TRADING LIMITED COMPANY 32

2.1 Overview of NGOC KHANH LIMITED COMPANY 32

2.1.1 The basic information about NGOC KHANH LIMITED COMPANY 32

2.1.2 The business characteristics of NGOC KHANH LIMITED COMPANY 33

2.1.2.1 Business areas 33

2.1.2.2 Products and infrastructure 34

2.1.2.3 Organization of management of NGOCKHANH AUTO CO.,LTD 35

2.1.2.4 Characteristics of business operations 39

2.2 Finacial situation in NGOC KHANH LIMITED COMPANY 40

2.2.1 NGOC KHANH LIMITED COMPANY’s Capital structure and financing policy 40

2.2.1.1 Assessing Ngoc Khanh company’s capital structure ratios .40

2.2.1.2 Assessing Ngoc Khanh company’s capital mobilization 41

2.2.2 NGOC KHANH LIMITED COMPANY’s current asset structure .51

2.2.2.1 NGOC KHANH LIMITED COMPANY’s current asset ucture ratios 51

2.2.2.2 Assessing the current asset structure of Ngoc Khanh company 52

2.2.4 Assessing Ngoc Khanh company’s cash flows 60

2.2.5 NGOC KHANH LIMITED COMPANY receivables management and solvency 64

2.2.5.1 Evaluating the firm’s receivables and payables managerment 64

2.2.5.2 Evaluating the firm’s solvency 67

2.2.6 NGOC KHANH LIMITED COMPANY asset utilisation efficiency 69

2.2.7 NGOC KHANH LIMITED COMPANY’s profitability 72

2.3 Assessment of NGOC KHANH LIMITED COMPANY’s financial situation 79

2.3.1 The achievements 79

2.3.2 The shortcomings and reasons 79

3.1 The development strategies of the NGOC KHANH COMPANY 83

3.1.1.Overview of the car market in Vietnam in the coming years 83

3.1.1 1 Socio-economic context 83

3.1.1.2 Market inputs situation 84

3.1.1.3 Market output situation 86

3.1.2 The development strategies of the NGOC KHANH COMPANY .87

3.1.2.1 Company's development prospects in the coming years 87

3.1.2.2 The development strategies of the NGOC KHANH COMPANY 90

3.2 Solutions for improving NGOC KHANH LIMITED COMPANY’s financial situation 92

3.2.1 Increase capital mobilization, build an optimal capital structure92 3.2.4 Enhancing the Debt management 99

3.2.5 Promoting product sales, save cost and actively seek the market to increase sales and profits 100

3.2.6 Other solutions 101

CONCLUCTION 102

REFERENCES 103

THE PREFACE

1 Research problem

The reform and opening up of the economy starting in 1986 brought theconcepts and theories of corporate finance management from developedcountries into Vietnam Since then, corporate finance management conceptsand corporate finance theory have graduated been studied and applied inVietamese enterprises, which have made important contributions to theconstruction of the national economy But more important is how to applyfinancial theories that are developed from advanced countries into the context

of Viet Nam

So far, Vietnam's economy has achieved great achievements In 2017,

the government signed free trade agreements such as CPTPP(Comprehensive

and Progressive Agreement for Trans-Pacific Partnership), EVFTA (EU-VN Free Trade Agreement),…which boosted FDI flow with modern technology

and modern management experience flowing into Vietnam In 2018, freetrade agreements, policies, circulars and decrees of the Government will comeinto force, it will make strongly change the supply and demand of the entiremarket economy

Since the 1990s, the appearance of the Vietnamese automobile industryhas not been completed The automobile market in Viet Nam has shown manyweakness in manufacturing and supplying products The new governmentpolicies has brought benefits to the automobile assembly enterprises but alsohindered the business of car dealers in the market A reasonable financialmanagement policy is very necessary for the automobile business in thecurrent period

Based on the meaning of the assessment and analysis of corporatefinance, after more than three months of practice at Ngoc Khanh Company.Under the guidance of instructor ************h and the guidance of the staff

in the Finance - Accounting Department of the company I bravely selectedthe topic: "Solutions for improving Ngoc Khanh Auto Service and Trading Limited Company’s financial situation" as the theme for mygraduation thesis.

2 Purpose and thesis questions

 First, the purpose of thesis is systematize the knowledge of financialsituation and financial management in the enterprise, thereby studying thecurrent financial situation at Ngoc Khanh automobile company

 Secondly, the thesis find out the shortcoming and limitations in thefinancial management of the company in order to propose practical solutions

to improve the financial situation of the company

3 Scope of reseach

 Space: To study the financial situation of Ngoc Khanh company

 On time: The financial situation of the business in 2015,2016 and2017

 Data source: The data used are collected from the accounting records,industry report, economic reports of Viet Nam and the world, the financialstatements of Ngoc Khanh company in three years 2015,2016 and 2017

4 Methodology

Based on knowledge at university, books and self-accumulation and toachieve these above objectives, several methods of studying the thesis areused as follow:

 Figure collection: from websites of Ngoc Khanh company, books,magazines, internetand internal information of the corporation

 Inductive, deductive and statistical method

 Figure comparison, data evaluation, judgment and conclusion

 Method of analyzing, summarizing, synthesizing materials and booksfrom the theoretical background

5 Thesis structure

Beside the Content, Introduction, Conclusion and References, the thesisconissts chapters:

 Chapter 1: Theories of firm’s financial situation

 Chapter 2: Financial situation in NGOC KHANH AUTO SERVICEAND TRADING LIMITED COMPANY

 Chapter 3: Solutions for improving NGOC KHANH LIMITEDCOMPANY’s financial situation

This thesis is the result of my internship experience at Ngoc Khanh Auto Service and Trading Limited Company After that, I want to express

my gratitude and appreciation to many people who trained, supported andencouraged me to finish this graduation thesis

I would like to send my deepest gratitude to my instructor, Dr PhamThi Van Anh, lecturer at Corporate Finance department, Academy of Finance.She has provided me many supports and advices from the beginning andinspired me by her knowledge and professional experiences, as my motivation

Due to my shortage of knowledge and limited time, the thesis can notavoid short-comings, therefore, I looking forward to receiving commentsfrom instructors as well as administrators in Ngoc Khanh company tocomplete my graduation thesis

Ha Noi, May, 2018

Sincerely

CHAPTER 1: THEORIES OF FIRM’S FINANCIAL SITUATION

1.1 Corporate finance and financial management

1.1.1.Corporate finance and financial decisions

1.1.1.1 Definition of corporate finance

There are many concepts of corporate finance that have been given up

to now

According to “The basic corporate finance” of Dr.Nguyen Minh Kieu:

“corporate finance is an activity related to the mobilization of capital

formation and the use of such capital to finance the investment in the assets of the enterprise to reach the target”

According to The corporate finance book of Academy of Finance, the

form and essence of corporate finance are expressed as follows:

- In terms of form, corporate finance is the monetary funds in theprocess of creation, distribution, use and movement associated with theoperation of the business

- In essence, corporate finance is the economic relations in the form ofvalue associated with the creation and use of monetary funds of enterprises inthe course of operation

Based on this view, there are some ideas for that: “ Corporate finance

is cash flow generated in the process of creating and using monetary funds associated with the operation of the business.” This perception is identical

between the nature and form of corporate finance

There are some other opinions that: “Corporate finance is the method

of monilizing, allocating and utilizing the financial resources of the business

to achieve business objectives”.

But this opinion has been consistent “corporate finance” – an objectiveeconomic category with financial management - a subjective activity of thecorporate finance manager

Thus, corporate finance can be approached under differentperspectives However, proper perception of corporate finance and itsnature have important implications in theory and practice This provides thebasis for the use of financial relationships to make sound financial decisions

to achieve the goals of the business

1.1.1.2 The financial decisions

According to the financial operations, financial decisions are divided

into investment decisions, mobilize capital decisions and profit distribution decisions.

 Investment decisions:

As the decstons related to the total value of assets and the value eachproperty unit (fixed assets and current assets) Investment decisions affect theleft (assets) of the balance sheet The investment decisions are mainly:

- Decision to invest liquid assets: cash balance decisions, inventorydecisions, sales policy decisions, investment decisions of short-term financial

- Decision of fixed asset investment: Decision of fixed assetprocurement, project investment decisions, long term financial investmentdecisions

- Decision structural relationship between invests in current assets andinvest in fixed assets: the decision to leverage business applications,breakeven point decision

 Mobilize capital decisions:

As the decision concerning the choice should be to provide capital forinvestment decisions Funding decisions affecting the right of balance sheet(capital resources section) The decision to mobilize capital of businessmainly covers:

- The decision to mobilize short-term: Short-term lending or use tradecredit decision

- The decision to mobilize term capital: The decision to use term liabilities through long-term loans from banks or issuing corporatebonds; decide to issue shares (ordinary shares or preference shares); decided

long-to structure relations between debt and equity (gearing); lending decisions long-topurchase or lease the property, etc

 Profit distribution decisions:

It is an important decision for stock companies to distribute dividends ordividends policy.The finance manager will have to choose between the use ofthe profit after tax to dividends, or retained for reinvestment These decisionsrelated to the business should pursure dividend policy of how and wheather thedividend policy has an impact how the value of the business or stock price on themarket or not

Over time, financial decisions can be divided into long-term decisions and short-term decisions.

 Long-term financial decisions:

As those decisions have strategic nature, there is a great influence onthe survival and development of enterprises Each decision requiresexecutives to scrutinize, analyze methodically and scientifically to ensureminimize risks that occur Long-term financial decisions include:

- Long-term Investment Decision: A decision to select businessesshould invest in these opportunities, or the public investment projects in thecontext of limited financial resources to maximize the value to the owner

- The decision to mobilize long-term capital: The decision to selectshould mobilize long-term capital from public sources, with the scale of howmuch to maximize the value to the owner

- The decision on a profit distribution policy of the enterprise: Isdecide how much should be spent to split profits to owners, how much toreinvest profits back to maximize enterprise value to the owner

 Short-term financial decisions:

As these decisions have operational nature, no big impact on thesurvival and development of enterprises; so it is also calledthe tacticalfinancial decisions.The rationality and correctn correctness of this decisionhas a certain influence on the risk and benefits to the enterprise, as well as forbusiness owners The short-term financial decisions include:

-Decide capital in cash reserves: When enterprise capital in cashreserves will ensure payment operations, pay to fulfill the financialobligations of the enterprise with all the other world is favorable, minimizerisk during operation However, the cash capital reserves will increase thecost of capital and increased opportunities at risk because money can be lostdue to inflation rates, or due to changes in exchange rates caused

-Decide on debts: When business credit sales will increase thecompetitiveness lead to increased sales and profits of the business However,credit sales will increase in receivables resulted in the freezing of capital andbusinesses at risk cannot recover the debt

-Decide on payment discount: The discount applies payments will helpbusinesses quickly withdraw cash sales, reduced capital requirements resulted

in reducing the cost of capital However, because of the implementation of thediscount to the customer's sales, profits may now be declining

-Decide on reserve inventory: Maintaining inventories will reduce risk

of business disruptions; but it increases the opportunity cost and the cost ofstoring, preserving reduce corporate profits

-The other short-term financial decisions: As decided on depreciation,decided to set aside a reserve fund, a decision on payment always creates therelationship between benefits and risks general business and business owners

in particular

1.1.2 Financial management

1.1.2.1 Definition and content of financial management

a) Definition of financial management

Corporate financial management is the selection, decision, making and implementation of financial decisions to achieve the operational goals of the business.

b) Content of financial management

Financial management includes the following main contents:

- Participate in the evaluation and selection of investment decision

- Determining the need for capital and organizing the mobilization ofcapital respond promptly enough capital needs caused by the operation of thebusiness

- Use effective existing capital, strict management of revenues,expenditures and ensure the solvency of the business

- Implementation of profit distribution, appropriation and use ofcorporate funds

- Check the operations of the business regularly

- Perform financial planning

1.1.2.2 The role of financial management

- Mobilizing ensure business activities take place normally and

continuously

Financial managers on the considering financial market conditions,capital needs and the specific conditions of the enterprise, thereby makingoptimal decisions in the organization mobilized capital sources (inside ,external) meet the needs for the operation of the business A properly fundedpolicies not only help enterprises reduce financial risk, but also a great impact

to the performance objectives to maximize business value

- Organizations using efficiency savings, contributing to improving the

business performance of the enterprise

With the selection of optimal investment projects on the basis ofconsiderations, comparisons between profitability ratios, capital mobilizationcost and risk level of projects v v financial managers have set the stage forthe use of savings and high efficiency

The organization promptly raises capital, will adequately be enterpriseflash business opportunities, increase revenue and corporate profits Thechoice of form and methods appropriate to mobilize capital, ensuring theoptimal capital structure can help businesses reduce the cost of capital,contributing to profit margins and equity enterprise

On the other hand, the maximum mobilization of existing capital tobusiness operations can help businesses avoid the damage caused by theaccumulation of capital, increasing asset turnover, reduce the number of suchloans from reduced interest payment loans, contributing to increased profitafter tax of enterprises

- Check, comprehensive monitoring of the production and business

activities of enterprises

Business processes of the enterprise as well as the movement of capitaltransformed monetary form So, through the consideration of the situation ofrevenue and expenditure daily cash and especially through the analysis andevaluation of the corporate finance and the implementation of financialdicators, financial managers can control the timely and comprehensiveoperational aspects of the business, thereby indicating the existence and the

untapped potential to make appropriate decisions and adjust activities toachieve heading out of the business

1.2 Firm’s financial situation

1.2.1 Definition of Firm’s financial situation

Now the term of financial situation is still unclear and consistent

According to the Vietnamese dictionary, "situation" is a noun describing

events, phenomena that are related to each other, occurring in a certain space or time, showing the state or development trend of everything So, the

financial situation can be understood as whole of events and phenomena that

relate to each other express financial relationship in the process of distribution, creation and use of the monetary funds associated with the firm’s operation.

Evaluating the firm’s financial situation is a comprehensive analysis ofall aspects of corporate finance which helps identify the strengths, limitations

as well as the capacity and potential of the business; Finding out the influentfactors and the level of influence in each factor on the financial situation andproduction and business activities of corporate Therefore, it can helpenterprises to set orientations and proper solutions for the operation ofenterprises in the following periods

To assess the corporate financial situation, the company's financialstatements are the most important document The company’s financialstatement include:

Balance sheet (B01-DN): The balance sheet is a summary of theassets, liabilities and equity of a business at a particular point in time Thebalance sheet is usually made at the end of the quarter

The balance sheet have two sides, the left-hand side is total value ofAssets, the right-hand side is total value of Liabilities Owner’s Equity

Income statement (B02-DN): The income statement is the financialstatement which reflects the general situation and results of business activities

in an accounting period of the enterprise according to each production andbusiness activity.

The income statement measures performance over period of time Netsales are shown at the top of each statement, after which various costs andincome taxes, are subtracted to obtain the net income

Statement of cash flow (B03-DN): Statement of cash flow is astatement reporting the impact of a firm’s operating, investing, and financeactivities on cash flow over an accounting period

This statement helps both financial managers and investors to answerquestions such as: Where is cash come from? From operating activities orfinancing activities?How is the firm generating extra cash to use ? Repay ebt

or to invesst in new product? So it is an important part of annual report

And it can be made according to two methods: Direct method orindirect method

Note to financial statements (B04-DN): Notes to financial statementsare additional information added to the end of financial statements Notes tofinancial statements help explain specific items in the financial statements aswell as provide a more comprehensive assessmnet of a company’s operatingavtivities, financial condition in reported period Notes to financial statementsinclude information that is not presented fully and clearly infinancialstatements

In addition, it must gather all information related to the financialsituation of the enterprise, such as general information on economy, currency,tax, information on the economic sector of the enterprise

1.2.2 Contents of firm’s financial situation

1.2.2.1 The firm’s capital structure and finacing policy

To achieve business objectives, businesses always try to determine theproportion of capital to achieve the optimal capital structure However, thisstructure is always dominated by the investment situation and sometimes evenbroken So every executive has to study about the capital structure to get aglimpse of how to make a successful financial strategy

 Assessing firm’s capital structure ratios

in the event of bankruptcy But business owners often prefer high debt ratesbecause they have a large amount of assets in their hands that only invest asmall amount of capital and that shows how leverage is used by the business

+ Debt – equity ratio

Debt – equity ratio = Total debt

Total equityThis index reflects the company's ability to use its own capital to covercorporate debt The smaller this indicator is, the better the financial health ofthe business If the index is less than 1 or Long-term debt < equity, it showsthat the enterprise has the ability to self-finance financially, independentlyand autonomously in production and business, the dependence in finance islow for creditors, and vice versa

 Assessing financing policies ( capital mobilization) of enterprise

Funds raised by businesses to meet capital needs include equity, loansand debt Equity mainly consists of owner's capital and profit forreinvestment Borrowings and loans include: credit, bond issuance, financelease, commercial credit and other appropriated capital Each capitalmobilization has certain advantages and constraints on the ability to mobilizeand use the business The study of capital mobilization situation to determinethe source of capital formation, will the capital size increase or decrease, whatdirection of the capital structure?

Assessing the current situation and situation of fluctuations in capitalsources of enterprises should use groups of indicator:

- Indicators that reflect the size of the source of funds include the value

of total funds and each type in the balance sheet

- The indicators reflect the proportion of capital source of the

corporation

The assessment of capital mobilization of corporations helps managersassess the degree of independence, financial autonomy of corporations, thefinancial risks faced by corporations, and the assessment of mobilizationpolicy

The capital of the business is to find a suitable capital mobilizationpolicy for the future Assessing the capital mobilization situation by analysingboth the size and composition of capital sources, combining both absolute andrelative amounts of capita, as wel, as the proportion of each type of capitalsource at the beginning of the period, at the end, from which to assess thesituation of capital mobilization of enterprises.

In business, it is necessary to coordinate flexibly between borrowingand equity in order to make the most of external capital while still ensuringfinancial security for corporations

 Assessing the net working capital (NWC) of enterprise

NWC is a long-term capital source of funding for the current assets ofthe business to ensure regular business operations and stability of thebusiness

NWC = Long-term capital - Long-term assets

Or

NWC = Short-term asset - Long-term capital

Net working capital creates a level of security for corporation inbusiness activities

NWC> 0: According to the first formula, it proves that enterprises havesurplus long-term capital; Equity and long-term debt allow full financing forfixed assets and long-term investments, while it partially funds short-termfixed and liquid assets, and corporate finance is balanced According to thesecond formula, the proceeds from current assets and short-term investmentswill enable the business to not only be able to pay due debts, but also to spend

a certain amount of money Therefore, corporate finance will balance in theshort term

NWC<0: According to a formula one shows that long-term capital isonly partially secured forr long-term assets, while the remaining part of thecapital is used in short-term to finance long-term assets Thus, corporatefinance is not balanced According to the second forrmula, it shows thatmoney that can be obtained from current assets and short-term investment isinsufficient to cover short-term debt so short-term balances are not guaranteed

in the short-term (except when liquid assets and short-term investments Ternturnaround much faster than short-term debt) Overall NWC represents thecurrent bad financial condition of the business going on, sponsorship policydoes not bring stability and safety

1.2.2.2 The firm’s current asset structure

a) Current asset structure:

 Asset structure’s ratio: Refers the level of investment in assets of a

corporation, including short-term assets and long-term assets

- Short-term asset ratio:

Short-term asset ratio = Short-term asset * 100%

Total assetsThe short-term assets ratio reflected in a business venture capital thatthe business spends is how much money is used to form short-term assets

- Long-term asset ratio:

Long-term asset ratio = Long-term asset * 100%

Total assetsThis indicator reflects the amount of capital invested in long-termassets accounted for the percentage of the total capital of the corporation Atthe same time, it reflects the state of technical facilities, equipment facilities,existing production capacity and long-term development trend of the business

in the future

b) Invested capital situation

Assessment of the use of capital by assessing the size of the firm'sassets, the level of investment by the business for the business as a whole, aswell as the areas of activity, or each asset in particular When assessing thissituation, it is necessary to consider the following issues:

- The fluctuation in business scale and investment level of the

corporation through the size of total assets, each type of asset, the volatility oftotal assets as well as each type of assets through comparison between thebeginning and end of the year both in absolute and relative numbers

- Assess the suitability of the asset structure, investment policy and its

impact on the business process of the business Determine the proportion ofeach type of assets to total assets, compare the proportion of each typebetween the end of the year and the beginning of the year to see thefluctuation of increase or decrease When assessing the structure of assets, it

is necessary to pay attention to the substances and the characteristics of thebusiness capital structure of a coloration, in combination with considering theimpact of each type of asset on the process and efficiency of production andbusiness

1.2.2.3 The firm’s operating result

In view of the current accounting opinion, the firm’s operating result isthe final result of the business activities, financial activities and otheractivities in a period of time Business results show the difference betweentotal revenue and total cost of economic activities that is performed in term

In other words, the business result is the profit of the business in a period oftime

The concept has identified the nature of the business results with theview of other researchers and reflects the cost factor (input) in the operation

of the business If revenue is more than cost, the result is represented by profit

and vice versa if the revenue is less than the cost of business result expressed

by the loss

Information on business results provides managements with anoverview of their business performance and performance in each sector Thishelps to identify the key management points and potentials to be exploited inorder to increase the scale and profitability of the enterprises

Analyze the overall performance of the company through two groups ofindicators:

- Indicators on the income statement

This indicators reflect the scale of income, expenses and businessresults of enterprises in the period according to the total and each field ofoperation

First, the main group of indicators reflects the turnover, income fromthe activities of enterprises in the period:

Net sale

Net sales is the total value of goods consumed and paid in the periodafter deducting sales deductions such as trade discount, sale discount, value ofreturned goods, indirect taxes, etc Net revenue from sales of goods andrendering of services is the basis for determining the profit (loss) of a business

Net sale = Sales revenue - The deduction

Financial incomes

Financial income reflects the economic benefits that enterprises earned

in the period from financial activities Financial income includes: Loaninterest, bank deposit interest, bond interest, share capital, joint ventureinterest, foreign exchange gain,

Other incomes

This is irregular incomes of enterprises received in the period,including incomes from liquidation, sale of fixed assets (liquidation price),gifts and fine collection of customers due to breach of contract copper,…

The indicator group reflects the expenses incurred by the enterprise inthe period for production and business activitiy, including:

Cost of good sold

Cost of goods sold is the total cost of production of all products andgoods consumed in the period The cost of goods sold is determined by one ofthe following methods: FIFO; LIFO or weighted average This is animportant indicator when assessing the cost of production and business of theenterprise because it reflects the level and capacity of managing costs,controlling the inputs of enterprises

General operating expense

This cost group consists of two types: “sales expense” and

“administrative expense” Sales expenses reflect the total expenses incurredwhen selling goods, finished products and services in the period of theenterprise Administrative expense also reflect the total costs incurred inmanaging all business operations This cost group is commonly referred to asthe cost of business management that reflects the cost management capability

as well as the management and control capacity of business executives in theenterprise So this is also a target that financial managers are very interested

Financial expense

Financial expenses represent expenses for financial activities including:expenses or losses related to financial investment, borrowing and borrowingexpenses, joint venture expenses Short-term transfer of securities, transactioncosts of securities sale, etc

In financial expenses, there is a very important expense that is interestexpenses, reflecting the costs to creditors (eg banks, credit institutions)through credit agreements

Other expense

Unrealized expenses in the period, which are fully reversed with otherincomes, including: expenses for liquidation, sale of fixed assets, contractbreach, irregular damages business activities

The last and most important indicator in assessing businessperformance is the group of profit targets

Profit is the indicator showing the volume of surplus value generated

by the labor of the enterprise in the period, reflecting the final result ofbusiness activities

To ensure that the financial position of financial managers iscomparable and assessed, the following criteria for profitability are identified:

Earning before interest and taxes (EBIT)= Net sales – Cost of goodsold – General operating expense

The total profit before taxes = EBIT – Loan interest expense

Net income = The total profit before taxes * (1- Income taxes rate)

- Indicators reflecting the cost management situation:

These indicators show the cost structure, the level of businessorganization, the potential business sectors or the risk of the enterprise

Expense ratio (Hcp):

Total net turnover

In which: Total net turnover = Net sales + Financial income + Otherincome

The cost factor shows how much the business costs to earn a revenueshare If this indicator smaller than 1, the operational efficiency of the higherbusiness and that is the basis for sustainable business development

Cost of good sold

The cost of goods sold ratio is determined as follows:

Cost of good sold ratio = Total cost of good sold

Net salesThis indicator shows how many cost of goods sold (VND) to earn 1VND of net revenue If this ratio is lower, the management of the cost ofgoods sold as more possible and vice versa

General operating expense ratio

The formula for determining General operating expense ratio

General operating expense ratio = Total general operating expense Net sales

This indicator reflects to earn 1 net revenue, the business must spendhow much business management costs in the period This ratio is lower showthe cost management business as possible, using cost savings and businesseffectively

1.2.2.4 The firm’s cash flows

Capital in cash as part of the corporate capital reserves to pay regularfor stakeholders in the payment process to reciprocal cash immediately Thistype of property has the highest liquidity and solvency decisions of thebusiness This type of capital accounts for the relatively small part of totaltrading capital, but its effects are not small business to the enterprise

To see the mobilization and use of the proceeds of the enterprise, theenterprise financial management analyzed changes in cash flow and use ofcorporate money, which can be directed to the mobilization capital and theuse of corporate funds in the future

 Identify the evolution and use of funds

This determination is made by: First, transfer all assets and liabilities onthe balance sheet accounting of the post Next, compare the data with thebaseline period-end to find out the change of each item on the Balance Sheet.Each change of each item will be considered and reflected in one of the twocolumns to use money or money movements following manner:

- Use the corresponding amount will increase or decrease capital

assets

- The corresponding funds will increase or decrease capital assets.

When calculating movements and use of funds Notes: The calculation for thedetailed items, not for synthetic items to avoid the mutual offset againstaccumulated amortization items and any provision for the increasedmovement if we make changes to the source of the money and then put intothe opposite movement used the money

 A table analyzing sources of cash, use of cash and net cash flow.Arrange the provisions relating to the use of money and involveschanging the form of a cash flow balance sheet Through this panel mayconsider and evaluate in general: The amount of increase or decrease of thebusiness during the period have been used for anything and the sources offunds, resulting in increased or decreased On the basis of the analysis can bedirected to mobilize capital for the next period

1.2.2.5 The firm’s debt management and solvency

a) Evaluating the firm’s debt management

The indicators reflect the debt structure and debt management le

- Receivable ratio include:

Total assets

This indicator reflects how much capital is occupied in the total assets

of the corporation

- Payable ratio:

Total assets

This indicator reflects the level of appropriation of cotporation It says

in the total assets of the business, how much ít funded by capital to occupy

b) Evaluating the firm’s solvency

Solvency assessment using the following indicator group

 The general coefficient of solvency

Coefficient of solvency = Total assets

Total liabilitiesThis coefficient indicates the relationship between the total assets thatthe firm is managing and using, and total liabilities, showing how many loansare secured by how many assets If the coefficient is less than 1, that is, theassets of the business are insufficient to pay off the debts, the equity iscompletely lost, the enterprise is in danger of bankruptcy The coefficient isgreater than 1, the firm is able to pay the debt, but the assessment of thesolvency of the business is good or bad depends on the ability to convert intomoney of the property

 Current ratio

Current ratio = Current liabilitiesCurrent assetsThis factor reflects the ability to convert assets into cash to cover short-term liabilities It represents the level of securing the repayment of short-termdebt of the business This low coefficient demonstrates the weak repaymentcapacity of the firm, which signals the potential financial difficulties that thefirm may face in repaying the debt And vice versa, showing that businesses

are highly capable of ready to pay due debts However, in some cases, thishigh factor is unlikely to reflect the business’s payment capacity as well.

Therefore, in order to properly assess the situation of the businessshould be considered through some other indicators

 Quick ratio

Quick ratio = Current assets - InventoryCurrent liabilitiesThe quick ratio is a measure closer to the solvency of a corporation,since it excludes inventories that are not readily convertible into money.However, in some cases, the high ratio does not accurately reflect thesolvency of the business is good because many companies account for largeamounts of receivables

 Cash ratio

Cash ratio = Cash and cash equivalentsCurrent liabilities

This factor indicates how much money a company has and the cash equivalents to pay immediately for a short-term debt This coefficient reflects the ability to pay due debt of the business at any time because this is a flexiblecover

 Times Interest Earned ratio

Interest is a fixed cost The source for paying interest is interest beforeinterest and taxes The interest payment ratio represents the relationshipbetween the pre-tax profit and the interest-taxable interest payable by theenterprise in the period:

Interest Expense

1.2.2.6 The firm’s asset utilisation efficiency

Performance factors measure the ability to manage and exploit the level

of performance of existing assets

- Total Asset Turnover

Total AssetsThis indicator reflects how many rounds of business capital has beenfilmed, and how much time that capital was generated during the period Thehigher the whole capital round, the greater the efficiency of capital use, thehigher the turnover, the more profitable the business

- Fixed capital utilization efficiency

Net Fixed AssetsThis indicator shows how much of the net revenue generated during theperiod contributed to a given period of time

- Working capital Turnover:

Working capital Turnover

Average Woking CapitalThis index reflects the working capital cycle in a given period is usuallyone year In particular, the average number of working capital is determinecaccording to the arithmetic average method, the worrking capital at thebeginning and the end of the quarter of the year Working capital turnover, thegreater the efficiency shown higher working capital

- Inventory turnover

Inventory turnover = Cost of goods sold

Inventory

This indicator reflects the effectively the firm is when they manage their assets The higher this ratio is, the more efficiently we are in managing inventory.

- Days’s sales in inventory (DSI):

It reflects how long it took to turn it over on average

Receivable turnover =

Net SaleAverage accounts receivables

This ratio makes more sense if we convert it to days, so the days salesoutstanding

- Days Sales Outstanding (DSO)

360Receivable turnover

DSO is used to appraise accounts receivable It represents the averagelength of time that the company must wait after making a sale beforereceiving cash, which is the average collection period The DSO may be short

or long, it depends to the firm’s credit policy or the customers not paying theirbill on time

1.2.2.7 The firm’s profitability (ROS, BEP, ROA, ROE)

a) Assessing the firm’s profitability ratios

Evaluate the effectiveness of using business capital of enterprisesthrough indicators reflecting the profitability of enterprises:

 Return on sales (ROS):

This rate shows the relationship between profit after tax and net sales.

It means when 1 VND in net sales is performed, how many VND is gotten inprofit after tax To ensure stable growth, ROS must always be positive.Affordability and management of income flow require managers to plan andimplement marketing strategies most effectively

Return on sales

It also shows abilities in manage and save the cost of enterprise

 Basic Earning Power (BEP)

This ratio reflects the profitability of asset without source of bussiness capital and corporate income

Basic Earning Power (BEP) = Earnings Before Interest and TaxAverage assets

It is very important in consider the relationship with loan interest rate ti assess the use of loans that effects the profitability of equity

 Return on assets (before tax)

This rate shows each VND in assets has profitability how many proiafter loan interest in period

Return on assets (before tax) = Profit before taxAverage assets

 Return on assets (ROA)

This rate reflects each VND in capital is used, how many profit aftertax is gotten

Return on assets (ROA) = Average assetsProfit after taxThis criterion reflects the profitability of an enterprise after itsobligations to the lenders and the State Positive ROA is the basis for thecompany growth from endogenous ability

 Return on equity (ROE)

Return on equity (ROE) = Average owner’s equityProfit after taxThis rate shows very syntheticall side about finance managementlevel of enterprise Increasing ROE will help business advance their ability tomobilize new capital in the financial market Conversely, this coefficient issmall and the equity is low, the business performance is low, the companywill have difficulty in attracting capital.However, ROE is high that is notalways promissing business advantages ROE is too high can be a sign ofleverage by executives This may pose a financial risk to the company.

b) The DUPONT identify

The return on equity of an enterprise is the result of a series ofmeasures and management decisions.In order to see the impact of therelationship between cost management, capital management, capitalmanagement on the profitability of business owners, researchers havedeveloped indicators to examine the effect of factors on the return on equity.The above analysis is called the DUPONT identify to look at the factors thatinfluence the financial ratios

 Factos affecting the ratio of profit after tax to business capital

Average of business

Net incomeAverage of business capitalor:

ROA = Net incomeNet sales * Total assetsNet sales

so:

ROA = The ratio of net income to Net sales * Total asset turnover

Considering this relationship, we can see the impact of the after-taxprofit margin on turnover and how the entire turnover affects the after-taxprofit-to-business ratio On that basis, the manager of the enterprise shall takeappropriate measures to increase the ratio of profit after tax to businesscapital

 Factors affecting the ratio of net income

ROE can be established from the following relationships:

ROE = Net incomeEquity

ROE = Net incomeTotal assets * Total assetsEquity

The DUPONT analysis look uses both the income statement as well

as the balance sheet to perform the examination As a result, major assetpurchases, acquisitions or other significant changes can distort the ROEcalculation Many analysis use average assets and shareholder’s equity tomitigate this distortion althoughthat approach assumes the balance sheetchanges occurred steadily over the course of the year, which may not beaccurate either

1.2.3 Factors impact financial situation

 Legal forms of business organization

Every business exists under certain legal forms of businessorganization In Vietnam, under the Law on Enterprises 2014, has four basiclegal forms of business include private enterprises, business partnerships,limited liability enterprises and joint-stock enterprises

Legal forms of business organization to influence large financialinstitutions such enterprises: method and deposit formation, the organizationand management of capital, the transfer of capital, distribution of profits andowner's responsibility for debts of the enterprise

 Economic - technical characteristics of business sector

The businesses operating in the manufacturing industry, commerce, theproportion of working capita, are higher, the speed of the working capital cycle

is faster than the agriculture, construction, hr this sector, the fixed capitalaccounts for a higher proportion than for working capital, capital recovery time

is also slower

 Business environment

- The infrastructure of the economy If infrastructure develop (transport

systems communications, electricity, water ), it will reduce investmentneeds of the enterprise, while enabling for enterprises to save business costs

- The state of the economy: an economy that is in the process of

growth, there are now more opportunities for investment and development,which requires enterprises to actively apply measures to raise capital to meetinvestment requirements In contrast, the economy is in recession, theenterprise is difficult to find good investment opportunities.

- Interest rate market: market interest rates are factors that impact

significantly on the financial operations of the business Market interest ratesaffect investment opportunities, the cost to use the opportunity to raise capitaland corporate capital On the other hand, the market interest rate indirectlyaffects production and business situation of enterprises When market interestrates rise, people tend to save more consumers, it’s limited to the sale of theenterprise products

- Inflation: As the economy has a high level of inflation, the consumer

products business had difficulty making the financial status of the businessstress If the business does not apply positive measures may also be loss ofbusiness capital Inflation also makes business capital needs increased and thefinancial situation is not stable now

- Economic policy and financial state of the enterprise: as policies to

age investment, policy of tax; Policy export, import, regimes depreciationfactor This is a major impact on the financial problems of the business

- The level of competition: If enterpises operating in the industry, the

field has a high level of competition requires companies to invest more for thereneval of equipment, technology and improve product quality, advertisingmarketing and sale of products, etc

- Financial markets and the system of financial intermediation

+ The development of diversified market instruments and other forms

of raising capital for businesses, such as the emergence and development ofother forms of financial lease, the formation and development of the stockmarket

+ The strong growth of the financial intermediary will provide financialservices more abundant and diverse than for businesses, such as thedevelopment of the commercial banks have to diversify the picture payment

as payment via bank transfer, credit card and electronic transfer The healthycompetition between financial intermediaries create better conditions forenterprises to access and use the credit funds with lower costs

The presentation of the basic arguments about the assesment of the financial situation of the business, which is the basis for in-depth analysis of business performance and assessment of the financial situation of the Ngoc Khanh company is presented in Chapter 2, the following section

CHAPTER 2: FINANCIAL SITUATION IN NGOC KHANH AUTO

SERVICE AND TRADING LIMITED COMPANY

2.1 Overview of NGOC KHANH LIMITED COMPANY

2.1.1 The basic information about NGOC KHANH LIMITED COMPANY

Vietnamese Name: Công ty TNHH thương mại và dịch vụ ô tô NgọcKhánh

International transaction name: NGOCKHANH AUTO SERVICEAND TRADING COMPANY LIMITED

Abbreviated name: NGOCKHANH AUTO CO.,LTD

Founded:

 Business license number ************ issued by Hanoi Authorityfor Planning and Investmen, on ************

Form of ownership: Limited Liability Company

Authorized capital at present: 40,000,000,000 VND

Main business: Trading Hyundai’s tourist car

Initially founded, the company operated in the form of a joint stockcompany At that time, the company had two co-founder, Mrs ************and Mrs ************ Total authorized capital at this time was 12 billionVND At that time, the company started business at Ngoc Khanh ParkingPoint, Kim Ma Ward, Ba Dinh District, Hanoi Based on the favorablebusiness location, the head office is located in the city center, where the speed