Phân tích báo cáo tài chính công ty cổ phần kinh doanh khí hóa lỏng miền nam

VIETNAM NATIONAL UNIVERSITY, HANOI
UNIVERSITY OF LANGUAGES AND INTERNATIONAL STUDIES
FACULTY OF ENGLISH LANGUAGE TEACHER EDUCATION

GRADUATION PAPER

CASE STUDY : FINANCIAL STATEMENT
ANALYSIS OF PETROVIETNAM SOUTHERN GAS
JOINT STOCK COMPANY

Supervisor : Nguyen The Hung
Student : Bui Thanh Tung
Course: QH2010

HÀ NỘI – 2014


ĐẠI HỌC QUỐC GIA HÀ NỘI
TRƯỜNG ĐẠI HỌC NGOẠI NGỮ
KHOA SƯ PHẠM TIẾNG ANH

KHỐ LUẬN TỐT NGHIỆP

PHÂN TÍCH BÁO CÁO TÀI CHÍNH
CƠNG TY CỔ PHẦN
KINH DOANH KHÍ HĨA LỎNG MIỀN NAM

Giáo viên hướng dẫn: Nguyễn Thế Hùng
Sinh viên: Bùi Thanh Tùng
Khoá: QH2010

HÀ NỘI – NĂM 2014


I hereby state that I: Bui Thanh Tung, QH2010.F1.E19, being a candidate
for the degree of Bachelor of Arts (TEFL) accept the requirements of the
College relating to the retention and use of Bachelor’s Graduation Paper
deposited in the library.
In terms of these conditions, I agree that the origin of my paper deposited in
the library should be accessible for the purposes of study and research, in
accordance with the normal conditions established by the librarian for the
care, loan or reproduction of the paper.
Signature

Date: May 1 st, 2014


ACKNOWLEDGEMENT
Firstly I would like to thank my school teachers for giving me supports throughout
the research Financial Analysis of PetroVietnam Southern Gas Joint Stock
Company especially my supervisor, Mr. Nguyen The Hung, for his dedicated
contribution as well as his helpful instruction during all the phases of the research,
from the selection of practical topic to the final submission. If it had not been for
his help, I would not have been able to finish this study.
Secondary I also want to thank my family and friends for their full supports during
the time of the research. They have been supporting me, both materially and
spiritually. Also many friends of mine have participated in the study as my
assistances. Without their help, I would find the conduct of study more drastically
difficult.
Finally, I like to thank all of the authors whose books and articles have been used
as references materials in my study. I owe my deepest gratitude to Professor

Nguyen Minh Kieu and Doctor Pham Thi Thuy for their works have been my
guidelines in the field of financial analysis.

i


ABSTRACT
Financial analysis, for a long time, has been among the most important
procedures for any professional participant in the financial market. However,
financial analysis and its application only receive minor interest in undergraduate
program for students in University of Languages and International Studies. The
goal of the case study is to help create a sufficient analysis system practically
applicable for the real-time analysis, and yet available and suitable for the usage of
undergraduate student. During the research, the researcher has demonstrated the
application in the specific case of Petrovietnam Southern Gas Joint Stock
Company, a developing company listed in HNX Exchange Market. The research
has assessed the company’s current financial situation for the last 5 year in order to
come to some conclusions relating to the company financial conditions, operating
performance and cash flow. Although the research is far from perfection, the
researcher hopes that it will provide the readers with an adequate system for
financial analysis, and would attract more attention to the related study in the near
future.

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TABLE OF CONTENT
Acknowledgements
Abstract
Table of Content

List of figures, tables, and abbreviations

Page
i
ii
iii
v

Chapter 1: Introduction
1.1. Statement of the problem and the rationale for the study
1.2. Aims and objectives of the study
1.3. Significance of the study
1.4. Scope of the study
1.5. Organization

1
1
1
2
3
4

Chapter 2: Literature review
2.1. General definition of Financial Statement Analysis
2.2. The importance of Financial Statement Analysis
2.3. Financial Statement Analysis Materials and Methods
2.3.1. Financial Analysis Materials
2.3.2. Financial Analysis Methods and Techniques
2.4. Analysis Content
2.4.1. General analysis of the company

2.4.2. Analysis of financial ratios
2.4.2.1. Liquidity Ratios
2.4.2.2. Solvency Ratios
2.4.2.3. Asset Management Ratios
2.4.2.4. Profitability Ratios

5
5
5
6
6
10
12
12
14
14
15
16
19

Chapter 3: Methodology
3.1. Introduction of PetroVietnam Southern Gas Joint Stock Company
3.1.1. History of establishment and development
3.1.2. The company’s principal activities
3.2. Data collection instruments
3.3. Procedures of data collection

21
21
21

21
22
22

Chapter 4: Financial Analysis of PetroVietnam Southern Gas Joint
Stock Company
4.1. General analysis of the company
4.1.1. Assets, Liability and Equity Analysis
4.1.1.1. Liabilities & Equity Analysis

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23
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4.1.1.2. Asset Allocation Analysis
4.1.2. Sales, Expense and Profit Analysis
4.1.3. Cash Flow Analysis
4.2. Analysis of financial ratios
4.2.1. Liquidity Ratios
4.2.2. Solvency Ratios
4.2.3. Asset Management Ratios
4.2.4. Profitability Ratios
4.3. Summary
Chapter 5: Conclusion
5.1. Summary of findings
5.2. Limitations
5.3. Suggestions for further research

References
Appendices

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28
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33
37
39
43
44
44
44
45
46
48

iv


LIST OF TABLES, FIGURES AND
ABBREVIATIONS
No
1
2
3
4
5

6
No.
1
2
3
4
5
6
7
8
9
10
11
12
13

Table
Table
Table
Table
Table
Table

Table
1: Cash flow of the PetroVietnam Southern Gas JSC
2: Gross Profit Margin
3: Operating Profit Margin
4: Net Profit Margin
5: Return on Asset
6: Return on Equity in DuPont model

Figures
Figure 1: Changes in liabilities and equity value
Figure 2: Revenue components of the PetroVietnam Southern Gas
JSC
Figure 3: Sales, Gross, Operating and Net Profit
Figure 4: Current Ratios, Quick Ratios and Cash Ratios
Figure 5 : Debt-to-asset Ratio
Figure 6: Debt-to-capital Ratio
Figure 7: Debt-to-equity Ratio
Figure 8: Financial Coverage Ratio
Figure 9: Interest Coverage Ratio
Figure 10: Receivables Turnover & Day of Sales Outstanding
Figure 11: Inventories Turnover & Days of Inventory on Hand
Figure 12: Payables Turnover & Payables Payment Period
Figure 13: Total Assets Turnover

Abbreviation

Meaning

1

CFA

Figureered Financial Analyst

2

JSC

Joint Stock Company

3

DSO

Days of Sales Outstanding

4

VND

Vietnam Dong

Pages
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40
41
41
42
Pages
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28
29
32
33
34
34

35
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37
37
38
39

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CHAPTER 1: INTRODUCTION
1.1.

Statement of the problem and the rationale for the study
Financial Statement Analysis is certainly among the most important processes to

be conducted by both individual and institutional investors who participate in the
Capital Market, especially those who follow the Fundamental Analysis in the Stock
Investment. However, the skills required for financial statement analysis is still a
challenge for most college students, since the knowledge acquired at school is too
theoretical and fragmented for the task. In order to successfully conduct an analysis of
a company’s financial situation, students must master a sufficient system of analysis
and valuation methods which are both academically reasonable as well as practicably
applicable. That is the reason demanding a research which focus on the finding of a
system of company financial statement analysis and its application in the real-time
market.
1.2.

Aims and objectives of the study

By doing the study, the researcher hopes to accomplish two objectives. The first
objective is to develop a system of financial statement analysis which would be
available and suitable for undergraduate students who wish further their study and
career in Finance. This in turn is to be applied in the case of Petrovietnam Southern
Gas Joint Stock Company to give the researcher a detail look at the company’s current
financial situation as well as prospect of future development. In other words, the study
will focus on dealing with the two following questions:
1.

What is the suitable set of financial statement analysis methods and models to

be applied in the case of Petrovietnam Southern Gas Joint Stock Company?
2.

Under the application of the identified methods and models, what are the

findings about the current financial situation and future prospec t of Petrovietnam
Southern Gas Joint Stock Company?
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1.3.

Significance of the study
Financial statement analysis is among the most important and popular activities

conducted in the financial market. Financial statement analysis is the process in which
the analyst, based on the previously collected data (including those reflected in the
financial reports, articles and in other form of information), assesses the financial
situation of a company in a specific period. Such process is indispensable for investors,

especially institutional ones, in the game of beating the market.
Recognized of such importance, financial statement analysis has received
increasing attention at the undergraduate level in the recent years. In his work “Tài
Chính Doanh Nghiệp” (2009), Professor Nguyen Minh Kieu has mentioned the general
knowledge of financial analysis. The topic is further studied by Doctor Pham Thi Thuy
in her work “Báo Cáo Tài Chính: Phân Tích. Dự Báo & Định Giá” (2012). Both have
been highly praised and been used as textbooks for undergraduate students in the
University of Language and International Studies and the University of Economics &
Business, Vietnam National University. However, as textbooks, both focus much on
the general academic and theoretical knowledge of financial analysis, with
oversimplified examples that cannot be fully applied to the diverse financial statement
analysis in real financial world.
There have been some researchers in Vietnam National University who have
lent insight into the process of financial analysis, such as Nguyen Thi Duyen’s “Phân
tích tài chính CTTM Zinia” and Nguyen Thi Thuong’s “Phân tích tài chính so sánh
CTCP FPT. CTCP Tập Đồn Cơng Nghệ CMC và CTCP Tập Đồn HIPT”. Those
researchers have both done a great jobs in generalizing the financial process suitable
for undergraduate’s level and applying it into specific cases of operating, listed
companies. However, their studies still only focus much on the use of financial index,
with few regard on non-index factors of the business.. Thus, the question of a sufficient
analysis for the purpose of investment is still left unanswered.

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For the above reason, the researcher wishes to conduct a study entitled “Case
Study: Financial statement analysis of Petrovietnam Southern Gas Joint Stock
Company”. This study with its results is hoped to be served as a valuable source of
reference for those who concern the subject of finance and investment.
1.4.

Scope of the study
During the preparation process, the researcher realizes that it is essential for the

scope of study to be noticed in advance.
The research will only study and apply the analytical and valuation methods
available to college students, i.e. the methods are directly provided in course books of
certain classes

(Corporate

Finance, Financial

Statements

Analysis, Financial

Institutions and Financial Investment) at undergraduate level. Though there are more
advanced methods can be applied for the same purpose of the study, the use of such
method would be too difficult for undergraduate students to comprehend nor conduct.
Thus, such complex methods would be avoided in the study.
In the matter of data collected, the study will not gather all input data that reflect
the whole process of development of the company (i.e. from its foundation date to the
very moment). Otherwise the information gathered would be too widespread, outdated
and therefore lack of comparably analytical meaning. Instead, the study will only focus
on data input within the time range of 2009-2013. This is the latest five-year period of
the company’s operation, which is “sufficient for the analysis” (Graham, 2009, p.547)
Also, since financial statement analysis process praises the accuracy of
information, the researchers will only look for data input that is original and
authorized. Particularly, the data must be provided in the form of authorized documents

and must be from trustworthy sources such as the company itself, as well as wellknown stock brokerage firms and companies that legitimately and legally provide
financial analysis services.

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1.5.

Organization

The case study contains 5 chapters, each with its own task:
 Chapter One: Introduction.
This chapter brings a concise introduction of the case study, including: the
statement of the problem and the rationale of the study, its aims and objectives, the
scope of the study and the overall organization
 Chapter Two: Literature Review
This chapter provides general knowledge of Financial Statement Analysis,
including various theory with models, methods and formulas as well as their meanings
in financial analysis.
 Chapter Three: Methodology.
This chapter introduces how the researcher conducts this study, including: the
introduction of the company, the data collection instruments and procedures.
 Chapter Four: Financial Statement Analysis of Petrovietnam Southern Gas Joint
Stock Company
This chapter reflects the application process of financial statement analys is theory into
the real-time case of the Petrovietnam Southern Gas Company and its findings and
conclusions.
 Chapter Five: Conclusion.
This chapter sums up the whole research with its findings, limitations and suggestions
for further studies.

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CHAPTER 2: LITERATURE REVIEW
2.1.

General definition of Financial Statement Analysis
Financial statement analysis is one part of financial analysis, and arguably among

the most importance processes to be conducted before the analyst can make any
conclusion about the financial condition or recommendations related to the company.
According to Elaine Henry, CFA, and Thomas R. Robinson, CFA, financial
analysis is the process of “examining a company’s performance in the context of its
industry and economic

environment

in order

to arrive at a decision or

recommendation” (2013, p.6).
Financial statement analysis is a more specific task – using the financial reports
prepared by the company, combining with other information, to evaluate the past,
current and potential performance and financial position of such company. Depending
on the purpose of analysis, the evaluation and conclusion could be either general (to
grasp a broad view of the company, for screening purposes, perhaps) or specifically
detailed on a single or more aspects of the business.
2.2. The importance of Financial Statement Analysis

Financial statement analysis is of great importance to almost every entity who is
interested in the business. During the process of financial statement analysis, based on
solid foundation of knowledge and legitimate data source as such provided in the
financial statement, the analyst can provide generally legit assessment and evaluation
of the business past and current financial condition, as well as forecast on future
performance. Such information and analysis is crucial for other entities to come up
with their financial decision related to the business: Equity investors are required to
understand the business to make equity investment. Creditors such as banks and other
lending institution need to be aware of the current financial position to accept or reject

5


any credit extension request from clients. Analysis is also important for authoritative
and regulatory agencies such as those belong to the government. Corporates must know
the situations of competitors before deciding its own competing strategy or evaluating
a merger or acquisition candidate. Therefore, it is valid to conclude that the assessment
and evaluation information resulted from financial statement analysis is crucial to
almost all entities whose interest and benefits are, directly or indirectly, related to the
business itself.
Due to the nature of this study is to emphasize on the use of financial statement
analysis for investment purpose, the researcher would like to focus more on the group
of investors as analysis users. In Vietnam modern financial market, there are two
common means to invest in a listed business: via stock investment or bond investment.
In investment via bonds, the investors benefit from the interest paid by the business,
and possible gains from selling the bonds prior to maturity. Since bonds investment is
of little different from lending operation of banks and similar institution, the research
will overlook such and instead focus on stock investment, in whic h the investors
become the owners of the business and thus share the benefits and risks attached to the
business performance.

In conclusion, financial statement analysis is a crucial process which helps
investors come up with the reasonable evaluation of the firm past, current situation and
potential future scenarios thus have an accurate valuation and make suitable investment
decisions.
2.3. Financial Statement Analysis Materials and Methods
2.3.1. Financial Analysis Materials
The financial statements are by far the most popular materials needed for the job
of financial analysis due to its importance and availability. For companies who have
their stocks listed in the Stock Exchange, it is obligatory to have their financial

6


statements audited by independent agency (to confirm the fairness and reliability of the
statements) and disseminated to the public.
According to the policies provided by the State Securities Commission of
Vietnam (SSC), financial statements include:
 The balance sheet (obligatory)
 The statement of income (obligatory)
 The statement of cash flows (obligatory)
 Footnotes (obligatory)
 Management’s Discussion and Analysis – MD&A (optional)
The researcher will review each of the financial statement in the following passages:
The balance sheet
The balance sheet is commonly the first major financial statement presented in the
financial report of the corporate. It is a snapshot of the corporation’s financial and
physical assets as well as liabilities at a point in time. The balance sheet consists asse ts,
liabilities and equity:
 Assets are the resources controlled by the corporation (usually as a result of past
transaction) and are expected to provide future economic benefit.

 Liabilities are obligation of the corporation and are expected to require future
outflow of economic resources.
 Equity is the owner residual interest in the corporation assets after deducting
the liabilities. Therefore, we have the equation:
The balance sheet is usually presented in the liquidity-based format, in which the
assets and liabilities are presented in the order of liquidity (start with the most liquid
assets/ liabilities and end with the least liquid one).

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The balance sheet is useful when assessing the firm’s liquidity & solvency, as well
as the ability to make distributions to shareholders. However, each elements in the
balance sheet (assets, liabilities and equity) should not be directly interpreted as market
value or intrinsic value. For most firms, balance sheet consists of a mixture of values
recorded by different methods. Additionally, there are many accounts that do not
appear on the balance sheet (off-balance accounts) but certainly have value and
therefore worth considering. In conclusion, balance sheet analysis must be place in
conjunction with the analysis of other statement, instead of independently, in order to
draw out valid assessment.
The income statement
While the balance sheet is a snapshot of a firm’s financial and physical assets as
well as liabilities at a point in time, the income statement presents a picture of its
economic activities over a period of time. The Income Statement, also known as the
“Profit and Loss Statement”, reports the revenues as well as expenses of the firm over a
period of time.
 Revenues are the amounts reported from the sales of goods and services in the
normal course of business. Usually, analyst focus on “net revenue”, which
equals revenue less adjustments for estimated returns and allowance for
customers or clients.

 Expenses are the amounts incurred to generate revenue. Expenses usually
include cost of goods sold (CoGS), operating expenses, interests and taxes.
 The Income Statement also includes Other Gains and Losses, which result in
an increase (or decrease) of economic benefits, not from ordinary business
activities.
 Net income is the remained economic benefits that the firm receives from
revenues after deducting all expenses.

8


The income statement can be analyzed in order to understand the firm’s performance.
Since forecasts of future earnings and thus estimates of firms’ value depend crucially
on current performance, income statement is arguably considered the most important
statement for some analyst.
The statement of cash flow
The Statement of Cash Flow is the third important financial statement that is
usually required. Unlike the income statement which is created based on the accrual
method, the statement of cash flow is created under the cash basis, which focuses on
the actual cash inflow and outflow of the company over the period, not the accounting
performance number. Therefore, the data interpreted from statement of cash flow, to
some extent, is more realistic and useful when analyzing firm’s activities and
forecasting future prospects.
Analyst, through studying the cash flow statement, can assess the firm’s liquidity,
solvency and financial flexibility, particularly whether:
 The firm’s regular operations can generate enough cash to sustain the business
and pay off the existing debts.
 The firm needs additional financing.
 The firm can take advantage of new business activities as they arise.
Every item on the cash flow statement come from 2 sources: either the income

statement items or the changes in the balance sheet accounts. All those items are in turn
classified into 3 major component of the cash flow statement: Cash flow from
operating activities (CFO), cash flow from investing activities (CFI) and cash flow
from financing activities (CFF).
Cash flow from operating activities (CFO) presents the cash inflow and outflow
resulting from transactions that affect the net income of the company:

9


Cash flow from investing activities (CFI) are the cash inflows and outflows resulting
from the acquisition or disposals of long-term assets and investments.
Cash flow from financing activities (CFF) are the cash inflows and outflows resulting
from transactions that affect the firm’s financial structure.
2.3.2. Financial Analysis Methods and Techniques
This section provides the readers with a “tool box”, including various
techniques that can be used to convert data into formats that facilitate analysis.
Theoretically, there are numerous analysis methods and techniques, each focus on a
different financial aspect of the studied company. In practical usage, however, analyst
can focus on some few methods and techniques that aid more in answering their
questions about the firm, while bypass the others.
Theoretically, there are four different analysis techniques which the analyst can use
when assessing a company, including:
 Ratio analysis
 Common-size analysis
 Graphical analysis
 Regression analysis
Among the above technique, while regression analysis is more related to
quantitative methods with hypothesis testing which requires the use of modern
computerized simulations, the other 3 techniques are basic and can be widely used by

mediocre analyst.
Ratio analysis
Ratios are useful tools for expressing relationships among data. Ratios can be used
for both internal comparisons and comparisons across firms. Ratios are useful in
assessing the overall performance, situation and identifying the problems of the

10


company, rather than explaining the problems directly. Specifically, ratios can be used
to do the followings:
 Projecting future earnings and cash flow
 Evaluating firm’s flexibility (the ability to grow and meet obligations even when
unexpected circumstances arise)
 Assessing the management’s performance
 Evaluating changes in firms and industry overtime
 Comparing firms with competitors.
Commonly, there are 4 types of ratios:
 Activity ratios (or assess management ratios): measure how efficiently the firm
manages its assets.
 Liquidity ratios: measure the firm’s ability to meet short-term obligations.
 Solvency ratios: measure the firm’s ability to meet long-term obligations.
 Profitability ratios: measure the overall performance relative to revenues, assets,
equity and capital
Common-size analysis
Common-size analysis is the technique used to normalize the firm’s balance
sheets and income statement to more easily compare the performance across firms and
for a single firm overtime. A common-size balance sheet expresses all balance sheet
accounts as a percentage of total assets. On the other hand, a common-size income
statement expresses all income statement items as a percentage of sales.

Graphical analysis
Several graphs can be used to visually present the performance comparisons and
composition of financial statement elements over time.

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2.4. Analysis Content
2.4.1. General analysis of the company
General analysis aims to provide the readers with a broad picture of the firm
financial situation. By looking at the general analysis, the analyst and readers can form
initial assessments of the firm’s current financial situation, including strengths and
weaknesses, as well as financial difficulties that the firm may have to face in the near
future. Thanks to general analysis, they can figure generally what is the best strategy
for the company in the near future.
General analysis consist of the study of fundamental contents, including: the
changes in balance sheet accounts, the current performance of operating activities
(revenue, expenses and profits) as well as the cash flows of the company.
Assets, liabilities and equity analysis
Under assets and liabilities analysis, the researcher will study the structure as
well as the changes in relative and absolute values of asset and liability items overtime.
The causes and effects of such features on the company operating performance are also
put under consideration.
For assets and liabilities analysis, the company’s balance sheets over time are
inarguably a major, if not the most important, material to study.
Additionally, the study of assets and liability should not be put in isolation. As
there is a strong relationship between the assets and liabilities of a company, their
studies should be in relation with each other in order for analyst to grasp a complete
picture of the company financial situation.

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Sales, Expenses and Profit analysis
Sales (or revenues), expenses and profits are the major items that reflects the
performance of the company’s activities overtime. Each of the items should be studied
both separately and interchangeably. By studying the sales and expenses of the
company, analyst will understand the major operations, the major source of income as
well as the expenses that the company has to pay and whether such expenses are in
reasonable relation with the income of the company. Profit is undoubtedly one of the
most important items and focuses of the analysis. Profit does not simply show the
earnings or wealth that the company contributes to its shareholders. It also provide the
answer for the question of the effectiveness and efficiency of the company’s operating
performance, including sale strategy, expenses control and so on. Again, the study of
profit should be put under relation with those of sales and expenses.
The income statement is the main material for analysis in this section. The
analysis should study and see the changes and relation of the company’s income
overtime, not in an operating period alone.
2.4.2. Analysis of financial ratios
While General Analysis only show the broad picture of the company’s financial
situation, financial ratios provide detail information of the company. In this section,
analyst and readers can further study the major financial aspects of the company,
according to their interest.
The major financial ratios of the company include:
•

Liquidity Ratios

•

Solvency Ratios

•

Asset Management Ratios

•

Profitability Ratios

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2.4.2.1Liquidity Ratios
Liquidity ratios focus on measuring how quickly the company convert its assets
into cash, thus be able to pay off short-term obligations. Liquidity level may vary
among different industries.
a. Current Ratio

This ratio express the current assets in relation to current liabilities, thus imply the
company’s ability to pay back all current (short-term) liabilities with its short-term
assets. In reality, companies with high current ratios but the majority of asset lie in
receivables and inventory can still have liquidity crisis, since those two categories of
assets are hard to liquidate.
b. Quick Ratio

Quick Ratio is more conservative than Current Ratio because it ignore currents
assets that might be hard to liquidate such as receivables and inventory, and only
include items that are more liquid. Quick ratio may be the better indicator of liquidity
than current ratio. Like current ratio, the higher the quick ratio is, the better liquidity

level of the company
c. Cash Ratio

Cash ratio is probably the most conservative liquidity measure. It only accounts
for truly liquid asset against current liabilities. Due to its conservativeness, cash ratio
might be the best measurement in time of crisis. However, cash ratio too high might

14


indicate that the company is not efficiently investing in its assets, since cash is not an
effective investment with little or no return in nature.
2.4.2.2Solvency Ratios
Solvency refers to a company’s ability to fulfill its long-term debt obligations.
The assessment of such ability usually includes in-depth analysis of the company’s
financial structure components. Solvency is important in long-term analysis, especially
when it comes to the valuation of the company’s securities and its creditworthiness.
Additionally, solvency ratios can also provide insight into the future prospects of the
company.
Normally, there are 2 types of solvency ratios: Debt ratios and Coverage ratios.
While debt ratios focus on the balance sheet and measure the amount of debt capital of
the company (in relation with equity capital), the coverage ratios concern about the
debt payments shown in the income statement. Both are important and useful in
assessing the company’s solvency.
a. Debt-to-Asset Ratio

This ratio measures the percentage of total assets financed with debt, instead of
equity. Note that “total debt” here is the sum of long-term debt and short-term debt, as
some may confuse it with “total liabilities)
b. Debt-to-Capital Ratio

This ratio measures the percentage of a company’s capital represented by debt. The
higher the ratio, the higher the solvency risk and thus, weaker solvency
c. Debt-to-Equity Ratio

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This ratio measures the amount of debt capital relative to equity capital. The
interpretation is similar to the above ratios. Note that some analysts may measure the
equity at fair value instead of traditionally at book value.
d. Financial Leverage Ratio

This ratio measures the amount of total asset supported by equity. The higher
financial leverage is, the more leveraged the company is in the sense of using debt and
other liabilities to finance assets.
e. Interest Coverage Ratio

This Coverage-type ratio measures the number of times (thus, ability) a
company’s EBIT could cover its interest payment. Some analysts may prefer using
EBITDA (earnings before interest, tax, depreciation and amortization) over EBIT in
the formula, though EBIT would be a more conservative measurement. A higher
interest-coverage rate indicates stronger solvency, offering greater assurance that the
company can service its debt from its operating earnings.

2.4.2.3Asset Management Ratios
Asset Management Ratios, also known as Asset Utilization Ratios or Activity
Ratios, are intended to measure the company’s efficiency in managing its various
assets, including both working capital and longer term assets. Additionally, since
efficiency has a direct impact on the liquidity of the company, some asset

management ratios can be useful in assessing liquidity.
a. Receivables Turnover & Day of Sales Outstanding

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Both Receivables Turnover and Days of Sales Outstanding (DSO) reflect how
fast the company collects cash from the customers to whom it offers credit.
Specifically, the Days of Sales Outstanding represents the elapsed time between the
sale and cash collection. A relatively high Receivables Turnover Ratio (and
commensurately low DSO) may indicate high efficiency in in cash collection.
However, it may also indicate that the credit policy of the company may be too
stringent, suggesting the possibility of sales being lost to competitors who offer more
lenient terms. On the other hand, a low Receivables Turnover would definitely raise
questions about the efficiency of the company’s cash collection procedure. In order to
assess the relative position of Receivables Turnover (as well as DSO), analysts may
compare the current index with the equivalent historical data of the company as well
as the industry averages.

b. Inventory Turnover & Day of Inventory on Hands

For some entities, especially those in the manufacture industries, Inventory
Turnover lies at the heart of operations. It indicates how much resources tied up in
inventories, thus imply the effectiveness of inventory management. A higher
Inventory Turnover ratio (when compared to past data and industry averages) may
suggest that the company has a more effective inventory management strategy than
those of its competitors, thus more efficient in controlling the flow of r esource.
However, it may also signal that the company does not carry adequate inventory, so
shortages could potentially hurt revenue.
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