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

PHÂN TÍCH TÀI CHÍNH TẠI CÔNG TY CỔ
PHẦN MAY X20
FOREWORDS
Necessity of the research thesis
During the business operation and production, the business control,
determining strengths, weakness, and potentials of the business in order to develop
timely solutions to exploit such potentials and strengths of X20 Joint-stock
Company, and to overcome weakness aiming at maximizing the corporate values is
the top and regular task of financial managers. To implement this task, financial
managers utilizes very useful tool as corporate financial analysis.
X20 Joint-stock Company is a company with financial potentials and
prestige in garment and textile industry. However, business results have not been
really effective. What are the reasons of this situation? What are the strengths not
exploited and promoted by X20 Joint-stock Company? This requires the application
of financial analysing tool in order to advise managers of X20 Joint-stock Company
to adopt effective measures to improve business efficiency in order to increase the
share price of X20 Joint-stock Company in the market
From such reality, the author chooses the research thesis “Financial analysis
of X20 Joint-stock Company”.
The researching objectives of the thesis
The thesis aims at three basic goals as follows:
- Firstly, systematically studying the basis of arguments on corporate
financial analysis including concept and objectives of corporate financial analysis,
the materials used in analysis, method and content of corporate financial analysis.
- Secondly, carrying out comprehensive financial analysis of X20 Joint-stock
Company in the period of 2009 – 2011 on the aspects including asset and capital
structure, business effectiveness, risks, cash flow, comparative analysis against the

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rivals in order to point out strengths and limitations about financial situation and its
causes.
- Thirdly, basing on developing orientations of X20 Joint-stock Company
and the causes to limitations in financial situation of X20 Joint-stock Company, the
author proposes practical solutions for management board of X20 Joint-stock
Company to improve business efficiency of the Company.
Subject and scope of research
The thesis focuses on researching argument system and financial analysis
situation of X20 Joint-stock Company with comparison with rivals in the industry.
The period of financial research and evaluation of X20 Joint-stock Company is
from 2009 to 2011.
Researching method
To create basis for analysis and adoption of solutions in improving business
operation effectiveness, the thesis utilizes following methods:
- Research and collection of information through specialty magazines, data
announced on websites, reports of the industry and companies.
- Synthesizing and comparing analysis on the basis of summary data of
garment and textile industry as well as practical data of the company in which the
student is working for in order to introduce comments, evaluation, and proposal of
implementing methods.
- Evaluating and forecasting analysis about the needs, developing trends of
the market and corporate.
Scientific and practical meaning of the research thesis
Scientifically, the thesis focuses on the research of argument basis on
corporate financial analysis, especially systematic introduction about analytical
methods and content of financial analysis.
Practically, the thesis applies financial analysis arguments and methods in
practice of X20 Joint-stock Company to determine strengths and limitations, causes

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of financial limitations in order to consult Management Board of X20 Joint-stock
Company in management of business operations in the future.
Structure of the thesis
In addition to the forewords, conclusion, list of reference, the main content of
the thesis is divided into three chapters:
Chapter 1: General theory about corporate financial analysis
Chapter 2: Financial analysis of X20 Joint-stock Company
Chapter 3: Solutions to improve financial management effectiveness in X20
Joint-stock Company
CHAPTER 1:
GENERAL THEORY ABOUT CORPORATE FINANCIAL ANALYSIS
1.1. CONCEPT, OBJECTIVES, MATERIALS AND METHODS OF
CORPORATE FINACNIAL ANALYSIS
1.1.1. Concept of corporate financial analysis
Financial analysis is a new concept since it is mainly developed in the 20 th
century. Financial analysis may be defined as a collection of methods permitting the
evaluation on financial situation in the past and at present, facilitating the decision
making by the management board and accurate assessment of other corporates.
In the last decades, the invention of new tools and development of new
concepts help to screen financial analysis.
First of all, we will study the concept of financial analysis, its objectives;
followed by the standardization of information needs and analytical tools to be
used.
Financial analysis appeared in late 19th century, and has been developed
continuously and rapidly due to various reasons as follows:
- Increasing corporate management need
- Development of financial market
- Establishment of national and multi-national groups

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- Wide application of information technology and computer
Financial analysis is based on accounts of the corporates. The harmonious
combination of accounts eases the comparison between corporates and economic
organizations.
Currently, financial analysis is becoming essential to corporates so that they
can understand their strengths, weakness in order to adopt measures to promote
their strengths in parallel with the determination of causes to ineffective operation
to have proper improving methods.
Human being activities are activities of awareness. Therefore, as conducting
any activities, irrespectively of simple or complicated, any individual or
organization base on their awareness of objectives, natures, trends, and developing
modes of the objects and phenomena. In economic management, awareness,
decision and action constitute a dialectical triad of scientific management, in which
awareness is the basis, and premise of decision-making, while organization is the
one to carry out the decision. Awareness determines decision; therefore, proper
awareness will lead to proper decision, and expected action. On the contrary,
improper awareness will lead to improper decision.
The most common concept is that: Financial analysis is the consideration,
research of objects, phenomena in the organic, dialectical relationship between the
items constituting such objects and phenomena. With such meaning, analysis is an
important tool to be aware of the natures, properties, and development modes of the
researched objects and phenomena.
Therefore, corporate financial analysis is a tool to be aware of issues related
to corporate finance. However, there are many subjects caring about and using
economic, financial information of the corporate in various aspects and objectives.
1.1.2. Objectives of corporate financial analysis

The information presented in the financial statement firstly serves the people
of direct interests (contributories, creditors, investment partners, clients,
employees…), then corporate leaders (Board of Directors, Management Board…),

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and finally people of indirect interests (tax agencies, financial agencies, statistics
agencies…). However, the data mentioned in financial statements fail to fully show
up the contents required by users. For examples, investors need to know the
profitability of assets, and the capital they have or will invest as well as the possible
safety (risk) in the future, the augmentation in share values…
Therefore, they have to use analytical technique to present more about main
relationship mentioned in financial statement to satisfy the needs of concerned
people.
The most valuable information to users of financial statement is what will
happen in the future. By comparing, evaluating, and analyzing trends, analysis of
financial statement aims at main objectives as follows:
Firstly, to fully, timely and honestly provide financial information to
shareholders, creditors, investors, management board of Company to help them to
make proper decisions in the future.
Secondly, to make true evaluation on situation of company in the reporting
period regarding capital, assets, level, rate and effectiveness of capital and asset
utilization to understand the problems and their causes to propose proper measures
in the planning period.
Thirdly, to provide information about fund raising, modes of fund raising,
loaning policy with the goal to increase profit, share value; and keep safety for
investment capital.
Financial analysis in various modes aims at serving various users such as
managers, current shareholders, or people desiring to become shareholders of the

corporate, financial analyst, people is participating in corporate operations,
corporate creditors including banks, financial institutions, bill buyers, or bill sellers
via bidding...
Different users will make decisions basing on different purposes. Financial
analysis by different user groups have to satisfy specialty issues of each group of
direct or indirect interests.
a. Groups of direct interests:

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Financial analysis to managers
Financial analyzing activities in corporate are called as internal financial
analysis, which is different from external financial analysis conducted by analysts
outside the enterprise. Thank to comprehensive information and clear knowledge
about the enterprise, internal financial analysts have much more advantages to
conduct the best financial analysis.
Corporate financial analysis has various objectives:
- To create regular evaluating cycles about the past business operations; to
carry out financial balancing, profitability, solvency, financial risks of the
enterprise.
- To orient decisions made by Board of Directors as well as financial
manager such as investment, funding, profit allocation...
- To act as basis to implement financial forecasts; profit, investment, cash
budget planning...
- Finally, financial analysis is a tool to control activities of the enterprise.
Financial analysis highlights the importance of financial forecast, and acts as
basis for managers to clarify the financial policy in particular, and policies of the
enterprise in general.
Financial analysis to investors

Shareholders as individuals or enterprises have direct concerns about the
calculation of corporate values since they contribute their capital to the corporates
and have to take risks.
Shareholder income is allocated dividend and added value of investment
capital. These two factors are affected by anticipated profit of the enterprise. In
reality, investors often evaluate profitability of the enterprise. Individual
shareholders of large companies in general must base on specialists (financial
analysts). They specialize on researching economic-financial information, clarify
corporate developing prospects, and evaluate shares in the financial markets.
Financial analysis experts utilize two methods to evaluate enterprises and
estimate share value as follows:

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- Analysis basing on the research on financial statement, profitability, risk...
to be mentioned in this thesis.
- Graph analysis bases on evolvement graphs of share price and transaction
volume.
b. Group of indirect interests
Financial analysis to creditors
If financial analysis is developed in banks when they want to ensure the
solvency of customers, financial analysis is used by lending, advancing, or selling
on credit enterprises.
Financial analysis is for other long-term debts with short-term loans.
- In term of short-term loans, creditors pay special care about quick solvency
of the enterprises, which means the enterprise ability to response to due debts.
- In term of long-term loans, creditors must be sure about the solvency and
profitability of the enterprises since the solvency and interest will depend on this
profitability.

Analyzing technique varies by nature and term of the loan; however, creditor
are, irrespective of long-term or short-term loan, concerned about financial structure
representing the risk level of borrowing enterprises.
- Regarding investors, creditor financial analysis helps them evaluate the
solvency, profitability... to make decision whether they should invest in or lend such
enterprise.
Above analysis shows that corporate financial analysis is an useful tool used
to determine economic value; evaluate strength, weakness of the enterprise; find out
objective and subjective causes helping each subject to make option and decision in
line with the objectives of their concern. Therefore, corporate financial analysis is
an crucial activity to all enterprise in the current market economy and international
economic integration.
1.1.3. Materials used in analysis

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Enterprise-related information source is varied. Some information is
obligatory and open; some only for shareholders. Many information is announced
by financial organizations or Economic - Financial newspapers. The information
may come from the enterprise or externally.
1.1.3.1. Internal corporate information
Financial statement system of the Company refer to extremely important
information since financial statements are used to synthesize the financial situation
of the Company for a specific period of time. They must summarize a relatively
high volume of information and be presented properly in a specific form and
particular principle in order to provide users with true view about the financial
power, solvency, risk, business-production outputs in the reporting period so that the
Company can propose useful measures to promote the development of the
Company. They are also valuable information helping securities investors to make

right investment decisions.
Documents used for analysis are financial statement of the Company, of
which the most important and crucial is the balance sheet and business result report.
a- Balance sheet
Balance sheet is a combined financial statement generally reflexing all assets
of the Company in two manners including capital and capital constituting source of
Company at the reporting time. Therefore, balance sheet aims at describe financial
power of the Company by presenting the things owned by the Company and those
owed by the Company at a specific time. Balance sheet is regarded as a snapshot
since it is developed at the end of an accounting period. This is the weak point of
balance sheet when we use its data in financial analysis.
In structure, balance sheet is divided in to two parts in the balancing
principle that asset is equal to capital source.
In both asset and capital source component, high liquidity is located on the
top of the table and decreased as moving downwards. Therefore, in the asset
component, short-term assets are located upper, while long-term assets lower. The

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same is applied to the capital source component, which is listed by order and
payment request. First are short-term debts (with maturity of less than 1 year),
followed by medium and short term debts, and finally owned capital. All assets
must be funded by a particular sponsorship such as loan or equity capital. Each
component has its specific economic and legal meanings.
Grasping economic and legal aspects of data mentioned on the balance sheet
helps us to understand meaning of analytical ratios to be mentioned in the following
part.
- Assets reflect the value of all existing properties under the management and
use right of X20 Joint-stock Company at the time of reporting.

- In economic aspect, data mentioned in assets reflect scale and structure of
existing property types of X20 Joint-stock Company at the reporting time in the
form of money capital, receivables, inventories, fixed assets... Basing on this, it is
possible to make overall evaluation on asset scale, operation nature, and asset using
level of X20 Joint-stock Company.
- In legal aspect, data mentioned in the assets show the existing properties
under the management and use of X20 Joint-stock Company.
- The asset reflects the forming sources of existing assets of X20 Joint-stock
Company at the time of reporting.
- In economic aspect, data in the Capital Source show the capital structure
invested and mobilized in production and business of X20 Joint-stock Company.
This enables the general evaluation on financial capacity and initiative of X20 Jointstock Company.
- In legal aspect, data mentioned in the Capital Source show the legal
responsibilities of X20 Joint-stock Company to creditors regarding payable debts, to
clients regarding payables, to the owners regarding invested capital, to the State
regarding payable amounts, to employees regarding payables..
b- Business result report: if balance sheet is regarded as a snapshot reflexing
the assets, capital, capital sources, debts of the company at the reporting time, business
result report is considered as a slow movie about the general business situation and
results in a specific accounting year. The data mentioned in this report provide the most

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

Business result report indicates the profitability or loss in the period. The
report is prepared using the principle that it must reflect each type of revenue
(revenue from business operation, service supply, financial activities, other
incomes), and the costs used to get such revenues. The difference between revenue
and cost constitutes the profit.
The content of business result report may be varied by period depending on
the management requirements, but has to reflect the basic items such as revenue,
cost price, selling expenses, and business management expenses …
c- Cash flow statement: Cash flow statement is one of important documents
in the financial statement, the necessary document used and understood by
managers. This report specifies the reasons why the cash and money equivalents
vary in the accounting period. Especially, this report indicates all changes in money
by three activities including business, investment and finance. The use of cash flow
statement enables managers to follow the cash flow out and in to help the
enterprises to calculate the solvency for the due debts. Cash flow statement does not
carry out calculations such as income statement. Any non-monetary transaction will
not be reflected in the cash flow statement. However, net income mentioned in the
top of cash flow statement similar to the last line of the income statement is the
profit of X20 Joint-stock Company. By series of adjustments, cash flow statement
explains the income into cash.
d- Notes to financial statement: Notes to financial statement are a integral
part of financial statement used by the enterprise to report or analyze data
information mentioned in the balance sheet, Business result report, Cash flow
statement as well as other necessary information upon the request of specific

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

statement.
Therefore, it can be seen that above financial statements clearly indicate
financial situation of an enterprise. Despite being presented separately, financial
statement sheets have close connection with each other.
e- Additional accounting and financial information
Financial analysis requires information about business situation of the
enterprise:
- Account books
- Funding plan
- Market share held domestically and foreignly
- Diversification of business operation
- Commercial policy
- Short-term, medium-term, long-term prospects.
This information is mentioned in financial statement, specially studied; and
announces financial ideas and reports of the enterprise. Information is relatively
abundant, the problem is how the users choose and analyze them to develop
forecasts necessary for decisions by managers.
1.1.3.2. External information
a. General information
The information is related to business opportunities, which means the general
economic situation at a specific proposed time. The regression or growth has strong
influence on the business results. In favorable opportunity, activities of the
enterprise are expanded; profit of company as well as securities price in the stock
market varies in the same direction with activities. General Statistics Office of
Vietnam, Organization of Economic Cooperation and Development (OECD)
regularly announce information related to general opportunities. Moreover, the
surveys periodically carried out by General Statistics Office of Vietnam provide

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monthly results on prospects in industry and commerce, which are surveys about
expenses, orders, market demand forecasts...
In corporate financial analysis, the most important thing is learn the periodic
appearance of opportunities, which means growth is normally followed by
regression, and vice versa.
b. Information by economic sectors
In the border of the sector, the research locates the development of the
enterprise in the connection with general activities of the business lines. The
characteristics of business sector are related to:
- The properties of the products
- The applied technical procedures
- Heavy or light industrial structure and their influence on profitability,
reserve capital rotation, funding vehicles…
- The developing space of economic cycles.
Researches by sector clearly show the enterprises where they are in the general
development of the industry by comparing their effectiveness with other enterprises
in the sector, and learning from strong enterprises.
In general, to carry out the most accurate corporate financial analysis, it is
necessary to add internal factors such as business structure, line of business,
products, technological procedures, employee capacity, management level of
corporate managers…; external factors such as socio-political system, economic
growth, scientific and technical progress, monetary policy, tax policy…
1.1.4. Corporate financial analysis method
Corporate financial analysis method refers to the manners, techniques to
evaluate the financial situation of the enterprise in the past, at present; and forecast
the future. To conduct corporate financial analysis, we should use various methods
in the method system of corporate financial analysis. Some main methods
commonly used in practice are mentioned below.
1.1.4.1. Comparative method

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This is a method commonly used in economic analysis in general and
corporate financial analysis in particular. The use of this method needs to ensure
following contents:
Comparative conditions:
- Ensuring the existence of at least two quantities for comparison.
- The quantities must ensure the comparability. It is the integration in economic
content, calculating method, time, and measurement units.
How to determine the principal for comparison: Depending on the analytical
purpose to determine principal for comparison:
-As determining the development trend and speed of original analytical
indicators, comparative principal is determined as the numeric value of analytical
indicators of the previous period or a series of previous periods.
- As evaluating the implementation of proposed goals, tasks, comparative
principal is the planning numeric value of analytical indicators.
- As determining position of the enterprise, comparative principal is determined
as average value of the sector or analytical indicators of rivals.
Comparative techniques: Normally, they use two basic comparative methods as
follows:
- Comparison of absolute number refers to the determination of difference
between values of indicators in the analytical period with those in the principal
period. The comparative results indicate the variation in absolute number of
analytical indicators.
- Comparison in relative number refers to the determination of increasing
(decreasing) ratio of analytical indicators between actual period with principal
period in order to evaluate the development rate or structure of these indicators.
In addition, they utilize analytical techniques in longitudinal direction and

horizontal direction. In which:
Longitudinal analytical technique is the consideration and determination of ratio
of each indicator in the general to see the importance of each indicator.

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Horizontal analytical technique is the quantitative comparison on one indicator.
In reality, this is the application of comparative method in term of absolute and
relative numbers regarding information collected after the processing and design in
the form of table.
1.1.4.2. Detailed method
Normally, during the corporate financial analysis, they concretize appearing
process and achieved results via economic norms in following manners:
+ Detailing by constituting factors refers to the sub-division of studied norms
into the elements constituting such norm.
+ Detailing by appearing time refers to the sub-division of the economic process
and results by temporal appearing and development order.
+ Detailing by appearing space refers to the sub-division of the economic
process and results by appearing and developing location of studied norms.
1.1.4.3. Ratio method
In corporate financial analysis, financial coefficients are normally determined
by directly dividing one norm by another to see the specific influence of each
component norm on the norm to be analyzed. In addition to above methods, they
also use ratio method as a highly practical method in analyzing financial
coefficients of the enterprise. Financial ratios are divided into typical ratio groups
reflecting basic contents by each operating goal of the enterprise. They are ratio
groups on solvency, capital structure, operating capacity and profitability.
1.1.4.4. The method on analyzing the interactive connection between
financial coefficients

The return on equity of an enterprise is the combined result of a series of
methods and management decisions by the enterprise. To understand the
relationship between the capital use and product consumption to the rate of return
of the enterprise, they develop an indicator system to analyze such impact. Dupont
is the first company in the United State to establish and analyze the interactive

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relationship between financial coefficients. This method carries high practical
meaning. The main relationships considered in Dupont method include:
- The interactive relationship between after-tax rate of return above business
capital with capital efficiency and rate of return.
- Interactive relationships with rate of return above owned capital.
In addition to above basic methods, in corporate financial analysis, they also
use some other methods such as graph method, recurrent correlation method, linear
planning method, econometrics method …
Therefore, to have proper evaluation on financial situation of an enterprise, it
is necessary to clearly identify the analytical objectives and select proper analytical
methods in combination with the use of various methods to generate adequate and
accurate conclusions.
1.2. CONTENT OF CORPORATE FINANCIAL ANALYSIS
1.2.1. Financial analysis by typical financial index
Different companies different financial coefficients. Even one company has
different financial index at different periods of time. Therefore, financial indexes
are considered as the most typical representation of the financial situation of the
company in a particular period of time.
1.2.1.1. Operating capacity index
Capital effectiveness is always integrated with the existence and
development of an enterprise. Therefore, the analysis of operating capacity index

indicates the highest effective utilization of resources with the lowest expenditure.
a. Inventory turnover:
Number of inventory

Cost of goods sold
Average inventory

=

turnover
Inventory turnover shows how many times a company's inventory is sold and
replaced over a period. A high turnover is highly appreciated since the investment in
inventory is low but still effective, avoiding inactive capital and vice versa.

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However, the evaluation on this index must be combined with the
consideration of sector, line of business. For example, if the Company trades in
fruits, fresh foods, the high turnover is a good sign; which is reverse for wine
production.
From inventory turnover, we can calculate the average days for one
inventory turnover.
Number of days for an

360 days

inventory turnover

=

________________
Number of inventory turnover

b. Receivables turnover:
Receivables turnover

Net revenue
=

(2)

Average balance of receivables
This index reflects the speed of converting receivables into cash. The higher
turnover indicates quicker recovery of receivables; therefore, capital is not
appropriated by enterprise or invested in receivables. Small turnover shows that the
enterprise has high level of capital appropriation, resulting in lack of capital for
production and business, requiring the enterprise to mobilize external capital and
pay interests for such mobilized capital.
From receivables turnover, analysts can determine the average collection
period. The average collection period shows the days of a receivables turnover.
Longer receivables turnover leads to shorter collection period and vice versa .
Average
receivabl
e period

360 days
=

=

Receivables

Average balance of receivables x 360 (3)
Net revenue

turnover
Long average collection period implies that the high level of capital
appropriation in payment, and slow payback capacity. The consideration of this
index requires the understanding of enterprise’s credit policy to clients, business
strategy in the near future.

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c. Working capital turnover:
Working capital turnover

Net revenue
=

(4)

Average working capital
This index shows how many dongs of net revenue can be generated from the
use of one dong of working capital in the period, which means that it measure the
effectiveness of working capital in the enterprise. The higher this coefficient is, the
higher the working capital effectiveness is. This is because of rapid goods
consumption, low level of inventory, low level of receivables…, decrease in
expenditures and increase in profit. On the contrary, low coefficient implies high
volume of inventory, high cash balance, failure in collecting receivables…, resulting

in the need to review financial situation of the enterprise to propose correction
measure.
While working capital turnover reflects the number of working capital
rotation, working capital turnover period shows the days of a working capital
turnover.
Working capital turnover
period

360 days
=

(5)

Number of working capital turnover
This index indicates the days of a working capital turnover, as an inverse of
working capital turnover.
Therefore, low index is a good sign. Long working capital turnover period
means working capital inactiveness, appropriation, resulting in low profitability
from working capital.
d. Fixed capital turnover:
This index is used to measure the fixed capital effectiveness, which means
how many dongs of net revenue can be generated from the use of one dong of fixed
capital in the period. The consideration of this index requires the consideration of

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

effectiveness

Net revenue
=

(6)
Average fixed capital

g. Capital turnover:
This index says how many monetary units generated by suing one monetary
unit of capital or how many turnovers the capital of the enterprise can be used in a
period. This index can be used to evaluate capital management level of the
enterprise. The higher the ratio is, the higher the profit, the competitiveness, the
prestige of the enterprise in the market are.
Net revenue
Capital turnover

=

(7)
Average capital

1.2.1.2. Profitability index group
For investors, this index is extremely important since it is attached to their
economic interests. It is a basis to measure business results in a particular period
and foundation for investors, managers to make financial decisions in the future.
a. Return on sales (ROS):
This index indicates how many dongs of profit can be generated from one
dong of net revenue in the period.
Profit

ROS

=

(8)

Net revenue
(Profit in above formula is the pre-tax or after-tax profit)
b. Return on assets (ROA):
ROA tells how many pre-tax and after-tax profit and EBIT were generated
from the use of one unit of asset.

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ROA gives an idea as to how effective and efficient management is at using
its assets to generate earnings.
Return on assets

=

Pre-tax and pre-interest profit

(9)
(ROA)
Total average assets
By adding loan interest into pre-tax profit, we have total profit before

allocating to investors (loan and contribution). Because the denominator comprises
of the sources provided by lender and contributors, the numerator must contain the

payback resource for both.
This indicator is important to investors since pre-tax profit and interest are
the source to pay loan interest. Therefore, if return on assets is higher than interest
rate, the enterprise makes effective use of capital and is able to pay loan interest. On
the contrary, if this ratio is lower than loan interest, enterprise can hardly pay loan
interest or make effective use of capital.
c. Return on investment (ROI):
This index is used to evaluate efficiency of an investment or to reflect how
many monetary units of after-tax profit can be generated from one monetary unit of
investment. The higher the index is, the more effective the enterprise operation is.
After-tax profit
ROI

(10)

Average investment
DuPont formula reflects the relationship between investment profitability,
return on sales and capital turnover as follows:
After-tax profit
x
Net revenue
Net revenue
Average investment
(11)
=
Return on sales
x Capital turnover
* Note: Some materials call ROA as economic profitability ratio or basic
ROI

=

profitability ratio of the asset, while profitability ratio of the assets is calculated like
ROI
d. Return on equity (ROE):
Equity includes capital of preferred shareholders and ordinary equity. It is
determined by the difference between the total assets with the total payable debts.
Total profit after paying all obligations to the state is considered as shareholder

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income. Therefore, the equity earning index evaluates the ability to ensure all
contributing partners to the Company.
After-tax profit
Return on equity (ROE)

=

(12)

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

ROE

=

1

1 - debt

Operating

x

capital

Gain on revenue

x

coefficient
( 13)

e. Rate of return of common stocks:
Equity capital is the capital held by common shareholders and determined by
the difference between equity and preferred capital. The earnings of equity capital is
the remaining of after-tax profit after paying all dividends for preferred stocks. Rate
of return of commons stock indicates the payback rate created to common
shareholders by the Company.
This is an index measuring the success of the Company. Investors often
compare this index with interest rate on the capital market. When Company creates
rate of return higher than the profitability in the market, the investment in the
Company is recommended.
Rate of return of common

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

=

stocks
g. Earning per share (EPS):

This index is of concern by investors since it is the basis to pay dividend and
to increase market price of common stocks.
This index is calculated by taking dividing the number of circulating
common stocks by the remaining amount after paying dividend of preferred stocks .
Earnings of a
common stock

=

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

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1.2.1.3. Growth rate index group
a. Dividend rate:
The return expected by investors is not only allocated dividend. Many
investors do not want to receive dividends but keep the Company for re-investment
to get rate of return of common stocks. Other investors want to have an earning
source through dividend rather than risk re-investment. Common stock dividend
rate shows how many percentages of earning per each common stock are used to
pay dividend and how many percentages for re-investment. Common stock
dividend rate is calculated by comparison in the form of ratio between allocated
dividends and earnings from each common stock.

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

Dividend rate

=

(16)

k = 1 – dividend rate
b. Sustainable growth (g):
This rate evaluates the growth potential of equity (the capital of common
shareholders) through profit accrual; therefore, it is possible to consider this ratio as
to reflect sustainable growth potential: growth gained from retained profit
Re-investment profit
Equity (beginning of the year) (17)
Growth potential analysis is an important content in financial analysis

Sustainable growth (g)

=

since it enables managers to see the factors with impacts on growth of an enterprise
in order to set future operations to gain higher growth.
Growth potential contains various indicators for measurement including
revenue growth rate, earning rate, operating capital growth rate, equity growth
rate... In which, equity growth rate is the most concerned index. To determine equity
growth rate, they use following formula:
g: equity growth

E : equity
We have:

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g = (E1 – E0)/E0 = Re-investment earning /E0
= ROE0 x return on re-investment
g = rate on revenue x capital turnover x 1/ (1-debt coefficient) x return on
re-investment
We can develop the growth diagram showing the factors of impact from
above formula:
g: expected
growth

Nhân với

Multiplied by

Return on
investment (ROI)

Assets on equity

Capital turnover

Return on
revenue

After-tax profit

Net revenue

subtracti
ng

Retained rate of
profit

Return on equity
(ROE)

Total
expenditures

Multiplied by

Net revenue

dividing

Net revenue

Cost price

Sales &
management cost

Loan interest

Income tax

dividing

Total assets

Fixed assets

Current assets

cash

Short-term stock

receivables

Inventory

Diagram 1.1: Dupont analysis
Therefore, the integration of data to above diagram enables financial
managers to clearly understand what factor is focused in the last growth rate. This
helps them to understand the need to use a combination of proper financial policies
such as asset investment policy, funding policy, dividend policy to gain high growth
rate in the future. With current and future conditions of the enterprise, the enterprise
needs to determine the key factors to be exploited.

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1.2.1.4. Financial and asset structure indicator group

a. Debt coefficient: this coefficient indicates how many units of debts are
required for one unit of operating capital.
Total debts
Total assets
(22)
This coefficient is used as profit lever by Company managers. High debt
Debt coefficient

=

coefficient tells high financial risk and possible insolvency of the Company.
b. Self-financing coefficient:
Self-financing
coefficient
Self-financing

(23)
=

Equity source
Total capital

=
(24)

1 - Debt coefficient

coefficient
This coefficient shows the independence or dependence of Company on
creditors as well as self-financing capacity on its business operations. It is the

measurement of shareholder capital ratio against total capital currently managed and
used by the Company (indicating pressure or binding of loans). The higher the
coefficient is, the safer the debs are.
c. Asset structure:
Asset structure tell us about the ratio of short-term assets and long-term assets
among the total assets.
Short-term asset
investment coefficient
Long-term asset

Total short-term assets
Total assets

=

(25)
=

Total long-term assets
Total assets
(26)

investment coefficient
Asset structure reflects the percentage of one capital unit used to form longterm assets and that for short-term asset. This structure depends on type of business
of each company. Most of capital in production companies is used in long-term
assets; while that of commercial companies in short-term assets. Long-term asset
investment coefficient tells the importance of long-term assets in total assets of the
company; shows the ability to equip technical and material facilities, technological

23

procedure, producing capacity, development direction, and competitiveness
compared with other enterprises.
In addition, they also compare the ratio of capital used in long-term assets
and short-term assets.
Total short-term assets
Total long-term assets
(27)
This coefficient is always completed by the Company; however, it is different
Asset structure

=

for different units and at different period of times. Normally, asset structure of the
industry is used as the comparative reference.
1.2.1.5. Solvency indicator group
a. General solvency coefficient:
general solvency

=

Total assets

(28)

coefficient
Long-term and short-term debts
In which, total assets comprise of all short-term assets and long-term assets
serving production and business operations.

Short-term debts refer to the debts with maturity of less than one year.
Long-term debts refer to the debts with maturity of more than one year.
This coefficient shows the relationship between total assets managed or used
by the company and the total payable debts (short-term and long-term debts),
reflecting how many monetary units of assets are used to guarantee one monetary
unit of debt. If this coefficient is smaller than 1, total assets are less valuable then
total debts; therefore, total existing assets of the Company are not enough to pay all
debts. This shows that the company is subject to insolvency and possible
bankruptcy. However, too high coefficient requires re-consideration, since the use of
financial lever by Company is ineffective.
b. Temporary solvency coefficient:
Temporary solvency (short-term debt solvency) is the relationship between
short-term assets and short-term debts. This coefficient shows the assurance of
short-term assets to short-term debts. Short-term debts are the debts to be paid
within this year; therefore, the Company have to use the assets those are convertible

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

Total short-term assets

=

coefficient

(29)

Total short-term debts

If this coefficient is smaller than 1, the Company faces with difficulty in
paying short-term debts. However, it is not good if it is too high. The consideration
of this coefficient must be put in the relationship with the characteristics of business
lines.
c. Quick solvency coefficient:
It is the measurement about the mobilization of assets with quick
convertibility into money to pay short-term debts requested by creditors. As we
know, only short-term assets have the highest liquidity among the total assets.
However, the convertibility of goods capital is low, quick solvency is not dependent
on the sales of goods, materials; and determined by following formula:
Quick solvency
Short-term assets – Goods capital
=
coefficient
Total short-term debts
(30)
In general, if this coefficient is small, Company will lose prestige to partners,
face with difficult solvency, and possibly risk selling assets at cheap price to pay
debts. Too high coefficient reflects high level of cash in hand, reduction in capital
effectiveness. Like temporary solvency, the value of this coefficient depends on line
of business, payment schedule of debts payable during the period.
d. Interest solvency:
It is the ratio between the source used to pay loan interest and payable loan
interest. The source used to pay loan interest is earnings before interest and tax

(EBIT).
Interest solvency

EBIT
(31)
Payable interest
This indicator is used to evaluate the capital effectiveness and willingness to
=

pay interest of Company. If the coefficient is higher than 1, the company is solvent,
profitable, effective in using loan, and vice versa.
1.2.2. Comparative financial statement analysis

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