DEBTS AND PROFITABILITY AN EXAMINATION OF MANUFACTURING FIRMS LISTED ON VIETNAM STOCK EXCHANGE

UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business






TRUONG HANH DUYEN






DEBTS AND PROFITABILITY
AN EXAMINATION OF
MANUFACTURING FIRMS LISTED
ON VIETNAM STOCK EXCHANGE




MASTER OF BUSINESS (Honours)
SUPERVISOR: Dr. PHAM QUOC HUNG

Ho Chi Minh City – Year 2012
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 2 of 44

TABLE OF CONTENT
6TAcknowledgement6T 3
6TAbstract6T 4
6TCHAPTER 1: INTRODUCTION6T 5
6T1.16T 6TVietnam Context:6T 5
6T1.26T 6TManufacturing firms in Vietnam:6T 6
6T1.36T 6TResearch Objective:6T 7
6T1.46T 6TResearch structure:6T 10
6TCHAPTER 2: LITERATURE REVIEW6T 11
6T2.1 The concept of debts:6T 11
6T2.2 The concept of profitability:6T 12
6T2.3 Relationship between debts and profitability:6T 14
6T2.4 Theoretical Framework:6T 17
6T2.5 Hypotheses Development:6T 18
6TCHAPTER 3: RESEARCH METHODOLOGY6T 20
6T3.1 Research Design:6T 20
6T3.2 Variables Definition:6T 21
6T3.3. Samples Collection:6T 22
6T3.4. Methods of Data Analysis:6T 24
6TCHAPTER 4: EMPIRICAL RESULTS & DISCUSSION6T 26
6TCHAPTER 5: IMPLICATIONS & CONCLUSIONS6T 30
6T5.1. Implication:6T 30
6T5.2. Limitation:6T 31
6T5.3. Conclusion:6T 32
6TReferences6T 33
6TAppendix 1: Outliners6T 36

6TAppendix 2: Normality and Heteroskedasticity6T 37
6TAppendix 3: MLR between Net margin and independent variables6T 39
6TAppendix 4: MLR between ROE and independent variables6T 42

Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 3 of 44

Acknowledgement

I would like to gratefully acknowledge the enthusiastic supervision of Dr. Pham Quoc
Hung during this work. I thank Prof. Nguyen Dinh Tho for the technical discussions on
the spectral response model, optical measurements and relevant discussions. Staff of
International School of Business (ISB) – University of Economy Ho Chi Minh is thanked
for numerous supports. I am grateful to all my friends and classmates from Mbus 1 – ISB
for sharing science materials and knowledge during the years I study there and for their
continued moral support there after. From the staff, Mr. Duong Minh Toan and Mr. Ho
Sze Ming are especially thanked for their care and attention. Finally, I am forever
indebted to my husband for his understanding, endless patience and encouragement when
it was most required.
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 4 of 44

Abstract

The ability of companies in determining suitable financial policies to make investment
opportunities is one of the most principal factors for the companies’ growth and
progression. Adopting a debt policy or a capital structure is considered as a momentous
decision that influences the companies’ value. The determination of a company’s capital
structure constitutes a difficult decision, one that involves several and antagonistic
factors, such as risk and profitability. That decision becomes even more difficult, in times

when the economic environment in which the company operates presents a high degree of
instability. Therefore, the choice among the ideal proportion of debt and other resources
can affect the value of the company, as much as the return rates can. In this study, I tried
to examine the influence of debts from Vietnam manufacturing firms regarding the factor
profitability. The necessary data, which are used in this work are the 3 consecutive years’
financial reports provided by the 200 respective firms. The Ordinary Least Squares
(OLS) method was employed in the estimation of a function relating the net margin and
return on the equity (ROE) with the indexes of long-term, short-term and total debts, and
also with the total of owner’s equity. The results indicate that short-term debt presents a
negative impact on net margin. The study recommends that managers should be careful
while using short term debts as a source of finance.


Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 5 of 44

CHAPTER 1: INTRODUCTION
This chapter includes three sections. The first section introduces Vietnam Context in
recent years, which is also the background of the research. The second is some briefs of
manufacturing firms in Vietnam and its vital role in the whole economy, thus the research
is to focus on this sector. The third section goes straightly to research objective as a
conclusion for two sections above and an opening for following chapters.
1.1 Vietnam Context:
Vietnam’s transition, from a centrally planned economy to a market economy and from
an extremely poor country to a lower-middle-income country in less than 20 years, is
now a case study in many development textbooks. But Vietnam’s other transition, to
becoming an industrialized and modern economy by 2020, has barely begun. The latest
Socio-Economic Development Strategy (2011-2020) goes on to identify the country’s
key priorities to meet this ambitious target: stabilize the economy, build world-class
infrastructure, create a skilled labor force, and strengthen market-based institutions.

Meeting these aspirations will not be easy. The country has experienced bouts of
macroeconomic turbulence in recent years: double-digit inflation, depreciating currency,
capital flight, and loss of international reserves eroding investor confidence. Rapid
growth has revealed new structural problems. The quality and sustainability of growth
remain a source of concern, given the resource-intensive pattern of growth, high levels of
environmental degradation, lack of diversification and value addition in exports, and the
declining contribution of productivity to growth. Vietnam’s competitiveness is under
threat because power generation has not kept pace with demand, logistical costs and real
estate prices have climbed, and skill shortages are becoming more widespread.
Until a few years ago, Vietnam was one of the world's hottest emerging markets. Now it
faces an urgent task: fix a beleaguered banking system or watch its economy continue to
slip behind faster-growing neighbors. Piles of bad loans following the financial crisis
have dragged down growth in Vietnam and left banks weakened and reluctant to lend,
lending interest rate sometimes climbed up to exceedingly 21% per annually in crisis
period. Economists warn that Vietnam has entered a dangerous cycle where banks,
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 6 of 44

saddled with bad debts, are unwilling to lend, making it harder for businesses to invest.
That feeds into slower growth, which in turn makes it harder for companies to pay back
loans, again harming the banks. In a report of government in July 2012, from early 2012
Vietnam recorded about 30,000 of firms are in financials difficulties, temporarily
stopping business and declaring bankruptcy.
1.2 Manufacturing firms in Vietnam:
Vietnam’s manufacturing sector grew at a compound annual growth rate (CAGR) of
9.3 percent from 2005 to 2010, and labor productivity in the sector increased at
3.1 percent a year. Because this sector accounts for around 30 percent of overall GDP,
this rapid growth made a substantial contribution to Vietnam’s expansion during this
period. Within manufacturing, some subsectors performed especially well. Motor vehicle
production grew at an annual rate of 16 percent during these five years, ready-made

clothes by 12.9 percent, and electrical equipment by 12.0 percent.
The manufacturing industry plays a vital role in Vietnam’s economy by providing
employment opportunities and accelerating its growth. Simultaneously, liberalization,
removal of investment restrictions, and semi-privatization of the economy have greatly
boosted the country's industrial growth rate. The main manufacturing sectors in Vietnam
are textiles and garments, food and beverages and leather and wood. The Government has
implemented various programs to transform Vietnam’s economic structure from
agriculture-driven to industry-driven and reduce its import dependency. The development
of export processing and industrial zones is just one of the initiatives that bolstered the
country's industrial growth. The Government has also offered incentives to investors in
social sectors such as health and education. However, since liberalization, the
Governments share in the overall industrial investment has been declining, thereby
enabling higher participation of private and foreign companies.
Financial and R&D (research and development) support, as well as the allotment of land
in industrial zones, are likely to encourage stakeholders in the manufacturing industry to
increase their investments. While sectors such as textiles, leather, food and beverages,
automobiles, chemicals and energy were resilient even during the economic downturn, a
booming food processing sector, an unsaturated pharmaceuticals market and a dynamic
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 7 of 44

garments sector are expected to add value to the industrial production in Vietnam. The
Government has retained the majority of the stake in energy, finance, banking and
telecom and shielded the agriculture, food and automobiles sectors from international
competition. Higher private and foreign investment had enhanced the growth rate of
sectors such as transportation, real estate, communication and mining. However, the
country does not permit foreign investments in national defense, security, and health and
it places conditional restrictions on investments in telecommunications, postal network
and airports. The Vietnamese Governments initiatives and specific incentives for the
industrial sector are likely to increase exports and drive the economic growth.

Liberalization and the removal of various restrictions generating sector-specific
investment opportunities are expected to attract more private and foreign participants to
manufacturing industry.
Overall, with an aim to become industrialized country by 2020, Vietnam’s manufacturing
industry has been undergoing major changes as a result of government initiatives, WTO
commitments and industrial liberalization. Industrial development strategy for the period
2011-2020 to focus on the development of Textiles, Leather, Chemicals, Agro
processing, Electronics, Automotive, Information and Communications technologies are
expected benefit from the industrial development strategy. Due to improving business
climate, increased trade and investment cooperation, low labor cost and Vietnam is
expected to emerge as a major manufacturing hub in the ASEAN region. Hence, the
vitalization of firms in this industry is very important for the growth of country. During
crisis period, many firms in sector have been badly affected resulted from high leverage
in capital structure. The companies, well overcome such bad cycle of economy, generally
do not only well prepare for business operation to maintain profitability, but also less
involve in debts by optimal capital structure.
1.3 Research Objective:
Which the relationship between debts and profitability? Does the fiscal benefit makes
debt more attractive than other funding resource? Does the risk associated to the increase
of the debt can, or should, be taken by the firm? Should the financing decisions of the
firms follow a single pattern, irrespective of the country where it operates? Those are
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 8 of 44

frequently asked questions that are significantly present in the processes related to
decision of capital structure of any firms.
Decisions of that type tend to become even more difficult when the economic conditions
of the country where the firm operates already are typically more uncertain. In the
Vietnamese case, specifically, the presence of two aggravating factors is observed: first is
the high interest rates practiced in the financial market, and second is the instability of the

economy before the international conjuncture. Those two factors play distinct roles;
however, they produce similar effects under the scope of uncertainty.
Any firm finances its operation and investment by either debt or equity and mostly both.
The firms might like to raise finance from their internal resources, instead of the bank
loans and debt issues. Thus the external equity financing is their last option. Conversely,
many organizations use debt financing to reduce their cost of capital so that they can
lower the “Weighted Average Cost of Capital (WACC)P0F
1
P” as it will allow the firms to
have wider extent of acceptance for capital budgeting options.
There’s many argument on the relationship of leverage (ratios of debts in asset structure)
and business performance before. As a point of departure, the Modigliani and Miller
(M&M) (1958) stated: With perfect capital markets and no taxes or information
asymmetry, debt financing has no effect on value. However, in a subsequent paper,
M&M (1963) eased the conditions and showed that under capital market imperfection
where interest expenses are tax deductible, firm value will increase with higher financial
leverage. Later, Miller (1977), elaborated a new revision, analyzing the subject of the
taxes paid by the investors, concluding that the corporate tax benefits of debt are reduced
by the tax penalty due to personal taxation. Models based on impact of tax, suggest that
profitable companies should have more debts. However, increasing debt results in an
increased probability of bankruptcy. Hence, the optimal capital structure represents a
level of leverage that balances bankruptcy costs and benefits of debt finance.

1
A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock,
bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on
equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.

Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 9 of 44

Since all firms’ managers try to get the optimal capital structure with least possible cost,
this led in 1984 for the pecking order theory to emerge. The theory began from Myers
(1984) states that there is no optimal capital structure for a firm, according to this theory,
since there is asymmetric information between managers and shareholders. Therefore to
minimize this asymmetric information, firms prioritize their sources of finance (from
internal financing to equity) according to the principle of least effort or of least
resistance, retained earnings are better than debt and debt is better than equity. But there
is another suggestion for case of asymmetric information; managers, directly involve in
daily operations of business, thus could master detailed positions of businesses and what
are actually being happened in the firms; whilst shareholders mainly rely on the reports
from managers, and could be disguised by the beautiful and vivid wordings of those
reports. Hence, to make manager be more responsible for their jobs, the firm owners
prefer to get more debts rather than equity; repayment obligation of debts and interest
occurred push managers work harder to get more profitability in the bottom line of
income reports.
Due to the importance of the issue and the impact of the financial structure or choice of
funding sources on the performance of companies, there are many previous studies and
various researches lead us to verify the relationship between capital structures or debts
and the performance of companies in different markets generally, but not many for
emerging markets and particularly for Vietnam financial market which is characterized as
small and unstable. Furthermore, management of capital structures in Vietnam is
typically different from others due to components such as high cost of debt, unstable
policy and political issues of a social republic country.
Unlike previous studies, this paper focuses deeply in the relationship between debts and
profitability of listed manufacturing firms on Vietnam Stock Exchange. Specifically, it is
aimed at: examining the relationship between Short-term debt, Long-term debt, Total
debts, and Net Profit Margin (NM) and Return on Equity (ROE). This study will be
significant to managers and shareholders in deciding proportion of debts and each debt
types to finance their operations and to maximize firm value which then contributes to the

economic development of Vietnam.
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 10 of 44

1.4 Research structure:
This thesis comprises five chapters.
Chapter 1: “Introduction” generally introduces the subject area interest with defined
problems, research questions, research objectives, and sources of information to be
collected for the research.
Chapter 2: “Literature Review” summarizes concepts and theories relating to debts,
profitability and the relationship between them. From such reviews, basic theories for
studying will be synthesized to develop an initial research model and hypotheses used for
the research.
Chapter 3: “Research Methodology” introduces the approach method of this research
through four sub-sessions including research design, variables definition, samples
collection and method of data analysis.
Chapter 4: “Empirical Results & Discussion” reports the analysis results and meaningful
figures.
Chapter 5: “Implications & Conclusions” discusses the implications of the results and
findings in session four, limitations are also drawn; based on which conclusions and
recommendations are provided.
Some appendix for detailed outputs from SPSS will be put at last papers for references.

Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 11 of 44

CHAPTER 2: LITERATURE REVIEW
In this chapter, theoretical background and review on previous studies are presented,
including 5 sections. The first and second section is some popular definitions of debts and
profitability. The third presents the relationship of debts and profitability. The forth is

theoretical framework, whilst the last describes the hypotheses development for this
research.
2.1 The concept of debts:
There are various measures of debts, which can be classified as accounting based
measures, market-value measures and quasi-market value measures. Since market values
of leverage may be difficult to obtain, accounting based measures are often applied as
proxies. The use of debt, or a loan, in business operation is to increase sales and profit.
Companies have to be careful with their use of financial leverage as too much can lead to
serious financial problems and even bankruptcy.
Debt includes the firm's current liabilities which are the obligations the firm intends to
pay off in one year or less, generally seen as current liabilities in balance sheet like short
term bank loan, accounts payables and accruals. Debt also includes long-term debt which
has a maturity of more than one year such as mortgages, long-term loans for other
purposes or even long-term prepaid amounts etc, and recorded in non-current liabilities of
balance sheet.
The debt ratio compares a company's total debt to its total assets, which is used to gain a
general idea as to the amount of leverage being used by a company. Total debts might be
replaced by short term or long term debts in the ratio or total assets might be replaced by
current or non current assets to get different views of how debts fund the firms’ assets,
the portion of debts in constitution of assets. The lower the percentage, the less leverage a
company is using and the stronger its equity position. In general, the higher the ratio, the
more risk that company is considered to have taken on, but could be compensated by
higher return.
Another measure of a company's financial leverage is calculated by dividing its total
liabilities by stockholders' equity indicates what proportion of equity and debt the
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 12 of 44

company is using to finance its assets, called debt to equity ratio. Sometimes
only interest-bearing, short-term or long-term debt is used instead of total liabilities in the

calculation.
Rajan & Zingales (1995) suggest that the choice of measure should be based on the
objective of the analysis. In their view, the ratio of total debt to capital, where capital is
defined as total debt plus equity i.e. ratio of total debts to total assets can be seen as the
best accounting based proxy for leverage.
2.2 The concept of profitability:
Profitability ratios are a class of financial metrics that are used to assess a business's
ability to generate earnings as compared to its expenses and other relevant costs incurred
during a specific period of time. For most of these ratios, having a higher value relative to
a competitor's ratio e.g. comparison between company A and company B or the same
ratio from a previous period or comparison profit of year 2010 with year 2011 is
indicative that the company is doing well.
Every firm is most concerned with its profitability. One of the most frequently used tools
of financial ratio analysis is profitability ratios which are used to determine the
company's bottom line and return to its investors. Profitability measures are important to
company managers and owners alike. Any business has outside investors who have put
their own money into the company; the primary owner certainly has to show profitability
to those equity investors. Popularly, listed firms have to publicly announce the business
performance periodically.
Profitability ratios show a company's overall efficiency and performance. We can divide
profitability ratios into two types: margin ratios and return ratios. Ratios that show
margins represent the firm's ability to translate sales dollars into profits at various stages
of measurement. Ratios that show returns represent the firm's ability to measure the
overall efficiency of the firm in generating returns for its shareholders.
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 13 of 44

Margin Ratios:
• Gross Profit Margin looks at how well a company controls the cost of
its inventory and the manufacturing of its products and subsequently passes on the

costs to its customers.
• Operating Profit Margin is a measure of overall operating efficiency, incorporating all
of the expenses of ordinary, daily business activity.
• Net Profit Margin shows how much of each sales dollar shows up as net income after
all expenses are paid. For shareholders and investors, this ratio might be the most
important, as it give them a tough view of how well their businesses are at the last.
• Cash Flow Margin is an important ratio as it expresses the relationship between cash
generated from operations and sales; measures the ability of a firm to translate sales
into cash.
Returns Ratios:
• Return on Assets (also called Return on Investment) measures the efficiency with
which the company is managing its investment in assets and using them to generate
profit.
• Return on Equity is perhaps the most important of all the financial ratios to investors
in the company. It measures the return on the money the investors have put into the
company.
• Cash Return on Assets ratio is generally used only in more advanced profitability
ratio analysis. It is used as a comparison to return on assets since it is a cash
comparison to this ratio as return on assets is stated on an accrual basis.
Grout and Zalewska (2006) indicated some other measures of profitability including NPV
(net present value), IRR (internal rate of return), ARR (accounting rate of return), ROS
(return on sales), and concluded that IRR and ARR can be used to identify whether a
company is earning an excess return. Although in the context of the ARR the necessary
adjustments to asset values are not usually made, at least in principle, the ARR is able to
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 14 of 44

identify excess returns and will be exactly equal to the IRR in some cases. However these
measures are more suitable to measure returns of project rather than normal business
operations, thus they will not be focused in this study.

2.3 Relationship between debts and profitability:
Studies showed contradictory results about the relationship between debts in capital
structure and firms performance (profitability).
In a study of listed firms in Ghana Stock Exchange (GSE) during a five-year period, Abor
(2005) examined the relationship between capital structure and profitability, and found
that Short-term and Total Debt are positively related with firm's ROE, whereas Long-
term Debt is negatively related with firm's ROE. Then in 2007, Abor’s research on small
and medium-sized enterprises in Ghana and South Africa again indicated that long-term
and total debt level is negatively related with performance.
Similarly, Arbabiyan and Safari (2009) investigated the effects of capital structure on
profitability by using 100 Iranian listed firms from 2001 to 2007 and found that Short
term debts and Total debts are positively related to profitability proxy by ROE which
indicate a negative relation between Long term debts and ROE.
While examining the relationship between capital structure and performance of 167
Jordan firms during 1989 - 2003, Zeitun and Tian (2007) found that capital structure have
a significant and negative impact on the firm’s performance measures in both the
accounting and market measures, debt level is negatively related with performance. It
means higher debts causes lower profits.
In a similar study on microfinance institutions in sub-Saharan Africa, Coleman (2007)
found that high leverage is positively related with performance proxy by ROA and ROE.
Husnan (2001) described that the use of debt statistically significant to the change in the
value of non-multinational companies’ ROE, while it is not significant to the
multinational companies.
However, the research made by Harjanti and Tandelilin (2007) to all manufacturing
companies listed in Jakarta Stock Exchange from 2000 to 2004 indicated that profitability
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 15 of 44

which was proxy by ROE, basic earning power (BEP), and gross profit ratio had negative
significance to leverage.

Based on Ebaid (2009) research, capital structure choice decision, in general terms, has
weak-to-no influence on the financial performance of listed firms from 1997 to 2005 in
Egypt as one of emerging or transition economies. By using three accounting-based
measurements of financial performance which are return on assets (ROA), return on
equity (ROE), and Gross Margin, the empirical tests come with the result that capital
structure (particularly Short term debts and Total debts) have a negative impact on an
organization’s performance which is measured by ROA. Apart from that, capital structure
(including short-term debt, long-term debt and total debt) have no significant impact on
an organization’s performance which is measured by ROE and Gross margin.
Jensen and Meckling (1976) argued that the conflict between shareholders and lenders
has the effect of shifting risk from shareholders to lenders and of appropriating wealth in
their favor as they take on risky investment projects (asset substitution). Hence,
shareholders, and managers as their agents, are prompted to take on more borrowing to
finance risky projects. Lenders receive interest and principal if projects succeed, and
shareholders appropriate the residual income; however, it is the lender who incurs the
loss if the project fails. Shareholders, though, while enjoying increased wealth in good
periods, tend to ignore a decline in profitability in bad times. This is due to the fact that
unfavorable consequences are passed onto lenders because of shareholders' limited
liability status. Therefore, the oligopolistic firms, in contrast to firms in competitive
markets, would employ higher levels of debt to produce more when opportunities to earn
higher profits arise. In corporate finance, the agency costs theory supports the use of high
debts, and it is consistent with the prediction of the output maximization hypothesis.
Valeriu and Nimalathasan (2010) pointed out capital structure and its impact on
profitability: a study of listed manufacturing companies in Sri Lanka. The result shows
that debt to equity ratio is positively and strongly associated to all profitability ratios
(gross profit ratio; operating profit ratio; and net profit ratio) except return on capital
employed and return on investment (ROI).
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 16 of 44

Pratheepkanth (2011) tested the relationship of capital structure (ratios of debt and equity
over fund) with financial performance of firms listed on Sri Lanka Stock Exchange from
2005 – 2009, indicated that there is a weak positive relationship between gross profit and
capital structure and at the same time, there is a negative relationship between net profit
and capital structure.
Luper and Isaac (2012) examined the impact of capital structure on the performance of
manufacturing companies in Nigeria. The annual financial statements of 15
manufacturing companies listed on the Nigerian Stock Exchange were used for this study
which covers a period of five years from 2005-2009. Multiple regression analysis was
applied on performance indicators such as Return on Asset (ROA) and Profit Margin
(PM) as well as Short-term debt to Total assets (STDTA), Long term debt to Total assets
(LTDTA) and Total debt to Equity (TDE) as capital structure variables. The results show
that there is a negative and insignificant relationship between STDTA and LTDTA, and
ROA and PM; while TDE is positively related with ROA and negatively related with PM.
STDTA is significant using ROA while LTDTA is significant using PM. The work
concludes that statistically, capital structure is not a major determinant of firm
performance.
Nour (2012) investigated the impact of capital structure on firm performance. The study
used fifth performance measures (including return on equity – ROE, return on assets -
ROA, earning per share - EPS, market value of equity to the book value of equity -
MBVR and Tobin’s Q) as dependent variables and four capital structure measures
(including short term debt to total assets - SDTA, long term debt to total assets – LDTA
and total debt to total assets - TDTA, and total debt to total equity - TDTE) as
independent variable. The investigation is performed using panel data procedure for a
sample of 28 listed companies the Palestinian Stock Exchange (PSE) over the period of
2006 - 2010. The results showed that firm’s capital structure had a positive impact on the
firm’s performance measures, in both the accounting and market’s measures, and
statistically significant with TDTA except MBVR was significant with TDTA and with
SDTA. Finally, the study findings suggest equations to determine the impact of the
various debts on the firm performance.

Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 17 of 44

A study of Nima, Mohammad, Saeed, & Zeinab (2012) examined the relationship
between capital structure and firm performance of Tehran Stock Exchange Companies is
investigated between the years 2006 to 2011. The study uses three performance measures
(including Gross Profit Margin, Return on Assets and Tobin’s Q) as dependent variable
and three capital structures (including long term debt short term debt and total debt ratios)
as independent variable. The study reported a significant relationship between dependent
and independent variable, except long term debts with gross profit margin.
2.4 Theoretical Framework:
The theoretical framework is constructed subsequent to the literature review. Derived
from the literature surveyed, the following theoretical framework is designed to facilitate
the research. It depicts the relationship between profitability and its explanatory
variables.


Variables used for the analysis include profitability and leverage ratios. Dependent
variable in this study is profitability, which is measured by profit ratios including return
on equity (ROE) and net margin ratio (NM). The independent variables, which are the
explanatory variables, are measured by ratios of short-term debt to total assets (SDTA),
long-term debt to total assets (LDTA), total debts to total assets (TDTA) and total debts
to total equity (TDSE).
Short-term debts
(Current liabilities)
Long-term debts
(Non-current liabilities)

Total debts
(Total liabilities)

Profitability
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 18 of 44

2.5 Hypotheses Development:
From literature review above, we see there are many different arguments on relationship
between debts and profitability, or different debt types cause different relationship. The
object of this study is to indentify the impact of respective debt types to the profitability
of manufacturing firms listed on Vietnam Stock Exchange. If the debts influence the
firm's profitability, the correlation between debt and firm's profitability can be expected.
Hypotheses for this study are developed based on the literature review and the actual
concepts in Vietnam financial market.
As a result of a rapid growth but bad control in the past, Vietnam faced the crisis with
high inflation (double digits) and weakened banking system. The increase in key interest
rates resulted in a sharp decrease in money market and credit growth; high cost of capital
also slowed down both domestic production and consumption. In the market, race in
mobilization and breaking cap interest rates happened popularly and frequently. Though
the state bank require commercial banks to comply with the cap rates, but exceeding cap
interest rates still exist. Liquidity troubles in banking system also affected lending
capacity of banks; it’s really difficult and costly for firms to source funds for business
operation. Consequently, lending rate sometime climbed up to 25% per annual, an
unimaginable rate in any other markets.
Compared to ideal return on investment/ equity ranging from 10% - 20% or net profit
margin of around 5%, sourcing fund from external is the last options of business owners/
managements. Bearing such high interest rate absolutely deteriorates profitability. So, we
argue that debts influences profitability negatively. Thus, the hypotheses are:
• HR
1
R: There’s negative relationship between Short-term Debt and Net Margin

• HR
2
R: There’s negative relationship between Long-term Debt and Net Margin
• HR
3
R: There’s negative relationship between Total Debt and Net Margin
• HR
4
R: There’s negative relationship between Short-term Debt and ROE
• HR
5
R: There’s negative relationship between Long-term Debt and ROE
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 19 of 44

• HR
6
R: There’s negative relationship between Total Debt and ROE
From the hypothesis recruited, 2 models for dependent variables to be described as

•
NM = βR
0
R−R

RβR
1
RSDTAR

R −R

RβR
2
R LDTAR

R− βR
3
RTDTA − βR
4
RTDSER

R+R

RεR
i
•
ROE = αR
0
R−R

RαR
1
RSDTAR

R −R

RαR
2
R LDTAR

R− αR
3
RTDTA − αR
4
RTDSER

R+R

RεR
j

Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 20 of 44

CHAPTER 3: RESEARCH METHODOLOGY
Chapter 2 reviewed literature and proposes hypotheses and research model. Chapter 3
will present how the research was implemented. It discusses the methodology used to
identify the impact of debts and profitability of listed manufacturing firms in Vietnam. It
outlines the research design adopted, identification of variables, sampling method and
procedure of data analysis.
3.1 Research Design:
This research work adopted an ex-post facto design (also called Causal Comparative
Research) and used data from financial statements of manufacturing companies listed on
the Vietnam Stock Exchange from 2009 - 2011. This type of design was used because of
the availability of audited financial statements of the sampled companies. Audited
financial statements are reliable as auditors certify them.
In this experimental research, the impact of debts on profitability was tested through
regression model.

Debts & Profitability: An examination of manufacturing firms listed in Vietnam

By Truong Hanh Duyen – Mbus 1 21 of 44

Figure 3.1: Research Process Inflow Chart

3.2 Variables Definition:
The idea of writing this research was to know the impact of the use of debt to companies’
profitability. However, if the data collected from audited reports of different firms with
different size, debt and profit of these firms can not be compared directly. To make data
in every sample corresponding to each other, the ratios of debts and profitability was used
instead of raw figures of debts and return amount.
(1) Ratio of Short – Term Debts to Total Assets (SDTA)
(2) Ratio of Long – Term Debts to Total Assets (LDTA)
(3) Ratio of Total Debts to Total Assets (TDTA)
(4) Ratio of Total Debts to Shareholder’s equity (TDSE)
(5) Ratio of Return to Shareholder’s equity (ROE)
(6) Net Profit Margin (NM/ Net Margin)
Define research problem
Review concepts and theories
Review previous research findings
Formulate hypotheses
Analyze data
Literature Review
Design research
Collect data
Interpret and report
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 22 of 44

Dependent variables:
Return on equity (ROE) measures the rate of return on the ownership interest

(shareholders' equity) of the common stock owners. It measures a firm's efficiency at
generating profits from every unit of shareholders' equity (also known as net assets or
assets minus liabilities). ROE shows how well a company uses investment funds to
generate earnings growth.
ROE = Net income/ Shareholder’s Equity
Net margin (NM), the ratio of net profits to revenues for a company or business segment,
typically shows how much of each dollar earned by the company is translated into profits.
NM = Net income/ Revenue
Both ROE and NM have numerator is net income. Net income stands in the bottom line
of income statement, is the profit after being deducted by all costs and popularly denoted
as net profit after tax (NPAT).
Independent variables:
SDTA = short - term debt (current liabilities) to total assets. The portion of debt
that is payable within one year. This data falls under current liabilities on
the company balance sheet;
LDTA = long - term debt (fixed/ non - current liabilities) to total assets: Liabilities
those are due to be repaid after more than one year. This is inclusive of
bonds and long-term loans;
TDTA = total debt (total liabilities) to total assets: It is the combined amount of
current liabilities and long-term liabilities. It can be found on the balance
sheet as "Total Liabilities”; and
TDSE = total debt (total liabilities) to total equity.
3.3. Samples Collection:
This research paper investigates the relationship between debts in various types including
short term debts, long term debts and total debts and the firms’ profitability including
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 23 of 44

return on equity and net margin of manufacturing firms listed on Vietnam Stock
Exchange. This research was limited to the analysis to manufacturing companies given

the important role of this sector in the economy. In addition, firm in same sector have
homogeneity in terms of financial structure.
In this aim, the population of the study was made up of the 223 manufacturing companies
with industry code between 10 and 31 listed on Vietnam Stock Exchange as below table.
Industry (manufacturing sector)
Code
Number of firms
Food
10
45
Beverage
11
7
Tobacco
12
3
Textiles
13
3
Costumes
14
6
Wood
16
1
Paper & paper products
17
14
Coke & refined petroleum
19

1
Chemical
20
9
Drugs, chemical & medicinal products
21
15
Rubber & plastic products
22
18
Mineral & non metal products
23
47
Metal
24
14
Casted metal products
25
7
Computer & electronic product
26
4
Electrical equipments
27
17
Other machineries & equipments
28
3
Motor vehicles & trailer
29

3
Furniture
31
6
Total
20
223

Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 24 of 44

In this study, audited financials in last 3 consecutive years (2009, 2010 and 2011) from
223 firms classified in manufacturing sector of economy was collected. The necessary
data, which are used in this work, are the financial figures including current liabilities,
non-current liabilities, total liabilities, total assets, total equity and net profit provided by
the respective firms, and availably updated on almost stock trading websites. These
figures are trusted to be audited by recognized audit firms, and to make sure they were
correctly input on websites, random checks against firms’ audited reports were
performed.
3.4. Methods of Data Analysis:
There are three types of data available for an empirical analysis: time series data, cross-
sectional data, and pooled data (i.e., combination of time series and cross-sectional).
Since the variables are selected from various companies between 2009 and 2011, the type
of data for this study can be considered as pooled. There are two approaches to analyze
pooled data which include classical linear regression model and panel data regression
model. In order to use the classical linear regression model, all firms’ data should be
considered as homogeneous; otherwise the panel data should be applied. Thanks to
homogeneity of the data in this research, the average of 3 years’ date was taken to put in
classical linear regression model.
This study uses descriptive statistics, correlation matrix, and multiple linear regressions

to test the average of debts and profits, how the debts correlated to profits and each other,
and the influences of debts on the companies’ profitability. Method of Ordinary Least
Square (OLS) is used to estimate the regression line. OLS is used because it minimizes
the error between the estimated points on the line and the actual observed points of the
estimated regression line by giving the best fit. All the dependent and independent
variables are pooled into cross-section data.
The process of data analysis could be described as below:
- Detecting outliers: all outliers suggested by SPSS were re-checked manually to retain
samples with insignificant difference. After detecting 23 outliners, there are 200 rows
got from average of 3 years’ figures (see Appendix 1).
Debts & Profitability: An examination of manufacturing firms listed in Vietnam
By Truong Hanh Duyen – Mbus 1 25 of 44

- Checking normality and heteroskedasticity: results showed that dependent variables
(ROE and Net margin ratio) are not perfectly normal distributions, but still acceptable
(see Appendix 1).
- Descriptive statistic for all variables
- Correlation matrix among variables
- Multi linear regression between Net margin and independent variables
- Multi linear regression between ROE and independent variables
The results of these processes were detailed in the next chapter.