Improving the efficiency of using capital at baoviet group

VIETNAM NATIONAL UNIVERSITY, HANOI
INTERNATIONAL SCHOOL
*****************

Phan Dinh Tam

IMPROVING THE EFFICIENCY OF USING CAPITAL AT
BAOVIET GROUP

MASTER THESIS

Ha Noi - 2020


VIETNAM NATIONAL UNIVERSITY, HANOI
INTERNATIONAL SCHOOL
*****************

PHAN DINH TAM

IMPROVING THE EFFICIENCY OF USING CAPITAL AT
BAOVIET GROUP

Major: Master in Financial Management
Code: 8340202.01QTD

MASTER THESIS

Supervisor: Nguyen Thi Hai Duong, PhD

Ha Noi - 2020

ABSTRACT
Thesis Title: Improving the efficiency of using capital at Bao Viet Group
Pages: 100
University: Vietnam National University
Graduate School: International School
Date: Octorber, 2019

Degree: Master

Graduate Student: Phan Dinh Tam

Supervisor: Dr. Nguyen Thi Hai Duong

Keywords: Business Capital, Bao Viet Group, improving efficiency

This paper focuses on analyzing, evaluating and offering solutions to overcome
shortcomings, and to contribute to improve and bring better efficiency for using capital at
Bao Viet Group in the period of 2016–2018. The researcher will study the system and
theoretical basis of the organization of capital use, do research and evaluate the status
of the organization of using capital in enterprises in general and the status of organization
using capital at Bao Viet Group, and provide recommendations and basic conditions to
improve the efficiency of capital use at the Bao Viet Group. The research uses following
methods: Statistical methods, synthetic methods, analytical methods and comparison
methods to clear the research objective. Thereby, the research recommends financial
solutions: Adjust capital structure in a more reasonable way; Strict management and
improve the profitability of capital in cash; Focus on investing in architectural houses,
means of transmission and improving the efficiency of using existing fixed capital;
Determine the Group's need for regular working capital appropriately; Regularly monitor,

analyze and evaluate the efficiency of capital use; Periodically conduct financial analysis
and evaluate the performance of the company, and needs to build and train high quality
human resources.

1


ACKNOWLEDGEMENT
I would like to send my sincere thanks to my supervisor: Dr. Nguyen Thi Hai
Duong, whose kind support and continued advices helped me with the completion of
my thesis.
I would like to send my great thanks to professors, lecturers and staffs at the
VNU - International School for the knowledge and experience that have been shared
through their lectures during the master program.
My thesis was also completed with the help from my superiors and colleagues
at Bao Viet Group.
Last but not least, I would like to express my gratitude to my friends and family
for giving me encouragement and supports during my studying time and completion
of my thesis.
Thank you!
Phan Dinh Tam

2


TABLE OF CONTENTS
ABSTRACT .............................................................................................................. 1
ACKNOWLEDGEMENT ........................................................................................ 2
TABLE OF CONTENTS .......................................................................................... 3
LIST OF TABLES .................................................................................................... 5

LIST OF FIGURES ................................................................................................... 7
CHAPTER 1: INTRODUCTION ............................................................................. 8
1. The necessity of the research ........................................................................ 8
2. Research objectives ....................................................................................... 8
3. Research Scope ............................................................................................. 9
4. Research Methods ......................................................................................... 9
5. Structure of the thesis .................................................................................... 9
CHAPTER II: THEORETICAL BACKGROUND AND LITERATURE REVIEW
................................................................................................................................. 10
1. CONCEPT AND CLASSIFICATION OF BUSINESS CAPITAL ........... 10
1.1. Concept of Business Capital .................................................................... 10
1.2 Characteristics of Business Capital ........................................................... 10
1.3. Classification of Business Capital ............................................................ 11
1.3.1. Based on the Source of Capital Formation ........................................... 11
1.3.2. Based on the characteristics of capital rotation ..................................... 12
1.3.3. Based on the scope of capital mobilization ........................................... 13
2. EFFICIENCY OF USING CAPITAL IN ENTERPRISE .......................... 14
2.1. The concept of efficient use of Business Capital ..................................... 14
2.2. Indicators for evaluating the efficiency of using Business Capital ......... 15
2.3 The necessity to improve the efficiency of using business capital of
enterprises in market economy........................................................................ 27
3. FACTORS IMPACT ON THE EFFICIENCY OF USING BUSINESS
CAPITAL ........................................................................................................ 27
3.1. External factors ........................................................................................ 28
3.2. Internal factors.......................................................................................... 28
CHAPTER III: DATA ANALYSIS AND SOLUTIONS TO IMPROVE THE
EFFICIENCY OF CAPITAL USE AT BAO VIET GROUP ................................ 30
3

I. SITUATION OF USING CAPITAL AT BAO VIET GROUP (2016-2018) ..... 30
1. Business performance of Bao Viet Group .................................................. 30
1.1. History and Development of Bao Viet Group ......................................... 30
1.2. Management Organization of Bao Viet Group ........................................ 31
1.3. Results of Business Performance of Bao Viet Group .............................. 34
2. The situation of effective use of business capital at Bao Viet Group (2016 2018)................................................................................................................ 40
2.1. The situation of using business capital .................................................... 40
2.2. Using Capital at Bao Viet Group ............................................................. 50
3. ASSESSMENT ON THE ORGANIZATION AND EFFICIENCY OF
USING CAPITAL IN BAO VIET GROUP ................................................... 81
3.1. Achievements ........................................................................................... 81
3.2. Existences ................................................................................................. 82
II. SOLUTIONS TO IMPROVE THE EFFICIENCY OF CAPITAL USE AT BAO
VIET GROUP ......................................................................................................... 84
1. Bao Viet group’s development orientations towards 2025 ......................... 84
1.1. Socio-economic context at home and abroad .......................................... 84
1.2. Developmental orientations ..................................................................... 85
2. Solutions to improve the efficiency of capital use at Bao Viet Group ....... 88
2.1. Financial solutions ................................................................................... 88
2.1.1. Adjust capital structure in a more reasonable way ............................... 88
2.1.2. Strict management and improve the profitability of capital in cash ..... 89
2.1.3. Focus on investing in architectural houses, means of transmission and
improving the efficiency of using existing fixed capital ................................ 91
2.1.4. Determine the Group's need for regular working capital appropriately 94
2.1.5. Regularly monitor, analyze and evaluate the efficiency of capital use 95
2.2. Others solutions ........................................................................................ 96
2.2.1. Periodically conduct financial analysis and evaluate the performance of
the company .................................................................................................... 96
2.2.2. The company needs to build and train high quality human resources .. 97
3. Conditions to implement recommendations ............................................... 97

3.1. For the state .............................................................................................. 97
3.2. For the Group ........................................................................................... 99
CONCLUSION ..................................................................................................... 100
4


REFERENCES ...................................................................................................... 102

LIST OF TABLES
Table
number

Table name

Number
of pages

2.1

Some financial information of Bao Viet Group (2016-2018)

35

2.2

Assets structure of Bao Viet Group (2016-2018)

40

2.3

Structure of business capital of Bao Viet Group (2016 – 2018)

44

2.4

Some targets on the structure of capital sources of Bao Viet Group
(2016– 2018)

46

2.5

Capital financing model of Bao Viet Group (2016– 2018)

47

2.6

Working capital structure of Bao Viet Group (2016– 2018)

49-50

2.7

The solvency assessment criteria of Bao Viet Group in 2016-2018

54

2.8

The average receivable and receivable turnover cycle of Bao Viet
Group in 2016– 2018

57

2.9

Compare the appropriated and occupied capital of Bao Viet Group
(2016-2018)

60-61

5


2.10

Some indicators evaluate the efficiency of using working capital of
Bao Viet Group (2016 – 2018)

64

2.11

Long-term assets structure of Bao Viet Group (2016 – 2018)

67

2.12

Fluctuation of tangible fixed assets of Bao Viet Group in 2018

71

2.13

The situation of depreciation of fixed assets of Bao Viet Group
(2017, 2018)

74

2.14

Effective use of business capital of Bao Viet Group (2016-2018)

77

2.15

Business plan of Bao Viet Group in 2020

85

6


LIST OF FIGURES
Table number

Table name

Number
of pages

FIGURE 2.1

Organizational model of Bao Viet Group

31

FIGURE 2.2

Market share of non-life insurance in Vietnam in 2017

37

FIGURE 2.3

Market share of new life insurance revenue in Vietnam
in 2017

38

FIGURE 2.4

Structure capital sources Bao Viet Group in 2016 –
2018

42

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CHAPTER 1: INTRODUCTION
1. The necessity of the research
Globalization is an indispensable trend now, which is taking place strongly. It is
creating a link and increasing exchange between countries, organizations or individuals in
all angles: Culture, economy, politics. Considering the economic perspective in general
and finance in particular, it can be seen that fierce competition is increasing among
countries in general and domestic enterprises in particular. An enterprise that wants to
survive and develop must have the qualifications, knowledge and management capacity.
In particular, capital is an important factor affecting the business performance.
Indeed, any business that wants to scale up or restructure the industry must have a
stable source of capital. After that, enterprises must know how to preserve and develop
their capital to improve their financial capacity. In the current economic context, Bao
Viet Group is a special-class enterprise, which is allowed by the Government to pilot the
equitization to establish a Group operating under the model of Parent Company and
Subsidiary Company. After more than 10 years of equitization, with the technical
support of HSBC strategic partner and Sumitomo Life, the Group has achieved quite
good results in core business sectors (insurance) and other financial sectors such as
Banking, Securities, Fund Management... Strictly controlling investment management
and cash flow management has helped the Group effectively to manage capital use,
thereby contributing significantly to the Group's business results in the past 10 years.
However, in the process of implementing the investment, the management and use of
capital in Bao Viet Group still has certain limitations and shortcomings, so I choose the
topic: “Improving the efficiency of using capital at Bao Viet Group” to analysis of
the Group's business capital efficiency, as well as some comparisons in the Group's core
business: Bao life insurance and non-life insurance.

2. Research objectives
Based on theoretical issues and actual situation of using capital of Bao Viet Group,
the thesis proposes solutions to improve the efficiency of capital using at the Bao Viet
Group. In detail, the sub objectives are followings:
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- Study the system and theoretical basis of the organization of capital use;
- Research and evaluate the status of the organization of using capital in
enterprises in general and the status of organization using capital at Bao Viet Group;
- Provide recommendations and basic conditions to improve the efficiency of
capital use at the Bao Viet Group.

3. Research Scope
The thesis is in-depth research on the use of capital at the Bao Viet Group. The
research period is from 2016 to 2018.

4. Research Methods
The research uses following methods: Statistical methods, synthetic methods,
analytical methods and comparison methods to clear the research objective.
The topic of systematizing, analyzing and clarifying theoretical issues about the
use of capital of Bao Viet Group in the period of 2016–2018. The efficiency of using the
Group's business capital in the subject of research.
Assess and analyze the current situation of using capital at Bao Viet Group in the
following aspects: Efficiency and not really effective, urgent contents to improve the
efficiency of the Group's capital use.
The thesis proposes research theorems, scientific points as the basis for solutions
to improve the efficiency of the Group's capital use, and provides and clarifies the
solutions especially flexible capital raising solutions. operating and using capital

effectively at the Group. With these solutions, the thesis clarifies qualitatively and
especially quantifies the benefits of the Group's capital efficiency.

5. Structure of the thesis
In addition to abstract, conclusion, appendices, table lists, tables, catalogs of
references and indexes, the dissertation is divided into 3 chapters:
- Chapter 1: Introduction;
- Chapter 2: Theoretical background and Literature review;
- Chapter 3: Data analysis and Solutions to improve the efficiency of capital use at
Bao Viet Group.

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CHAPTER II: THEORETICAL BACKGROUND AND
LITERATURE REVIEW
1. CONCEPT AND CLASSIFICATION OF BUSINESS CAPITAL
1.1. Concept of Business Capital
Production and business activities are fundamental activities of enterprises. The
prerequisite for forming a business is business capital, businesses that want to register
their business as well as carry out business activities need capital. In order to carry out
the process of production and business, enterprises need to have the following basic
elements: Labor, labor and labor materials. In order to get these three factors, businesses
must apply a certain amount of capital called business capital (business capital).
According Bui Van Van and Vu Van Ninh (2013) “Business capital of the
enterprise is the entire amount of advance that businesses spend to form the necessary
assets for production and business activities of the enterprise”.
1.2 Characteristics of Business Capital
To manage and use business capital effectively, businesses must be aware of some
characteristics of business capital:

- Business capital is expressed as the value of assets of the enterprise. In other
words, capital must represent a certain amount of asset value. Therefore, it is impossible
to have capital without assets or vice versa.
- Capital must be mobilized to earn profit. Capital is expressed in money but
money is not necessarily capital. To become capital, money must be mobilized for profit.
In the business process, capital can be transformed through many different forms, but the
starting and ending points of the cycle must be the monetary form with a value greater
than the original value, ie business profitable. This requires businesses to manage the use
of business capital so that the circulating capital is not stagnant.
- Capital must accumulate, focus on a certain amount to be effective in business,
which shows that to be able to use capital effectively requires businesses to calculate
accurately the amount of capital to be used to avoid the shortage of capital, businesses
will fall into a passive or excess capital which will cause capital stagnation, increase
10


opportunity costs during the process of using capital, and reduce use efficiency.
Therefore, businesses must not only rely on their available potential but also seek to
attract capital from various sources.
- Capital is valuable in terms of time, ie the value of the same amount of capital at
different times is not the same. This feature requires businesses in the process of using
capital to make capital move constantly, not to "die" capital.
- Capital associated with one or more certain owners. This feature requires
businesses to choose capital mobilization to balance between profit and cost to mobilize
capital.
- At one time, capital can exist in many different forms, which can be in the form
of specific material such as cash, inventory, machinery, vehicles... or no morphology.
Specific material such as land use rights, trademarks... This feature helps businesses have
a comprehensive view of business capital, thereby having appropriate solutions to
promote the strength of business capital.

1.3. Classification of Business Capital
In order to classify business capital, we can consider many different criteria such
as capital formation, capital transfer characteristics, capital mobilization scope.
1.3.1. Based on the Source of Capital Formation
According to capital formation criteria, the enterprise's business capital includes
equity and liabilities.
a) Equity: Equity is the source of capital owned by the business owner and
members of the joint venture company or shareholders in joint stock companies.
Equity = Total asset value - Total liabilities
With different types of businesses, equity is also formed from different sources. In
Vietnam today there are the following types of equity:
- For state-owned enterprises: Owner's equity is capital operated by the state or
invested. Therefore, the owner is a state.
- For limited liability companies (limited liability companies): Capital is formed
by the members participating in the establishment of the company. Therefore, these
members are capital owners.
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- For joint stock companies: Equity is the capital formed by shareholders.
Therefore, the capital owner here is the shareholders.
- For partnerships: Capital contributed by the members involved in establishing
the company. These members are capital owners. A partnership is an enterprise that must
have at least two partners and may have capital-contributing members.
- For private enterprises: Enterprise's capital is contributed by the business
owner. Therefore, the owner of capital is, of course, the business owner. The owner of a
private enterprise must be responsible for all his assets.
- For joint-venture enterprises (which may include joint ventures or jointventure enterprises): Joint ventures may be conducted between domestic enterprises or
domestic enterprises or foreign enterprises.
b) Liabilities must pay: Liabilities are debts arising in the course of production

and business activities that businesses must pay, must pay to creditors, including loans,
debts and payables for sellers, for the State, for employees and other payables.
1.3.2. Based on the characteristics of capital rotation
Based on the capital turnover criteria, capital of enterprises is divided into two
types: fixed capital and working capital. Specifically:
a) Fixed capital: Fixed capital is the value of fixed assets (fixed assets). These
types of assets are assets of great value, the duration of use lasts through many business
cycles of the business. From the above definition, fixed capital has characteristics:
- Firstly: Rotate through many production and business periods of enterprises due
to fixed assets and long-term investments involved in many production and business
cycles of enterprises.
- Secondly: When participating in the business process of business, the fixed
capital invested in production is divided into 2 parts. A fixed capital component
corresponding to the depreciation value of fixed assets is shifted into business costs or the
cost of products and services produced, this value unit will be offset and accumulated
each when goods or services are consumed. The remaining part of fixed capital is in the
form of residual value of fixed assets.
In enterprises, fixed capital is an important part and accounts for a large proportion
in the structure of investment capital in particular, production capital in general. Fixed
12


capital scale and fixed capital use management is a key factor affecting the efficiency of
using business capital of enterprises.
b) Working capital: Working capital is expressed in cash of short-term assets so
the movement characteristics of working capital are always influenced by the
characteristics of short-term assets. From the above definition, working capital has
specific characteristics:
i. Fast traffic.
ii. Move once into the production and business process.

iii. Complete a cycle after completing a business process.
iv. The movement of working capital is a closed cycle from one form to another
and returns to the original form with a value greater than the original value. The
mobilization cycle of working capital is the basis for assessing the solvency and business
and production efficiency of enterprises and the efficient use of capital of enterprises.
The biggest difference between working capital and fixed capital is: fixed capital
gradually transfers its value into the product through depreciation, while working capital
transfers its entire value into the product value according to production and business
cycle.
1.3.3. Based on the scope of capital mobilization
According to the standard of capital mobilization, the business capital of the
enterprise is classified according to two sources: the internal capital source of the
enterprise and the capital outside the enterprise. Specifically:
- Internal capital of the enterprise: The enterprise mobilizes the use of the
internal capital of the enterprise with the advantage that the enterprise is entitled to
autonomy to use for the purpose of the business without having to bear the pressure of
use costs capital. With the above characteristics, many businesses easily fall into the case
of inefficient use of capital.
- Capital source outside the enterprise: It is an enterprise's capital source that
can be mobilized from outside to meet the demand of using capital for production and
business activities of enterprises. There are many sources for businesses to mobilize such
as bank loans, loans from other financial institutions, issuance of debiting instruments...
With the above characteristics, the external capital mobilization channel of enterprises is
13


very wide. If businesses build a reasonable business plan, the mobilization plan from
outside will help businesses thrive. However, with capital mobilized from outside,
enterprises will be subject to pressure to pay interest on debt as prescribed. If the business
does not have a reasonable business plan and repayment, the enterprise will be exposed to

great risks.
Thus, with the characteristics of the capital mobilization mentioned above, the
combination of internal capital and external capital sources will bring about efficient use
of capital for businesses and reduce risks when mobilizing capital.

2. EFFICIENCY OF USING CAPITAL IN ENTERPRISE
2.1. The concept of efficient use of Business Capital
In a market economy, the biggest purpose of an enterprise is business and
production activities that bring about high economic efficiency. This means businesses
must take advantage of all capital to develop production and business, bring high
economic efficiency and facilitate the expansion of production scale. Business capital
helps businesses operate continuously, stably and effectively. Corresponding to each
production scale requires a certain amount of capital. However, it is only a necessary
condition, it is important that the enterprise uses that capital to bring the highest
efficiency, not only to preserve capital but also to develop capital and bring the effect.
Highest business results. The effect is the economic benefit gained after compensating for
the expenses for production and business activities.
Thus, the efficiency of using business capital of enterprises is an economic
category reflecting the quality and usefulness of the use of input cost factors in the
production process, determined by term. The relation between the output and the input
cost of an economic system in a certain time so that the profit achieved by the enterprise
is the highest with the lowest total cost. At the same time, it is possible to create capital
for its business and production activities, ensuring the investment and production
expansion of enterprises in the future (Bui Van Van and Vu Van Ninh, 2013.
In a market economy, every business wants to survive and grow; it must have a
required amount of monetary capital. However, with the same amount of capital, the
profits of businesses are different. The main reason is due to the efficiency of capital
utilization of each enterprise and different. Effective use of capital ensures the safety of
14

businesses, affecting the existence and development of that business. Therefore,
improving the efficiency of organizations using business capital in enterprises is an
objective requirement for the production and business process of enterprises.
2.2. Indicators for evaluating the efficiency of using Business Capital
When studying to find out measures to improve the efficiency of capital of
enterprises, we need to assess the current state of using business capital of enterprises
through analyzing the criteria of evaluating the efficiency of using capital business. Basis
for evaluating the effectiveness of capital use, including the criteria considered as
follows:
1.2.2.1 Performance indicators for using business capital of enterprises
a) Performance of business capital:
Circle of money: This indicator reflects in the period, how many rounds of
business capital of the business turn. Or in the period of 1 dong, the capital is spent on
production and business
Net revenue
Circle of money=

Average business capital

b) Performance using working capital:
When considering the use of working capital, people often consider the circulation
rate of working capital according to the following two criteria:
- Working capital turnover: This indicator reflects the period of working capital,
how many rounds or 1 dong of working capital will be generated.
Net revenue
Working capital turnover =

Average working capital in the period

Working capital turnover cycle, the more revs, the more effective the working
capital is used.
- Circulating working capital: This indicator reflects the average number of days
required for working capital to execute a rotation (or the length of time a rotation of
working capital in the period).
Number of days in the period

15


Circulating working capital =

Working capital rotation

The shorter the rotation period, the faster the working capital is circulated, and the
higher the effective working capital
c) Target savings of working capital
This indicator reflects the working capital that can be saved by increasing the
speed of circulating working capital compared to the original period.
VTK (+-)

M1
=

×

(K1- K0)

360

Or= M1/L1- M1/L0
With:
VTK: The amount of working capital can be saved or increased due to the effect of
the circulating working capital rate compared with the original period.
M1: Total amount of circulating working capital in comparison period.
K1, K0: The circulating period of working capital in the comparison and original
periods.
L1, L0: Number of times of circulation of working capital in comparison period,
original period.
If the working capital turnover period is longer than the previous period, the
enterprises will have wasted working capital.
d) Content of working capital:
This indicator reflects to create a net revenue that requires how much working
capital.
Average working capital in the period
Content of working capital =

Net revenue

In addition to assessing the efficiency of using working capital, people also use a
number of other criteria such as: inventory turnover, accounts receivable turnover,
average collection period...
The study of the above indicators helps businesses improve capital efficiency. If
the business strives to shorten the capital rotation cycle by saving reasonable working
16


capital, raising the total capital turnover, it will increase the working capital turnover.
From there, contributing to increase profits, increase business efficiency of the business.
e) Inventory turnover:

Inventory turnover is a ratio showing how many times a company has sold and
replaced inventory during a given period. A company can then divide the days in the
period by the inventory turnover formula to calculate the days it takes to sell the
inventory on hand. Calculating inventory turnover can help businesses make better
decisions on pricing, manufacturing, marketing and purchasing new inventory.

Sales
Inventory Turnover =

Average Inventory

The higher the inventory turnover coefficient, the more quickly the business sells
and the inventory is not stagnant. This means that the business is less risky if the
inventory items in the financial statements have decreased over the years.
f) The average collection period
The average collection period is the amount of time it takes for a business to
receive payments owed by its clients in terms of accounts receivable (AR). Companies
calculate the average collection period to make sure they have enough cash on hand to
meet their financial obligations.
360
The average collection period =

Receivables turnover

With receivables turnover:
Revenue (with tax)
Receivables turnover =

The average balance of receivables

If the turnover of receivables increases from year to year, it shows the weak ability
of debt management in a company (and vice versa).
g) Fixed use of capital
When considering fixed capital usage, people often base on the following specific
criteria:
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- Fixed capital use performance: Reflecting a fixed capital to create net revenue in
the period.
Net revenue
Fixed use of capital =

Average fixed capital

- Fixed capital content: is the inverse quantity of the fixed capital use efficiency
index to create a net revenue that needs how much fixed capital.
Average fixed capital
Fixed capital content =

Net revenue

- Usage efficiency Fixed capital and other long-term capital: This indicator reflects
a fixed capital and other long-term capital (long-term total assets) involved in the period
of how much revenue is generated.
Net Sales Revenue + Financial Revenue
Usage efficiency Fixed

=

Total fixed capital and other long-term

capital and other long-

capital on average

term capital
After calculating the above indicators, people compare them between years to see
if the fixed capital (or fixed assets) is used effectively or not. It is also possible to make
comparisons between Enterprises in the same sector or an area to consider whether their
competitiveness, use status and business management are effective.
h) Coefficient of fixed assets
This indicator reflects the level of wear and tear of fixed assets in the enterprise
compared to the initial investment time.
Coefficient of
fixed assets

Accumulated depreciation amount
=

Historical costs Fixed assets at the time of
evaluation

This higher coefficient indicates that fixed assets are old and need to be renewed
investment, on the contrary, the lower this coefficient indicates that enterprises always
pay attention to investment in equipment and machinery innovation.
i) Number of days of money transfer
18

This index is a useful way to assess the company's cash flow because it measures
the amount of time invested in working capital. The cash conversion cycle (CCC) is
calculated by the following formula:
CCC = RCP + ICP - PDP
with:
RCP: Receivable Collection Period
ICP: Inventory Conversion Period
PDP: Payable Deferral Period
Thus, the cash cycle can be shortened by reducing inventory conversion time by
faster handling and sales of goods or by reducing customer collection times by speeding
up debt collection or by how to extend payment time by delaying repayments to
suppliers.
1.2.2.2 Indicators to evaluate the efficiency of using business capital of
enterprises
a) Indicators reflect the profitability of business capital
 The ability to profitability of all business capital
- Basic earning power (BEP) ratio is a measure that calculates the earning power
of a business before the effect of the business' income taxes and its financial leverage. It
is calculated by dividing earnings before interest and taxes (EBIT) by total assets.

BEP =

Earnings Before Interest anh Taxes (EBIT)
Total Assets

This index is very significant in comparing the situation of company operations
with the common ground of the industry. The higher the BEP, the better the business
performance of the Company.
- Return on assets (ROA) is a profitability ratio that provides how much profit a
company is able to generate from its assets. In other words, return on assets (ROA)

measures how efficient a company's management is in generating earnings from their
economic resources or assets on their balance sheet. ROA is shown as a percentage, and

19


the higher the number, the more efficient a company's management is at managing its
balance sheet to generate profits.
Net income
ROA =
Average Total Assets
A high and stable ROA for a long time is a positive sign that the company is using
its assets more and more effectively and optimizing the resources available.
- The return on equity ratio (ROE) is a profitability ratio that 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.
ROE is also an indicator of how effective management is at using equity financing
to fund operations and grow the company.
Net Income
ROE =

Shareholder’s Equity

The higher this indicator, the greater the profitability of equity, the more co-equity
a co-owner generates after-tax profits.
- Return on sales (ROS) often called the operating profit margin, is a financial
ratio that calculates how efficiently a company is at generating profits from its revenue.
In other words, it measures a company’s performance by analyzing what percentage of
total company revenues are actually converted into company profits.

Operating Profit
ROS =
Net Sales
This larger indicator shows the higher the efficiency of the business.
 Profitability of working capital
- Working capital return: This indicator reflects in the period, one dong of
working capital participating in the business process creates how much profit before tax

20


(after) tax. It has a proportional relationship to the profitability of the business and can be
used to see how efficient it is to use working capital compared to the cost of financing it.
(This indicator reflects in the period, how many dongs of working capital involved
in a business process generate profits before (after) the tax. can be used to see the
working capital efficiency versus funding costs for it.)

Working capital rate of return =

Profit before (after) tax
Average working capital in the period

 Profitability of fixed capital
Fixed capital rate: This indicator reflects a fixed amount of capital involved in the
period, which can generate as much of the previous (after) tax profit.

Fixed rate of return on capital =

Profit before (after) tax
Average fixed capital in the period

b) Indicators reflect the level of business capital safety
 Frequent working capital also known as Net working capital (NWC) is a
liquidity calculation that measures a company’s ability to pay off its current
liabilities with current assets. This measurement is important to management,
vendors, and general creditors because it shows the firm’s short-term liquidity as
well as management’s ability to use its assets efficiently.
Much like the working capital ratio, the net working capital formula focuses on
current liabilities like trade debts, accounts payable, and vendor notes that must be repaid
in the current year. It only makes sense the vendors and creditors would like to see how
much current assets, assets that are expected to be converted into cash in the current year,
are available to pay for the liabilities that will become due in the coming 12 months.
Net Working Capital = Current Assets – Current Liabilities
or,
Net Working Capital = Current Assets (less cash) – Current Liabilities
(less debt)
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or,
NWC = Accounts Receivable + Inventory – Accounts Payable
If long-term capital is larger than long-term assets, the enterprise has regular
working capital. This is a sign of safety for businesses because it allows businesses to
cope with risks that may occur as far as bankruptcy of large customers, credit cuts of
suppliers including losing temporary hole...
In case of long-term capital source is smaller or equal to long-term assets, it means
that the enterprise has no working capital regularly. The fact that long-term capital is
smaller than fixed assets and long-term assets means that the enterprise has used a shortterm part of its capital to finance long-term assets. Even if the long-term capital is equal
to long-term assets, that means: long-term capital of the enterprise is enough to finance
long-term assets, financial balance in this case, although it still achieves stable properties.

The decision is not high, the risk of violating the financial balance principle is still
potential. This is a sponsorship policy that does not bring stability and safety to
businesses.
 Debt ratio: It is a very important financial factor for business managers, with
creditors as well as investors. For corporate managers, through debt ratios,
financial independence, financial leverage and financial risks can be encountered
from which to adjust financial policy appropriate main. For creditors, by
considering the debt ratio of the business, it is possible to see the security of the
loan to make loan decisions and debt recovery decisions. Investors can assess the
level of financial risk of the business, based on that to consider the investment.
The capital structure coefficient is expressed mainly through debt ratio. Debt ratio
represents the use of corporate debt in the organization of capital and it also shows the
level of using leverage of enterprises.
Debt ratio

=

Total debt
Total asset

This coefficient indicates how many dong is raised in a loan fund, in which the
mobilized capital is.
 The solvency index group
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- Current solvency coefficient: Also known as the ability to pay short-term debt.
This coefficient reflects the ability to convert assets into money to cover short-term debts
of businesses.
Current solvency coefficient

Short-term assets
=
Short-term debt

Total short-term assets include short-term financial investments. Short-term
liabilities are liabilities payable for a period of less than 12 months.
In order to evaluate this coefficient, it is necessary to base on the average
coefficient of enterprises in the same industry or the criteria for assessing the financial
ratios of the banking industry. It should be noted that there are differences between these
coefficients in different business sectors. An important basis for evaluation is to compare
with the current solvency coefficient at the previous points of the business.
Normally, when this ratio is low (especially when it is less than 1), it is weak and
is also a sign of potential financial difficulties that businesses may encounter. in debt
repayment. This high coefficient indicates that enterprises are highly capable of being
willing to pay due debts. However, in some cases this coefficient is too high to reflect the
payment capacity of the business as well.
In order to better assess the solvency of the business, we use the ability to pay
quickly.
- Quick payment coefficient: Is a criterion to assess more closely the solvency of
enterprises. This coefficient indicates how much VND short-term debt is guaranteed by
short-term assets after eliminating low liquidity assets is inventory.
Short-term assets - inventory
Quick solvency coefficient

=
Short-term debt

This indicator is high, indicating that NNH of enterprises is well guaranteed with
high liquidity assets. However, in difficult economic conditions, short-term receivables of

enterprises may not be fully recovered, affecting the solvency of the company. Therefore,
in order to further assess the solvency, we use the ability of instant solvency.
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