Luận văn hv chính sách và phát triển financial statement analysis at song minh development investment joint stock company in the period of 2018 2020

ACADEMY OF POLICY AND DEVELOPMENT
INTERNATIONAL SCHOOL OF ECONOMICS AND FINANCE

GRADUATION THESIS
Topic: “Financial statement analysis at Song minh
Development Investment Join Stock Company in the
period of 2018-2020”
Supervisor:

M.Sc Dang Thuy Nhung

Student:

Le Xuan Thanh

Student

ID: 5083402213

Class:

TCCLC8.3

Hanoi, Jun 2021
i


ACADEMY OF POLICY AND DEVELOPMENT
INTERNATIONAL SCHOOL OF ECONOMICS AND FINANCE

GRADUATION THESIS

Topic: “Financial statement analysis at Song minh
Development Investment Join Stock Company in the
period of 2018-2020”
Supervisor:

M.Sc Dang Thuy Nhung

Student:

Le Xuan Thanh

Student

ID: 5083402213

Class:

TCCLC8.3

Hanoi, Jun 2021
ii


ACKNOWLEDGEMENTS
SONG MINH Development Investment Joint Stock Company gave me a
lot of experience on construction and the documents related to the company’s
privacy. I would like to thank and wish SONG MINH Development Investment
Joint Stock Company success in the future.
I would like to thank the Academy of Development and Policy for giving
me the opportunity to participate in a reality project and let me learn valuable

knowledge in the 4 year-period.
Finally, I would like to thank Mrs. Dang Thuy Nhung for following
closely and helping me to edit and build this thesis from the most basic stages
to the details so that I can complete the thesis.
Thank you sincerely!

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Table Categories
Table 1.1: Contracts that the company get involved ....................................... 25
Table 2.1: Balance sheet.................................................................................. 35
Table 2.2. Income statement ........................................................................... 44
Table 2.3. Cash flow statement ....................................................................... 47
Table 2.4: Short term solvency ratios ............................................................. 50
Table 2.5: Long-term solvency ratios ............................................................. 52
Table 2.6: Asset utilization ratios.................................................................... 54
Table 2.7: Profitability ratios .......................................................................... 55
Table 2.8. DuPont Analysis ............................................................................ 57

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Charts, Pictures Categories
Pictures 1.1: Organizational structure ............................................................. 26
Picture 1.2: Business orientation of SONG MINH ......................................... 29
Chart 2.1. Assets, Liabilities and Owners' Equity structure of Song Minh .... 39
Chart 2.2. Current assets structure of Song Minh ........................................... 41
Chart 2.3. Liabilities and Owners’ Equity structure of Song Minh structure of
Song Minh ....................................................................................................... 42

Chart 2.4. Short term solvency ratios .............................................................. 50
Chart 2.5. Long term solvency ratios .............................................................. 52
Chart 2.6. Asset utilization ratios .................................................................... 54
Chart 2.7. Profitability ratios ........................................................................... 55
Chart 2.8. DuPont Analysis ............................................................................. 59

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Table of Contents
OVERVIEW OF THE RESEARCH PROJECT ............................................. 1
CHAPTER 1: LITERATURE REVIEW ON FINANCIAL STATEMENT
ANALYSIS ........................................................................................................... 3
1.1.

Overview of financial statements ....................................................... 3

1.1.1.

Definition of financial statements ................................................. 3

1.1.2.

Functions of financial statements ................................................. 3

1.1.3.

Categories of financial statement .................................................. 4

1.2.

Overview of the financial statements analysis .................................. 6

1.2.1.

Definition of financial statements analysis ................................... 7

1.2.2.

Roles of financial statements analysis........................................... 7

1.2.3.

Process of financial statement analysis – EIC analysis ............... 8

1.2.4.

Financial statements analysis methods ....................................... 10

1.3.

Factors affecting financial statements analysis .............................. 20

1.3.1.

Subjective factor ........................................................................... 20

1.3.2.

Objective factor ............................................................................. 21

CHAPTER 2: FINANCIAL STATEMENT ANALYSIS OF SONG MINH
DEVELOPMENT INVESTMENT JSC.’S FROM 2018 TO 2020............... 22
2.1.

Overview of SONG MINH Development Investment Join Stock

Company ........................................................................................................ 22
2.1.1.

Establishment and Development ................................................. 22

2.1.2.

Functions and areas of activity.................................................... 23

2.1.3.

Organizational structure .............................................................. 26

2.1.4.

Business orientation of SONG MINH Development Investment

Join Stock Company toward 2030 ............................................................. 27
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2.2.

Financial statement analysis at SONG MINH Development

Investment Join Stock Company in the period of 2018-2020 ................... 29
2.2.1.

EIC analysis.................................................................................. 29

2.2.2.

Balance sheet analysis ................................................................. 35

2.2.3.

Income statement analysis ........................................................... 43

2.2.4.

Cash flow statement analysis ....................................................... 47

2.2.5.

Ratio analysis................................................................................ 49

2.2.6.

DuPont identity ............................................................................. 57

2.3.

Assessment.......................................................................................... 59

2.3.1.

Advantages .................................................................................... 59

2.3.2.

Limitations .................................................................................... 60

CHAPTER

3:

SOLUTIONS

TO

IMPROVE

THE

FINANCIAL

SITUATIONS OF SONG MINH DEVELOPMENT INVESTMENT JSC.
TOWARD 2025 ................................................................................................. 63
3.1.

Economic Background towards 2025 .............................................. 63

3.2.

SWOT analysis................................................................................... 65

3.3.

Solutions to improve the financial situations of Song minh

Development Investment Join Stock Company ......................................... 67
3.3.1.

Solution for the inefficient in generating profits ........................ 67

3.3.2.

Solution for lack of short-term receivable management ............ 69

CONCLUSION .................................................................................................. 71
REFERENCES .................................................................................................. 72

vii


OVERVIEW OF THE RESEARCH PROJECT
1. Origin of the study:
In the continuous development of the country's economy, the field of
construction, technical infrastructure and transportation, ... is an important area
not only for the country but also especially important to large, small businesses,
at home or abroad. With the repair of infrastructure, a large number of
companies can face many obstacles when doing this work when they do not
know how to improve, repair as well as related regulations. There are a few

subsidiaries formed by large cooperation with expertise related to construction,
infrastructure, and transportation. However, it is extremely difficult for both
small domestic and foreign companies to work directly in this field. Companies
will spend a lot of time and resources to improve their understanding of
construction fields, technical infrastructure, and not only that it can also cause
obstacles to the development of companies, enterprise. Therefore, the
development of construction companies is becoming bigger and bigger.
In order to expand and develop over time, Song minh Development
Investment Joint Stock Company needs to use the Financial statement analysis.
This would help to understand more about its financial situation, the operation
and figure out the weakness and then create several solutions fit to the company
situation. With the understanding about the importance of financial statement
analysis, I chose the graduation thesis topic “Financial statement analysis at
Song minh Development Investment Joint Stock Company in the period of
2018-2020”.
2. Objective of the Study
Object of the Study is:
- Common goal: analyzing the financial situation of Song minh
Development Investment Joint Stock Company in the period of 20182020.
1


- Detail goals: the detail goals include 3 main aspects:
o Literature review on financial statements analysis.
o Financial statement analysis of Song Minh Song minh
Development Investment Joint Stock Company in 2018-2020.
o Solutions to improve the financial situations of Song minh
Development Investment Joint Stock Company toward 2025.
3. Scope of the Study
- Space of research: Song minh Development Investment Joint Stock

Company.
- Time implement assess: 2018- 2020
- Time implement resolve: 2021- 2025
- Content of research:
- The subject of research: Financial activities at Song minh Development
Investment Join Stock Company.
- The objective of research: Financial activities.
4. Research Methodology of the study
- Data collection method: collect the information through the financial
statement and further documents about Song Minh.
- Processing data method: process the correct data from financial statements
and further documents about Song Minh for the analysis.
- Using analysis methods: EIC analysis, common-size analysis, trend
analysis, ratio analysis, DuPont identity.
5. Structure of the study
The graduation thesis consists 3 chapter:
- Chapter 1: Literature review on financial statement analysis
- Chapter 2: Financial statement analysis at Song minh Development
Investment Join Stock Company in the period of 2018-2020.
- Chapter 3: Solutions to improve the financial situations at Song minh
Development Investment Joint Stock Company.
2


CHAPTER 1: LITERATURE REVIEW
ON FINANCIAL STATEMENT ANALYSIS
1.1. Overview of financial statements
1.1.1. Definition of financial statements
According to the Institute of Certified Public Accountants (AICPA): “The
financial statement is created for the purpose of periodically evaluating or

reporting about the investing situation and the result achieved. The financial
statement system reflects the combination of recorded events, accounting
principles and the evaluation apply mainly on noting the events.
According to Vietnam Accounting system (2010), Financial statement is
a kind of accounting report, reflecting a general overview of assets situation,
capital, the situation and result of a firm’s business activities in a specific period
of time. With that, Financial statements not only provide the necessary for the
outsiders of the company like: investors, creditors, tax organization, … but also
provide the information for the firm manager, help them evaluate, analyze the
financial situation like the results of the firm production activities. Financial
statement is a combination of a balance sheet, income statement, cash flow
statement and notes.
According to the scope of the study, the author applies the definition for
financial statements from Viet Nam Accounting system (2010) in this thesis.
1.1.2. Functions of financial statements
According to Nguyen Nang Phuc (2009), financial statements play a really
important role in analyzing the financial activities of the company. In addition,
it is also important to business operations. All of that are express to several key
opponents:
- The financial statement provides an overview about the economy and
finance, this helps in analysis of the situation and the outcome of
productivity, it also analyzes the current financial situation of the company
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over a period of time. In that perspective, this helps to check, supervise
the use of capital and the abilities to increase it on productivity. Financial
statement also evaluates the execution of the company’s financial
economic policy.
- The information on the financial statement is the important base of the

analysis, it also discovers the potential of the economy. With that info, it
can give several forecasts on the productivity situation and the
development trend of the company. That is the important info to base on,
that helps the company make its decision on operation and productivity,
this info also helps the investor, the creditor, future stockholder make their
decision too.
- Financial statement provides helpful info on analysis of the asset, equity
situation, the situations and results productivity on a specific period of
time and the current financial situation of the company like: the
movement, the size of the company’s asset and capital structure, payment
capacity of the company, …
- The data on financial statements are an important base in order to calculate
the further economic ratios, this number will then help evaluate and
analyze the efficiency in productivity, the use of capital.
1.1.3. Categories of financial statement
In the financial statement categories, there are a lot of different kinds of
reports, sheets and statements, but for the wide use of investors, managers, …
These are four of the most familiar when talking about financial statement:
1.1.3.1. Balance sheet
- Definition:
According to “FSA Gibson 12e”, The balance sheet is a photo from the
accountant of firm’s financial position by the control on the company’s
resources, which is from its asset generated by owner’s equity and liabilities on
4


a specific period of time, this “picture” can be as the firm stand stood. The
balance sheet has three parts, which can be represented by the equation:
Assets = Liabilities + Owner’s equity
- Function:

Balance sheet: According to “FSA Gibson 12e”, it provides the
information about the assets, liabilities situation and the source of asset’s
generating in a specific period of time, help the current financial situation
analysis of the company like: the movement in scale and the structure of the
assets, the source generating the assets, the situation of the payment and
payment capacity of the company. In addition, it also helps value the abilities
to call for capital on the company’s productivity in the future.
1.1.3.2. Income statement
- Definition:
According to “FSA Gibson 12e”, The income statement is the movie about
the activities of the firm from the time its start to the end of a period. It collects
the info about revenues and expenses, gain and loss, and close with the amount
of net income. Additionally, the accounting equation for the income statement
is:
Revenue – Expenses = Income
- Function:
The income statement: According to “FSA Gibson 12e”, it provides
information about the productivity results of the company in a specific period
of time, provides information about the current financial duty of the company
to the government. From the number analysis of the income statement, it helps
the company’ management, helps the ones use the information to evaluate the
changing potential about the economic resources which the company could
control in the future, evaluate the profit generated and the effectiveness of using
the added resources, which the company could use.
5


1.1.3.3. Cash flow statement
- Definition:
According to “FSA Gibson 12e”, The cash flow statement can be seen as

the most important aspect of the financial statement. This focuses on the cash
and cash equivalent. The transactions of cash flow in and out of the company
are being reported in the cash flow statement. The amount of cash and the assets
can be seen as cash separate into three main groups: Cash flows from operating
activities, Cash flows from investing activities, Cash flows from financing
activities.
- Function:
Cash flow statement: According to “FSA Gibson 12e”, it provides the
information about the financial fluctuation in the company, help analyze the
investment, financial and business activities of the firm, in order to evaluate the
abilities to create cash flow and cash equivalent in the future, as well as using
this resources for further business activities, financial investment of the firm.
1.1.3.4. Notes
- Definition:
According to “FSA Gibson 12e”, The notes to the financial statements are
an integral part of the financial statements. The notes to the financial statements
are the explanation and the added complicated information from balance sheet,
income statement, cash flow statement.
- Function:
Notes to the financial statements: According to “FSA Gibson 12e”, it
provides the more detailed information on the business production situation,
financial situation of the company, helps the analysis to be more detailed in
several parts and reflects the financial situation that the financial statement does
not provide.
1.2. Overview of the financial statements analysis
6


1.2.1. Definition of financial statements analysis
According to Nguyen Nang Phuc (2009), Financial statements analysis is

the process of considering, checking, contrasting and comparing the date about
finance in current time to the period of time in the past. The financial statements
analysis might provide to the information user the info on evaluating the
potential, the business efficiency, also the financial risk of the firm in the future.
1.2.2. Roles of financial statements analysis
According to Nguyen Nang Phuc (2009), The basic purpose of the
financial statements analysis is providing the necessary information, to help the
information users see through an objective evaluation about the financial
power, the abilities to generate profit and further development in business
production of the firm. With that, financial statements analysis is attractive to
many people, who use the data differently, like: the board of directors,
investors, creditors, suppliers, stockholders in the present and future,
customers, insurances, workers, …. Every subject using the information of the
firm has different needs about different information. Through that, every
subjects that uses the information tends to focus on many different angles of
the firm’s “the financial picture”.
In order to achieve the basic purpose of the financial statements analysis,
the role of it is reflected to several following aspects:
- Financial statements analysis must provide the full information, which is
useful for the investors, lenders and other people for different info to help
them make the right decision on investing or lending.
- Financial statements analysis must provide the full information to the
firm’s owner, investors, lenders, other people for different info on
evaluating the abilities and the assurance of the cash flow coming in and
out, the efficiency of using its assets, the situation and the payment
capacity of the company.
7


- Financial statements analysis must provide the information about the

owner’s equity, debts, results of the production activities, events and
situations that can make a change in the capital and debts of the firm.
The regularity of the financial statements analysis is understandable, its
help the corporate governance saw the picture of the current financial situation
clearer, confirm and see the drawback, the stage of effect from the firm’s
financial situation. From that, provide useful solutions to stabilize and build up
the financial situation.
1.2.3. Process of financial statement analysis – EIC analysis
There are a large number of ways to analyze the financial statement but
one of the most popular methods is the EIC analysis (top down EIC). EIC
Analysis stands for Economic Industry Company Analysis. The acronym EIC
stands for economic, industrial, and corporate analysis. The individual
conducting the EIC analysis looks at the entire economy and then determines
which industries are the most appealing in light of the current economic
situation. Finally, the analyst highlights the most appealing companies within
the appealing industry.
1.2.3.1. Economy analysis
The economy analysis is the understanding of important economic parts
affecting the business activities, industry, region, … of the economy through
the eyes of experts. This process is based on the real activity and the whole
economy conditions. With this, the company can make better decisions.
The economy analysis provides information on several aspects like
inflation rate, exchange rate, … Every firm can be impacted by external factors.
So in order to recognize the factors outside either it is opportunities or threats,
the company should have an in-depth look at the evaluation of the economics
element.

8

A large number of companies tend to invest in organizing the plan for
everyone to two times and play several economic scenarios in mind for 2 or 3
year times. After that, the company will analyze each scenario in order to know
which of these situations can affect the company. A specific project can be
evaluated to match the economic situation and financial feasibility by the
economic analysis.
The analysis also gives the owner of the company a detail situation on the
current economic environment and helps the company see its ability on
development. With this, the vision over the market strengths and weaknesses.
1.2.3.2. Industry analysis
Industry analysis is the process of understanding and evaluating one
specific business industry from the market supply and demand, the level of
competitiveness in the industry, future potential and the effect from the external
components… In the process of evaluating and selecting stock, industry
analysis is one of the most important parts because it provides an in-depth look
at the production environment, the benefit over other competitors, the chance
of development and the financial risk of the firm.
Industry analysis has an important role in basic investment method:
- The understanding of the business structure and business environment of
the company: it provides an in-depth look at the production environment,
the benefit over other competition, the chance of development and the
financial risk of the firm. With the credit analysis, Industry analysis helps
evaluate the abilities to pay out the debts.
- Evaluate the opportunities with efficiency: the investor can perform a topdown investment method through Industry analysis in order to identify the
potential for the growth of profit and development of the industry.
- Portfolio diversified: Industry analysis helps the portfolio manager to
select industries and fields in order to maximize the investment.
9

1.2.3.3. Company analysis
Company analysis is a process that includes financial situation analysis,
goods and services analysis and the competitive strategy of the company.
Company analysis will be started after the analyst figures out the external
factors, macroeconomics, demographic, government, technology and society
that can impact the industry competitively.
The function of Company analysis is:
- Provide the overview of the company, including: the basic understanding
about business activities, investment activities, corporate management
and the strength and weakness of the company.
- Explain characteristics relevant to the industry which the company
operates in.
- Analyze the need for goods and services of the company.
- Analyze the goods and services supply, including analyzing the expenses.
- Analyze the factors affecting the price of a company’s goods and services.
- Explain the financial ratio, compare in time and competitors.
Company analysis usually include forecasting the financial statement,
especially when its purpose is the company valuation.
1.2.4. Financial statements analysis methods
1.2.4.1. Common-Size analysis (vertical analysis)
According to Investopedia, the approach of evaluating financial
information known as common-size analysis involves representing each item
in a financial statement as a percentage of a base amount for the same time
period. This examination can be used for a company's balance sheet or income
statement.
In Common-Size analysis, the following equations is used:
Common Size Amount = (Analysis Amount / Base Amount) x 100%

10

When one item is compared to the base item, a vertical analysis of items
from the company's statements is performed. Vertical is commonly applied for
a single period. Common-Size calculates the weight from each segment divided
by the overall amount like total asset, total liabilities, …
Common-Size analysis helps the user see clearer the factors that push the
company’s profit. Additionally, it also helps highlight the factors affecting the
financial situation of the firm. The financial statement users can easily compare
the financial performance with the company in the same industry.
This method also helps investors figure out the trend that standard
financial statements might not find out. Common-Size analysis helps highlight
any trend in a single period, despite it being a negative or positive thing.
1.2.4.2. Trend Analysis (horizontal analysis)
According to Investopedia, Horizontal analysis is a type of financial
statement analysis that compares historical data across many accounting
periods, such as ratios or line items. Horizontal analysis can utilize absolute or
percentage comparisons, with the figures in each subsequent period given as a
percentage of the baseline year's value, with the baseline amount indicated as
100 percent.
If you use horizontal analysis on a company's financial data, it's easy to
predict its development and success. The goal of the horizontal analysis is to
predict the dynamics.
1.2.4.3. Ratio Analysis
According to Stephen Ross (2011), Ratio Analysis is a quantitative
method in order to understand more about the liquidity, the efficiency in
operation and the firm’s profit with the data on financial statements.
Investors and analysts use Ratio Analysis to evaluate financial
performance of the company. This can be seen through the past and financial

11

statement of the firm. The comparison in ratios can prove how a firm operates
over time and also predict future efficiency.
This ratio can be compared in two ways, the first is comparing the firm’s
financial situation to the industry average and the second way is measuring the
company’s operation to other companies in the same industry.
a) Short-term solvency or liquidity ratios:
Liquidity ratios is the evaluating of a firm’s abilities to turn assets into
cash and the abilities to make cash in order to meet the upcoming debts in a
short period of time (1 year). Liquidity ratios analysis must be considered fully
and comprehensive about current payment.
Liquidity ratios are particularly relevant to short-term creditors for
obvious reasons. Understanding these ratios is critical for financial managers
who engage with banks and other short-term lenders on a regular basis. One
benefit of examining current assets and liabilities is that their book and market
values are likely to be comparable. These assets and liabilities simply do not
live long enough to become significantly out of sync. Current assets and
liabilities, like any sort of near-cash, can and can change quickly, thus today's
values may not be a trustworthy indication to the future.
 Current ratio:
The equation for current ratio is:
CURRENT RATIO =

𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐚𝐬𝐬𝐞𝐭𝐬
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬

The current ratio is a measure of short-term liquidity because current
assets and liabilities are in theory converted to cash over the next 12 months.
Dollars or times are the units of measurement.

A current ratio of at least 1 is expected unless there are exceptional
circumstances; a current ratio of less than 1 indicates that net working capital
(current assets less current liabilities) is negative.
12


 Quick ratio:
The equation for quick ratio is:
QUICK RATIO =

𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐚𝐬𝐬𝐞𝐭𝐬−𝐈𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬

The quick ratio is a measure of further liquidity because large inventories
are frequently an indication of impending crisis. As a result of overestimating
revenues, the company may have overbought or overproduced. In this instance,
the company's liquidity may be heavily burdened by slow-moving goods.
 Cash ratio:
The equation for cash ratio is:
CASH RATIO =

𝐂𝐚𝐬𝐡
𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬

The cash ratio may be the strongest predictor of a ratio that measures a
company’s liquidity in a short period of time. This might catch the eyes of the
short-term creditors.
It is unrealistic to expect a corporation to have enough cash equivalents
and marketable securities to meet current liabilities, so analysts rarely give the
cash ratio much weight when analyzing a firm's liquidity. If the company is

forced to rely on cash equivalents and marketable securities for funding, Its
cash and solvency could be jeopardized.
b) Long-term solvency or financial leverage ratios
Long-term solvency ratios are used to assess a company's capacity to meet
its debts in the long run, or, more broadly, its financial leverage. Financial
leverage ratios, or simply leverage ratios, are two terms used to describe these
ratios. Three regularly used measurements, as well as several modifications, are
examined.
 Total debt ratio:

13


TOTAL DEBT RATIO =

𝐓𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬−𝐓𝐨𝐭𝐚𝐥 𝐞𝐪𝐮𝐢𝐭𝐲
𝐓𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬

The total-debt-to-total-assets leverage ratio compares a company's total
debt to its entire assets. Analysts can compare a company's leverage to that of
other companies in the same industry using this indicator. This information
might reveal a company's financial stability. The greater the ratio, the more
leveraged the company is and, as a result, the bigger the danger of investing in
it.
The total-debt-to-total-assets ratio indicates how much debt has been
utilized to fund a company's assets. The computation takes into account all of
the company's debt, not simply its payable loans and bonds, as well as all assets,
including intangibles.
When a company's total debt-to-total-assets ratio is 0.4, creditors finance
40% of the company's assets, while owners (shareholders) equity funds 60%.

 Debt- equity ratio:
DEBT- EQUITY RATIO =

𝐓𝐨𝐭𝐚𝐥 𝐝𝐞𝐛𝐭
𝐓𝐨𝐭𝐚𝐥 𝐞𝐪𝐮𝐢𝐭𝐲

The debt-to-equity (D/E) ratio is computed by dividing a company's total
liabilities by its shareholder equity to determine its financial leverage.
In corporate finance, the D/E ratio is a crucial measure. It's a measure of
how much a corporation relies on debt to fund its operations rather than totally
owned funds. In the event of a business downturn, it indicates the ability of
shareholder equity to satisfy all outstanding debts. A specific sort of gearing
ratio is the debt-to-equity ratio.
Higher leverage ratios typically imply a company or stock that poses a
greater risk to investors. The D/E ratio, on the other hand, is difficult to evaluate
across sector groupings because acceptable debt levels vary. Because the risks
associated with long-term liabilities differ from those associated with short14


term debt and payables, investors frequently adjust the D/E ratio to focus on
long-term debt.
 Equity multiplier:
EQUITY MULTIPLIER =

𝐓𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬
𝐓𝐨𝐭𝐚𝐥 𝐞𝐪𝐮𝐢𝐭𝐲

The equity multiplier is a risk indicator that quantifies how much of a
company's assets are financed by equity rather than debt. It's computed by
dividing the overall asset value of a firm by the entire shareholders' equity

A high equity multiplier, in general, suggests that a corporation is heavily
reliant on debt to fund its assets. When the equity multiplier is low, the
corporation relies less on debt.
However, the equity multiplier of a firm may only be compared to
historical standards, industry averages, or the business's peers to determine
whether it is high or low.
 Times interest earned ratio:
TIMES INTEREST EARNED RATIO =

𝐄𝐁𝐈𝐓
𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭

The TIE ratio is a measure of a company's capacity to meet its debt
commitments based on current income. Earnings before interest and taxes
(EBIT) divided by total interest payable on bonds and other debt is the formula
for calculating a company's TIE number.
The outcome is a number that indicates how many times a company's
pretax earnings could pay its interest expenses.
The TIE of a corporation reveals its ability to repay its debts.
A higher TIE score indicates that a corporation has sufficient cash after
paying its obligations to continue investing in the firm.
c) Assets management or turnover ratios
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The efficiency with which the corporation utilizes its assets is the next
topic we'll look at. Asset management or utilization ratios are two terms used
to describe the measures in this section. All of the ratios we've spoken about
can be construed as indicators of turnover. They're meant to describe how
effectively, or intensively, a company uses its assets to generate revenue.

 Total asset turnover:
TOTAL ASSET TURNOVER =

𝐒𝐚𝐥𝐞𝐬
𝐓𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬

The asset turnover ratio compares the value of a company's assets to the
value of its sales or revenues. The asset turnover ratio is a metric that measures
how effectively a corporation uses its assets to produce income.
A company's ability to generate revenue from its assets is measured by its
asset turnover ratio. The higher the asset turnover ratio, the more efficient it is.
A low asset turnover ratio, on the other hand, suggests that a corporation is not
effectively leveraging its assets to produce revenues.
This indicator aids investors in determining how efficiently businesses use
their assets to create revenue. The asset turnover ratio is used by investors to
compare companies in the same sector or group. Large asset sales as well as
considerable asset purchases in a given year can have an impact on a company's
asset turnover ratio.
 Inventory turnover:
INVENTORY TURNOVER =

𝐂𝐨𝐬𝐭𝐬 𝐨𝐟 𝐠𝐨𝐨𝐝𝐬 𝐬𝐨𝐥𝐝
𝐈𝐧𝐯𝐞𝐧𝐭𝐨𝐫𝐲

Inventory turnover is a financial statistic that shows how many times a
company's inventory has been sold and replaced over a period of time. The days
it takes to sell the inventory on hand may then be calculated by multiplying the
number of days in the period by the inventory turnover formula.

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Inventory turnover calculations can allow firms to make better decisions
about the price, production, marketing and acquisition of fresh inventories.
Low sales and maybe extra inventory mean slow turnover, while a quicker
ratio involves strong sales and insufficient inventory. The largest inventories
turnover tends to be high-volume, low-margin sectors, such shops and
supermarkets.
 Receivable turnover:
RECEIVABLE TURNOVER =

𝐒𝐚𝐥𝐞𝐬
𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐬 𝐫𝐞𝐜𝐞𝐢𝐯𝐚𝐛𝐥𝐞

Inventory turnover measures indicate how quickly a company can sell
things. With receivable turnover, the users are currently looking at how quickly
the firm collects sales.
The receivables turnover ratio is an accounting metric that determines how
efficient a firm is in collecting its accounts receivable, or money owed by
customers or clients. This ratio assesses how successfully a firm manages and
uses the credit it gives to consumers, as well as how fast that debt is recovered
and paid. A company with a high accounts receivable turnover ratio is one that
is efficient in collecting payments due.
Comparing a company's ratio to that of its counterparts in the same
industry might help determine if it is competitive.
A high receivables turnover ratio may suggest that a firm's accounts
receivable collection is effective and that the firm has a large number of highquality customers who pay their bills on time.
Inefficient collection, poor credit procedures, or clients that are not
financially viable or creditworthy might all contribute to a low receivables
turnover ratio.

d) Profitability ratios

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Profitability ratios are a group of financial indicators that are used to
evaluate a company's capacity to create profit over time in relation to its
revenue, operational costs, balance sheet assets, or shareholders' equity,
utilizing data from a certain moment in time.
Higher ratio outcomes are typically more beneficial, but when compared
to the outcomes of similar firms, the company's own previous performance, or
the industry average, these ratios reveal considerably more information.
 Net profit margin:
NET PROFIT MARGIN =

𝐍𝐞𝐭 𝐈𝐧𝐜𝐨𝐦𝐞
𝐒𝐚𝐥𝐞𝐬

(unit:%)

The net profit margin, sometimes can be called as net margin, is a
percentage of sales that reflects how much net income or profit is created. It is
the ratio of a company's or business segment's net profits to revenues. The net
profit margin is usually reported as a percentage, but it can also be stated as a
decimal. The net profit margin shows how much profit a firm makes out of each
dollar of revenue it receives.
Investors can use the net profit margin to see if a company's management
is making enough money from its sales and if operational and overhead costs
are under control. One of the most crucial indications of a company's overall
financial health is its net profit margin.

 Return on asset:
RETURN ON ASSET =

𝐍𝐞𝐭 𝐢𝐧𝐜𝐨𝐦𝐞
𝐓𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭

(unit:%)

Return on assets (ROA) is a measure of a company's profitability in
relation to its total assets. The return on assets (ROA) tells a manager, investor,
or analyst how well a company's management is utilizing its assets to create
profits. The return on investment (ROI) is expressed as a percentage; the larger
the ROA, the better.
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