ANALYSIS FINANCIAL STATEMENT NAM THANH MEDICAL EQUIPMENT SCIENCE TECHNOLOGY CO , LTD1

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DECLARATION

Signed hereby, certify hereby that this is my own research. The content and
the figures presented in the thesis reflected a fair and true situation of the
internship organization.

Author
Chu Thi Huong Giang

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ACKNOWLEDGEMENTS
First of all, I would like to express my deep gratitude to my supervisor,
Mrs. Pham Phuong Oanh for her precious advices and close instructions that
guide me through this study.
I also want to send my thanks to Ms. Pham Nga, Accountant of Nam
Thanh Medical Equipment and Science Technology Limited Company, and

staff of Accounting Department for their support during my internship.
Thanks to them, I had chance to access all necessary documents and financial
statements and opportunity to work with the Company.
Ultimately, I owe my sincere thanks to my family and friends. Their
continuous assistance and encouragement helped me a lot during time of
internship and attempt to finish this study.

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ABSTRACT

The thesis is aimed at studying situation and solutions to enhance the financial
capacity in Nam Thanh Medical Equipment and Science Technology Limited
Company (NTMED) from 2012 to 2014. By analyzing the data collected from the
balance sheets and income statements of NTMED from 2012 and 2014, the result
revealed that the company gained some achievements in enhancing its financial
capacity. However, there were still shortcomings including unreasonable assets and
capital structure, poor asset management and low liquidity. From that, some
proposals were given to NTMED including adjusting reasonable financial structure
and have effective funded policy, enhancing business efficiency by increasing
revenue and reducing costs. Furthermore, State and government also should some

suggestions such as completing legal document to create equity business
environment, making administrative regulatory reform, and decreasing procedures
which cause difficulties for enterprises…

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TABLE OF CONTENTS
DECLARATION................................................................................................i
ACKNOWLEDGEMENTS..............................................................................ii
ABSTRACT.....................................................................................................iii
TABLE OF CONTENTS.................................................................................iv
LIST OF TABLES............................................................................................vi
INTRODUCTION.............................................................................................1
CHAPTER 1: LITERATURE REVIEW...........................................................3
1.1. Overview about financial capacity and financial analysis......................3
1.1.1. Financial capacity..............................................................................3
1.1.2. Financial statement analysis..............................................................3
1.1.3. Financial statements..........................................................................4
1.2. Criteria in financial analysis to evaluate financial capacity....................8
1.2.1. Overview of financial situation of the company...............................8

1.2.2. Financial ratios analysis..................................................................11
1.3. Factors affecting on financial analysis..................................................21
1.3.1. The quality of information using on financial analysis...................21
1.3.2. The level of analyst.........................................................................22
1.3.3. The system of average ratios...........................................................22
CHAPTER 2 ANALYSIS FINANCIAL STATEMENT NAM THANH
MEDICAL EQUIPMENT & SCIENCE TECHNOLOGY CO., LTD...........23
2.1. Introduction about NTMED CO. ,LTD.................................................23
2.1.1. General information.......................................................................23
2.1.2. Organizational structure:.................................................................24
2.2. Financial Statements of NTMED CO. ,LTD Analysis..........................25
2.2.1. Overview about financial situation of company............................25

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2.2.2. Analysis financial situation of the company through calculating
following ratios:..............................................................................................36
2.3 Evaluation about financial capacity of the company through financial
analysis:...........................................................................................................42
2.3.1 Advantages.......................................................................................42

CHAPTER 3: SOLUTIONS AND RECOMMENDATIONS TO ENHANCE
FINANCIAL CAPACITY OF NTMED COMPANY THROUGH
FINANCIAL ANALYSIS...............................................................................45
3.1. Development orientation of the NTMED company in the future........45
3.1.1. The context of Vietnam economy and healthcare industry in the
next years.........................................................................................................45
3.1.2. Development orientation of the NTMED........................................45
3.2. Solutions and recommendations for enhancing financial capacity of
NTMED...........................................................................................................46
3.2.1. Solutions for enhancing financial capacity of NTMED..................46
3.2.2Recommendations to implement solutions for enhancing financial
capacity of NTMED effectively......................................................................49
CONCLUSION...............................................................................................51
REFERENCE..................................................................................................52

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LIST OF TABLES

Figure 2.1. Organizational structure of NTMED CO. , LTD
Table 1.1. Structure of Balance Sheet Example

Table 1: The business capital of NTMED CO. ,LTD
Table 2: Capital resources of NTMED CO. ,LTD
Table 3. The asset allocation of NTMED CO. ,LTD
Table 4. The capital resources allocation of NTMED CO., LTD
Table 5. Net Working Capital
Table 6. The business revenue of NTMED CO. ,LTD
Table 7. The business cost of NTMED CO., LTD
Table 8. The business profit of NTMED CO. ,LTD
Table 9. Liquidity ratios of NTMED CO.,LTD
Table 10. Asset and Debt Structure ratios of NTMED CO.,LTD
Table 11. Inventory turnover of NTMED
Table 12. Receivables Turnover of NTMED
Table 13. Total Assets Turnover of NTMED
Table 14. The profitability ratios of NTMED
Table 15. DuPont Analysis

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INTRODUCTION
Rationale

Nowadays, along with the renewal of the market economy, the
increasingly fierce competition between economic sectors has caused the
difficulties and challenges for businesses. In this context, in order to assert
their position, every business should understand their financial position and
the results of production and business activities. To achieve that, businesses
must always concern about their own financial situation as it related directly
to the business activities of.
Assessing regularly the financial situation helps businesses and the
managers to see the status of financial activities, the results of production and
business activities of enterprises in the period. Therefrom, they can assess
potential production and business efficiency as well as the risks and future
prospects of the business. They can find out effective solutions, accurate
decisions in order to improve quality of economic management and the
efficiency of production and business of enterprises.
Nam Thanh Medical Equipment and Science Technology Limited
Company is one of the leading enterprises in providing medical machinery
and equipment in Vietnam. However, in the context of the economy in
trouble, along with most other businesses, Nam Thanh Medical Equipment
and Science Technology Limited Company is also facing many challenges in
its operations. Lower global growth and the process of integration with the
increasingly fierce competition in recent years have caused the consumption
of the company's products to be more difficult, which are accompanied by a
series of shortcomings in financial capacity. Therefore, the company needs to
assess accurately its current financial situation and find out appropriate
solutions to improve the company's financial capacity in the next years.
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Being awarded of this practical requirements and combining with the
internship report in Nam Thanh Medical Equipment and Science Technology
Limited Company, I chose the topic: “Financial statement analysis and
solutions to enhance financial capacity of Nam Thanh Medical Equipment and
Science Technology Limited Company” to study.

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CHAPTER 1: LITERATURE REVIEW
1.1.

Overview about financial capacity and financial analysis

1.1.1. Financial capacity
According to “Corporate Finance” (2nd Ed.) by Jonathan Berk (2011):
The financial capacity of each company is the financial resources of the
company itself, the ability to generate cash, organize cash flows reasonably and

ensure the solvency reflected in capital scale, the quality of assets and profitability...
enough to ensure and maintain business operations.
Criterion for evaluating the financial capacity of the business inclusive:
- The quantitative factors are scale and structure of capital sources; quality and
structure of asset; the ability to pay short-term debt; profitability…
- The qualitative factors are the exploitation and management and use of
capital resources which is reflected in organization and management level, scientific
and technological level, human resources management...
1.1.2. Financial statement analysis
Economists give the definition of financial statement analysis as follows:
Financial statement analysis is the process of reviewing and evaluating a
company's financial situations, thereby gaining an understanding of the financial
health of the company and enabling to have more effective decision making.
The purpose of financial statement analysis is to examine both past and current
financial data so that a company's performance and financial position can be
evaluated as well as the future and potential risks can be estimated. Financial
statement analysis can yield valuable information about trends and relationships, the
quality of a company's earnings, and the strengths and weaknesses of its financial
position.
Financial statement analysis begins with establishing the objective(s) of the
analysis. For example, whether the analysis undertaken is to provide a basis for
granting credit or making an investment? After the objective of the analysis is
established, the data is accumulated from the financial statements and from other

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sources. The results of the analysis are summarized and interpreted. Conclusions
are reached and a report is made to the person(s) for whom the analysis was
undertaken.
Another definition of financial statement analysis is that an evaluative method
of determining the past, current and projected performance of a company. Several
techniques are commonly used as part of financial statement analysis including
horizontal analysis, which compares two or more years of financial data in both
dollar and percentage form; vertical analysis, where each category of accounts on
the balance sheet is shown as a percentage of the total account; and ratio analysis,
which calculates statistical relationships between data.
There are a number of users of financial statement analysis. They are:
- Creditors. Anyone who has lent funds to a company is interested in its ability
to pay back the debt, and so will focus on various cash flow measures.
- Investors. Both current and prospective investors examine financial
statements to learn about a company's ability to continue issuing dividends, or to
generate cash flow, or to continue growing at its historical rate
- Management. The company controller prepares an ongoing analysis of the
company's financial results, particularly in relation to a number of operational
metrics that are not seen by outside entities
- Regulatory authorities. If a company is publicly held, its financial statements
are examined by the Securities and Exchange Commission (if the company files in
the United States) to see if its statements conform to the various accounting
standards and the rules of the SEC.
1.1.3. Financial statements
1.1.3.1

Balance Sheet

 Definition of a balance sheet:
A balance sheet is a financial statement that summarizes a company's assets,
liabilities and its shareholders' equity at a specific point in time.
A balance sheet must follow the below formula:

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Assets = Liabilities + Shareholders' Equity
 Structure and Content of a balance sheet
Table 1.1. Structure of Balance Sheet Example
Assets
Current Assets
- Cash and cash equivalents
- Trade and other receivables
- Investments
- Inventories
- Assets held for sale

Non-Current Assets:
- Property, plant, and equipment

- Intangible assets
- Goodwill

Liabilities
Current Liabilities:
- Trade and other payables
- Accrued expenses
- Current tax liabilities
- Current portion of loans payable
- Other financial liabilities
- Liabilities held for sale

Non-Current Liabilities:
- Loans payable
- Deferred tax liabilities
- Other non-current liabilities
Owner’s Equity:
- Capital stock
- Additional paid-in capital
- Retained earnings

 Drawback of a balance sheet:
Balance Sheet has some limitations:


Firstly, balance sheets do not show true value of assets. Historical cost is
criticized for its inaccuracy since it may not reflect current market valuation.



Secondly, some of the current assets are valued on an estimated basis, so the
balance sheet is not in a position to reflect the true financial position of the
business.
 Finally, the balance sheet cannot reflect those assets which cannot be

expressed in monetary terms, such as skill, intelligence, honesty, and loyalty of
workers.

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1.1.3.2


The Income Statement
Definition of an income statement:

According to “Corporate Finance” (2nd Ed.) by Jonathan Berk (2011):
The income statement presents the results of a business for a stated period of
time. The statement begins with revenues, from which expenses are subtracted to
arrive at a profit or loss. The income statement is an essential part of the financial
statements that an organization releases.


Structure and Content of an income statement

There are some major components of typical income statement:
- Revenue is the amount earned by the company in exchange of goods it
supplied and services it provided
- Cost of goods sold is the cost of goods sold and services provided. It
includes all such costs that can be traced or assigned to goods sold or services
provided
- Gross profit (= revenue – cost of sales) is the profit earned on the goods and
services of the company before any selling, general and administrative expenses and
finance costs are accounted for.
- Operating expenses mainly include selling and distribution expenses and
general and administrative expenses.
- Operating profit (equivalent to earnings before interest and taxes (EBIT) =
gross profit – operating expenses) is the profit after cost of sales and all operating
expenses have been charged to revenue. It is before any adjustment for interest or
investment income and interest expense and taxes.
- Income from continuing operations (= EBIT – taxes) represents the net
income (i.e. after-tax income) earned from business components that the company
intends to own in the future. It excludes any income earned during the year from
business components that are treated as discontinued operations.

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- Income from discontinued operations is the after-tax income of business
components which the company has disposed-off during the year or has classified
as held-for-sale at the year-end.
- Net income (= income from continued operations + after-tax income from
discontinued operations) is a company’s total net income including income from
both continued operations and discontinued operations. It represents the income
earned during the year after accounting for all expenses
- Distribution of income is a consolidated income statement providing a
statement of how the income is distributed between parent and minority
shareholders
- Earnings per share (EPS) = (net income – preferred dividends)/weightedaverage number of common shares is a critical part of income statement for
companies that are required to calculate and present their EPS (mainly companies
listed on a stock exchange)


Drawback of an income statement

Income Statement has some limitations as below:
Firstly, income statements include judgments and estimates, which mean that

items that might be relevant but cannot be reliably measured are not reported and
that some reported figures have a subjective component.
Secondly, with respect to accounting methods, one of the limitations of the
income statement is that income is reported based on accounting rules and often
does not reflect cash changing hands.
Finally, income statements can also be limited by fraud, such as earnings
management, which occurs when managers use judgment in financial reporting to

intentionally alter financial reports to show an artificial increase (or decrease) of
revenues, profits, or earnings per share figures

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1.1.3.3

The Statement of Cash flows

 Definition of a statement of cash flows:
According to “Corporate Finance” (2nd Ed.) By Jonathan Berk (2011):
The statement of cash flows is part of the financial statements issued by a
business, and describes the cash flows into and out of the business. Its particular
focus is on the types of activities that create and use cash. Though the statement of
cash flows is generally considered less critical than the income statement and
balance sheet, it can be used to discern trends in business performance that are not
readily apparent in the rest of the financial statements
 Structure and Content of a statement of cash flows:
Cash flows in the statement are divided into the following three areas:
- Operating activities. These constitute the revenue-generating activities of a
business. Examples of operating activities are cash received and disbursed for
product sales, royalties, commissions, fines, lawsuits, supplier and lender invoices,

and payroll.
- Investing activities. These constitute payments made to acquire long-term
assets, as well as cash received from their sale. Examples of investing activities are
the purchase of fixed assets and the purchase or sale of securities issued by other
entities.
- Financing activities. These constitute activities that will alter the equity or
borrowings of a business. Examples are the sale of company shares, the repurchase
of shares, and dividend payments.
1.2.

Criteria in financial analysis to evaluate financial capacity

1.2.1. Overview of financial situation of the company
1.2.1.1. Evaluation of situation of assets
Analysis of overall financial situation over the balance sheet can show the
changes in the items of assets and capital resources of the company through the
business cycle. Special purpose of analyzing volatility and use of capital sources are
to review and assess the change of the accounts on balance sheet.

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Firstly, we present the form of the balance sheet (from assets to capital) and

compare the data of each item of Balance Sheet between periods in order to
calculate the increase or decrease of those items according to the following
principles: If assets increased and the capital reduced: shown on column of using
capital. If assets reduced and capital increased: shown on the column of capital.
Amount of capital and amount of using capital must be balanced.
Finally, making arrangements indicators of capital and use of capital under
certain sequences depending on analysis objectives and presenting them on the
table.
This table shows how much assets and capital increase or decrease in the
business cycle and what indicators mainly influenced the increase or decrease of
capital and the use of capital. Therefore, we can find out the solutions to raise
capital and improve the efficiency of using capital in companies.
1.2.1.2. Evaluation of situation of capital resources
If companies want to carry out business activities, they need to have assets
including fixed assets and long-term investments, current assets and short-term
investments. In order to form two types of assets, there are two financing capital
resources, including long-term capital, and short-term capital.
The short-term capital is capital that businesses use for a period of less than
one year for production and business activities, including short-term liabilities,
short–term payables and other short-term liabilities.
The long-term capital is used for long–term business operations, including
owner’s equity, loans in the middle and long–term. The long–term capital was first
invested for fixed assets, the balance of long-term capital and short-term capital are
invested for shaping the current assets.
To assess the ability of paying short-term liabilities, analysts are concerned
about the net working capital indicator. This indicator is also an important and
necessary factor for assessing the balanced financial condition of a business. It is
defined as the difference between total current assets and total current liabilities.

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Net Working Capital = Current Assets - Current Liabilities
The ability to meet its payment obligations, to expand its business scale and to
take the favorable opportunity of the enterprise mainly depends on both working
capital and net working capital. Therefore, the development of enterprise is also
reflected through the growth of net working capital.
Safety level of current assets depends on the level of working capital.
Analyzing the situation of ensuring capital sources for operations, we only need to
calculate and compare items of the capital sources and assets.
 Long-term capital sources < Fixed assets or Current assets < short-term
capital sources
This means that the net working capital is smaller than zero. Therefore, longterm capital source is not enough for investment in fixed assets; enterprises have
invested one part of short–term capital source in fixed assets. Meanwhile, the
current assets do not meet the demand of short–term liabilities payment, the
payment balance of the company is imbalanced, they have to use part of fixed assets
for paying short-term. In such cases, the solution of business is to increase shortterm capital source legally or reduce long – term investment or to conduct both of
two solutions.
 Long-term capital > Fixed assets or Current assets > short term funds
This means that long-term capital source surplus after investing in fixed assets.
This part is invested in current assets. Simultaneously, Current assets are much
more than short – term capital source, so the solvency of the business is well.
 Net working capital = 0

This means that long-term capital financing for fixed assets and current assets
are sufficient enough for businesses to pay short-term liabilities. This financial
situation is good for the company. The net working capital demand is short-term
capital source which need to finance for one part of current assets, such as inventory
and receivables.

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1.2.1.3. Evaluation of business operation
Income statement is a report on the income, expenses and profits of the
enterprise for a certain period. Therefore, the general characteristics of the income
statement are to provide data about revenues, expenses and profits of the business in
a period. From content in income statement, we can see the situation of revenue in
the period, specially the net sales, the situation of cost (including cost of goods sold,
cost of sales, selling cost or general and administrative cost...), the situation of
income in the period (including operational income, financial income and
extraordinary income ...)
1.2.2. Financial ratios analysis
1.2.2.1. Liquidity ratios:
These ratios measure how easily the firm can lay its hands on cash
 Current ratio
The current ratio is a liquidity and efficiency ratio that measures a firm's

ability to pay off its short-term liabilities with its current assets. The current ratio is
an important measure of liquidity because short-term liabilities are due within the
next year.

Current assets
Current ratio =

=
Current liabilities

The current ratio helps investors and creditors understand the liquidity of a
company and how easily that company will be able to pay off its current liabilities.
A higher current ratio is always more favorable than a lower current ratio because it
shows the company can more easily make current debt payments. If a company has
to sell of fixed assets to pay for its current liabilities, this usually means the
company isn't making enough from operations to support activities. In other words,
the company is losing money. Sometimes this is the result of poor collections of

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accounts receivable. The current ratio also sheds light on the overall debt burden of
the company. If a company is weighted down with a current debt, its cash flow will

suffer.
 Quick (or Acid – Test) Ratio
The acid test ratio measures the liquidity of a company by showing its ability
to pay off its current liabilities with quick assets.

Current assets - Inventory
Quick ratio

=

=
Current liabilities

Higher quick ratios are more favorable for companies because it shows there
are more quick assets than current liabilities. A company with a quick ratio of 1
indicates that quick assets equal current assets. This also shows that the company
could pay off its current liabilities without selling any long-term assets. An acid
ratio of 2 shows that the company has twice as many quick assets than current
liabilities.
 Cash ratio
The cash ratio is a liquidity ratio that measures a firm's ability to pay off its
current liabilities with only cash and cash equivalents.

Cash + Cash Equivalent
Cash ratio

=

=
Total Current liabilities

A ratio of 1 means that the company has the same amount of cash and
equivalents as it has current debt. In other words, in order to pay off its current debt,
the company would have to use all of its cash and equivalents. A ratio above 1
means that all the current liabilities can be paid with cash and equivalents. A ratio
below 1 means that the company needs more than just its cash reserves to pay off its
current debt.

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As with most liquidity ratios, a higher cash coverage ratio means that the
company is more liquid and can more easily fund its debt. Creditors are particularly
interested in this ratio because they want to make sure their loans will be repaid.
Any ratio above 1 is considered to be a good liquidity measure.
1.2.2.2. Asset and Debt Structure ratios (Solvency or Leverage ratios):
These ratios show how heavily the company is in debt and the ability of
business to survive over a long period of time
 Debt – to – owner’s equity ratio
The debt to equity ratio is a financial, liquidity ratio that compares a
company's total debt to total equity. The debt to equity ratio shows the percentage of
company financing that comes from creditors and investors. A higher debt to equity
ratio indicates that more creditor financing (bank loans) is used than investor

financing (shareholders).

Debt to Equity Ratio

Total Liabilities
=

Total Equity

A lower debt to equity ratio usually implies a more financially stable business.
Companies with a higher debt to equity ratio are considered more risky to creditors
and investors than companies with a lower ratio. Unlike equity financing, debt must
be repaid to the lender. Since debt financing also requires debt servicing or regular
interest payments, debt can be a far more expensive form of financing than equity
financing. Companies leveraging large amounts of debt might not be able to make
the payments.
Creditors view a higher debt to equity ratio as risky because it shows that the
investors haven't funded the operations as much as creditors have. In other words,
investors don't have as much skin in the game as the creditors do. This could mean
that investors don't want to fund the business operations because the company isn't
performing well. Lack of performance might also be the reason why the company is
seeking out extra debt financing.
 Debt ratio

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Debt ratio is a solvency ratio that measures a firm's total liabilities as a
percentage of its total assets. In other words, this shows how many assets the
company must sell in order to pay off all of its liabilities.

Debt Ratio

=

Total Liabilities
Total Assets

This ratio measures the financial leverage of a company. Companies with
higher levels of liabilities compared with assets are considered highly leveraged and
more risky for lenders.
This helps investors and creditors analysis the overall debt burden on the
company as well as the firm's ability to pay off the debt in future, uncertain
economic times.
A lower debt ratio usually implies a more stable business with the potential of
longevity because a company with lower ratio also has lower overall debt. Each
industry has its own benchmarks for debt, but 0.5 is reasonable ratio. A debt ratio of
0.5 is often considered to be less risky. This means that the company has twice as
many assets as liabilities. A ratio of 1 means that total liabilities equals total assets.
In other words, the company would have to sell off all of its assets in order to pay
off its liabilities. Obviously, this is a highly leverage firm. Once its assets are sold
off, the business no longer can operate.
 Equity ratio

The equity ratio is an investment leverage or solvency ratio that measures the
amount of assets that are financed by owners' investments by comparing the total
equity in the company to the total assets.

Equity Ratio

=

Total Equity
Total Assets

In general, higher equity ratios are typically favorable for companies. This is
usually the case for several reasons. Higher investment levels by shareholders
shows potential shareholders that the company is worth investing in since so many

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investors are willing to finance the company. A higher ratio also shows potential
creditors that the company is more sustainable and less risky to lend future loans.
1.2.2.3.

Asset Management ratios (Efficiency or turnover ratios):

These ratios measure how productively the firm is using its assets
 The Inventory turnover
The inventory turnover ratio is an efficiency ratio that shows how effectively
inventory is managed by comparing cost of goods sold with average inventory for a
period. This measures how many times average inventory is "turned" or sold during
a period.

Inventory Turnover Ratio

=

Cost of Goods Sold
Average Inventory

Inventory turnover is a measure of how efficiently a company can control its
merchandise, so it is important to have a high turn. This shows the company does
not overspend by buying too much inventory and wastes resources by storing nonsalable inventory. It also shows that the company can effectively sell the inventory
it buys. This measurement also shows investors how liquid a company's inventory
is. Inventory is one of the biggest assets a retailer reports on its balance sheet. If this
inventory can't be sold, it is worthless to the company. This measurement shows
how easily a company can turn its inventory into cash. Creditors are particularly
interested in this because inventory is often put up as collateral for loans. Banks
want to know that this inventory will be easy to sell.

Day’s Sale in Inventory

=

Ending Inventory

The days sales in inventory calculation measures the number of days it will
take a company to sell its entire inventory. This is an important to creditors and
investors for three main reasons. It measures value, liquidity, and cash flows. Both
investors and creditors want to know how valuable a company's inventory is. Older,
more obsolete inventory is always worth less than current, fresh inventory. The
day’s sales in inventory show how fast the company is moving its inventory. In

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other words, it shows how fresh the inventory is. This calculation also shows the
liquidity of inventory. Shorter day’s inventory outstanding means the company can
convert its inventory into cash sooner. In other words, the inventory is extremely
liquid.
 Receivables Turnover and Days’ Sales in Receivables
An efficiency ratio or activity ratio measures how many times a business can
turn its accounts receivable into cash during a period. In other words, the accounts
receivable turnover ratio measures how many times a business can collect its
average accounts receivable during the year.

Net Credit Sales
Account Receivable Turnover

=
Average Accounts Receivable

Since the receivables turnover ratio measures a business' ability to efficiently
collect its receivables, it only makes sense that a higher ratio would be more
favorable. Higher ratios mean that companies are collecting their receivables more
frequently throughout the year. Higher efficiency is favorable from a cash flow
standpoint as well. If a company can collect cash from customers sooner, it will be
able to use that cash to pay bills and other obligations sooner.
Accounts receivable turnover also is an indication of the quality of credit sales
and receivables. A company with a higher ratio shows that credit sales are more
likely to be collected than a company with a lower ratio. Since accounts receivable
are often posted as collateral for loans, quality of receivables is important.

Account Receivable
Day’s Sales Outstanding

=
Net Credit Sales

The days sales outstanding calculation measures the number of days it takes a
company to collect cash from its credit sales. This calculation shows the liquidity
and efficiency of a company's collections department.

CHU THI HUONG GIANG

CLASS: CQ50/51.02

GRADUATION THESIS

ACADEMY OF
FINANCE

 Assets Turnover
The asset turnover ratio is an efficiency ratio that measures a company's ability
to generate sales from its assets by comparing net sales with average total assets. In
other words, this ratio shows how efficiently a company can use its assets to
generate sales

Assets Turnover Ratio

=

Net Sales
Average of Total Assets

.The total asset turnover ratio calculates net sales as a percentage of assets to
show how many sales are generated from each dollar of company assets. For
instance, a ratio of .5 means that each dollar of assets generates 50 cents of sales.
This ratio measures how efficiently a firm uses its assets to generate sales, so a
higher ratio is always more favorable. Higher turnover ratios mean the company is
using its assets more efficiently. Lower ratios mean that the company isn't using its
assets efficiently and most likely have management or production problems.
1.2.2.4. Profitability ratios:
They are used to measure the firm’s return on its investment
 Profit Margin

The profit margin ratio is a profitability ratio that measures the amount of net
income earned with each dollar of sales generated by comparing the net income and
net sales of a company. In other words, the profit margin ratio shows what
percentage of sales are left over after all expenses are paid by the business.

Profit Margin Ratio

=

Net Income
Net Sales

Creditors and investors use this ratio to measure how effectively a company
can convert sales into net income. Investors want to make sure profits are high
enough to distribute dividends while creditors want to make sure the company has
enough profits to pay back its loans. In other words, outside users want to know that

CHU THI HUONG GIANG

CLASS: CQ50/51.02


GRADUATION THESIS

ACADEMY OF
FINANCE

the company is running efficiently. An extremely low profit margin would indicate
the expenses are too high and the management needs to budget and cut expenses.
 Basic earning power (BEP)

Return on capital employed or ROCE is a profitability ratio that measures how
efficiently a company can generate profits from its capital employed by comparing
net operating profit to capital employed. In other words, return on capital employed
shows investors how many dollars in profits each dollar of capital employed
generates.

Return on Capital Employed (ROCE) =

Net Operating Profit
Employed Capital

ROCE is a long-term profitability ratio because it shows how effectively assets
are performing while taking into consideration long-term financing. This is why
ROCE is a more useful ratio than return on equity to evaluate the longevity of a
company.
 Return on Assets (ROA)
The return on assets ratio is a profitability ratio that measures the net income
produced by total assets during a period by comparing net income to the average
total assets. In other words, the return on assets ratio or ROA measures how
efficiently a company can manage its assets to produce profits during a period.

Return on Assets Ratio

=

Net Income
Average of Total Assets

The return on assets ratio measures how effectively a company can turn a
return on its investment in assets. In other words, ROA shows how efficiently a

company can covert the money used to purchase assets into net income or profits. It
only makes sense that a higher ratio is more favorable to investors because it shows
that the company is more effectively managing its assets to produce greater amounts
of net income. A positive ROA ratio usually indicates an upward profit trend as

CHU THI HUONG GIANG

CLASS: CQ50/51.02


GRADUATION THESIS

ACADEMY OF
FINANCE

well. ROA is most useful for comparing companies in the same industry as different
industries use assets differently. For instance, construction companies use large,
expensive equipment while software companies use computers and servers.
 Return on Equity (ROE)
The return on equity ratio measures the ability of a firm to generate profits
from its shareholders investments in the company. In other words, the return on
equity ratio shows how much profit each dollar of common stockholders' equity
generates.

Return on Equity Ratio

=

Net Income
Shareholder’s Equity

So a return on 1 means that every dollar of common stockholders' equity
generates 1 dollar of net income. This is an important measurement for potential
investors because they want to see how efficiently a company will use their money
to generate net income. ROE is also an indicator of how effective management is at
using equity financing to fund operations and grow the company. Investors want to
see a high return on equity ratio because this indicates that the company is using its
investors' funds effectively. Higher ratios are almost always better than lower ratios,
but have to be compared to other companies' ratios in the industry.

CHU THI HUONG GIANG

CLASS: CQ50/51.02