Company’sSymptoms
Thehigherincreasingin therevenue,thegreaterrisingin costandexpenses
Forthe wholecompany,exportvalue andoperatingrevenueincreasegraduallyover theperiod2013-2015.Indetail,theCompany’sexportvalueincreasedsharplyin
2015(Appendix3).OperatingrevenueincreasedfromVND7 , 7 4 9 b i l l i o n i n 2 0 1 2 t o VND11,179 billion andVND15,042 billion in 2013 and 2014respectively.Althoughin2015, itsoperatingrevenuecouldnot maintain thisamazingrateanddecreasedslightly17%, ingeneral,thecompanyhas ahighgrowthrate over theperiod Theaveragegrowthrate duringthe period 2012-2015was20.5%-quitehighwhencomparingto theaveragerateat10.6% ofthefishingindustryaspublishedbytheGeneralStatisticsOfficeofVietnam.
Inthe mean oftime,thecostofgoodssoldincreaseddramaticallyfrom VND10,058b i l l i o n i n
2 0 1 3 t o VND13,782billion in 2014.Thistrendcontinuedin 2015 with thecostofgoodssoldraisedto VND 11,446 billion,accountedfor91.98%in thestructureof therevenue.
Inaddition,thefinancialexpenseshowedanup-wardtrendduringthe period, itrosefromVND2 9 8 b i l l i o n i n 2 0 1 4 t o VND325 billionin2015.Thegrowthrateof financial expense in 2015was8.9%andthiskeptincreasinghighlyup to 32.36%in just thefirstthree quartersofyear2 0 1 6 , valueVND430 million On thecontrary,otherexpensesfromselling,administrating,etc.…illustratesthedown-wardtrend
Thisleadsto theresultofnetprofitin 2015whichdropsd e e p l y 59%in comparison with its netprofitin2014.Detailscould befound onTable1below.
ThedeclineofHVG’sprofitabilityandprofitmarginover thetime
The Table1alsoillustratesthe mostserioussymptomthatalthoughHVGhas agoodgrowthratein theoperatingbusiness, its profitabilityofbusinessshowedthedown- wardtrendd u r i n g theperiod.Indetail, theresultofoperating profitdown 68.0%fromVND377 billion in2 0 1 4 t o V N D 121 billion in 2015 and thenetprofitalsodecreased58,9%incomparisonwith itsresultin 2014.Moreover,the position ofnetprofitintherevenuedecreasedsteeplyfrom2.22%i n 2 0 1 3 t o 0 9 6 % in 2015.
Additionally,Table2 illustrates that most of thecompany’sfinancialratiosof efficiencyshowedthedown-wardtrendovertheperiod.In2012,
ROAandROEwas4.08%and11.97%r e s p e c t i v e l y andtheseratiosdecreasedsignificantlyto 0.83%and3.61%respectivelyin 2015.T h e profitmarginon revenue(GOS)alsodecreasedfrom3.39%to 0.97%in 2015, this problemleadsto
EPSgoingdowngraduallyto 0.75 in 2015, this is thelowestrateofEPSin thelast fiveyears.
ThefluctuationandreductionofHVG’sstockprice
From2013to2014,thestockpriceincreasedsteadilyfromVND11,000pershareandgotthepeakat VND22,000persharein thelastquarterofyear2014.In2015,thestockpricekeptfluctuatedandwentdownsteeplyinthelastquarter,thelowestpointwasVND8 , 5 0 0 pershare.Since2016,itsstockpricehasfluctuatedintheregionfromVND9persharetoVND11pershareandithasshownthedownwardtrendingeneral.
IsthereanyrelationbetweenHVG’sperformanceandthecapitalstructure? accordingtot h e resultofMyers’theory(3)thatpredictsanegativeeffectofleveragechangeonstockpric esandastrongereffectforfirmsmorelikelytoexperiencedebtoverhang.Cai,Jieetal(4)alsoconfirmedinth eirresearchthatwhenafirmismorepronetodebtoverhang,anincreaseintheleverageratiomayaffectfutur einvestmentandexpectedfuturecashflowmoreseverelyandt h e r e b y effectingonthestockprice.
Problemidentification
TheproblemforempiricalworkinHVG’soperation is its profitabilitydecreasingsteadilyoverthetimedespiteof itsgoodgrowthrate in therevenue whichis equivalenthigherthanthiso f thecompetitorsandtheaveragein theindustry.Indetail, thesymptomhasbeenshowedc l e a r l y throughmost of theprofitableratioslike ROE,
The rapid decline in ROE and EPS over the year highlights the significance of various determinants of firm profitability, such as control-ownership disparity, industry characteristics, and firm-specific attributes In firms with high control-ownership disparity, controlling shareholders may exert significant control while owning only a small portion of cash flow, leading to potential conflicts of interest that can negatively impact performance Additionally, factors like industry conditions, macroeconomic factors, and firm attributes—including financial structure, size, market share, and business strategy—play crucial roles in profitability Regarding capital structure, while rising debt levels can elevate default risk, they may also prompt firms to minimize wasteful investments to ensure survival However, increased debt can create conflicts between creditors and equity holders, potentially leading equity holders to favor risky projects due to their limited liability.
The issues faced by HVG may stem from its firm attributes and detailed expense management, as indicated by the symptoms observed To further investigate the existing problems within the company's business, a comparison with competitors and market analysis will be conducted As illustrated in Figure 1, HVG holds a dominant market share and has consistently achieved the highest revenue growth rate in the industry Revenue values steadily increased from 2012 to 2015, creating a significant gap between HVG's revenue and that of its competitors However, despite this revenue growth, HVG's profit margin has gradually declined, in contrast to the upward trends observed among its rivals during the same period.
Asgrossprofitmarginis the quickindicatorofthe abilityofgenerate profitfromthecompanymain activity(6), it should beap o s i t i v e numberoratleast show thepositiveimprovementtrend.ThenegativetrendinHVG’s
HVG IDI FMC VHC profitmarginoverthe timesignalsthattheremust be aproblemin thebasicactivity.
Pig 2Revenueof the4 biggestcompaniesin thefisheryindustry Pig 3 Profitmarginofthe4 biggest companiesin thefishery industry
HVGachievedthehighestrevenueamongthefourcorporatesintheindustry,withIDI,werethetwocomp anieshavingthehighestgrowthrateintheindustry,approximatelyincreased20.2%comparingwithyear 2014(Table4).However,HVG’snetprofitdecreased56.2%,thiswasm u c h lowerthanVHC’s.IDIan d FMCarethetwocompanieswhichhavethepositivegrowthrateofprofitwhiletheirrevenueareless approximately6timesincomparisonwithHVG’srevenue
Growthrate of profit ROE EPS
Interm ofthe profitableratios,theTable4hasshowed clearlytheaccuratenumberandundeniablecomparison with itscompetitors,In2012,HVG’sROAandROEwere4.08%and3 3 2 % inrespectivelyandweremuch higherthanIDI’sandFMC’s.In2015,thesefinancialratiosofHVG’sdecreasedsteadilyandweremuchlo werthanthatoftheothersinindustry,itsROAandROEwere0.83%and5.8%respectivelyandweremuchl owerthanthisratioofFMCandVHC.ThisisthereasonwhythecapabilityearningprofitpershareofHVGisl owestamongt h e fourcorporatesinthestatistic.
Table4: ROA and ROEofthe4 biggestcompaniesinthefishery industry
Fromresultofanalysisthecompany’sannualfinancialreportandcomparingwith thecompetitors,itcouldbeseenthatforsimilarcompanyintheindustry,theirgrossprofitmarginincreased duringtheperiod2012-
2014orslightlydecreasedin2015inspiteoftheirlowerrevenueinbothvalueandthegrowthratethanthisof HVG.Additionally,theirprofitableratiosshowedtheup- wardtrendinsteadofgoingdownasthecompany’s.Itisproventhattheproblemo f HVGisunlikelyduetot hemarketconditionbutthecompanyitself.
Possiblereasonsofproblem
Recognitionof Possiblereasons
To identify the potential reasons for low efficiency in HVG's operations, a Dupont Analysis was conducted using data from HVG's annual financial report This model, developed by F Donaldson Brown in the early 1900s, is a valid tool for assessing profitability through the analysis of Return on Equity (ROE) and Return on Investment (ROI) The Return on Equity breaks down performance into three key components: Net Profit Margin, Total Asset Turnover, and the Equity Multiplier, which can be clearly defined through a specific formula.
NetIncome/TotalEquity=(NetIncome/NetSales) x(NetSales/TotalAsset)x(TotalAsset/T o t a l Equity);orit canberewrittenas
NetIncome/TotalEquity=(NetIncome/NetSales) x(NetSales/TotalAsset)x(TotalA s s e t / T o t a l debt)x(Totaldebt/TotalEquity).
AccordingtocalculationfromHVG’sfinancialreports, DupontAnalysisforHVGcaseis showni n table5below:
Table5 showsanobviousanalysisofcomponentsimpactsonROE.TheTotaldebt/Totale q u i t y ratio isincreasing from1,748 to 3,367 in theperiodof2012-
2015.Incontrast,theNetsale/TotalAssetandNetIncome/NetSales ratio isdecreasing,whichcauses Dupont–ROE in adownwardtrend.Technically,ItcanbepointedoutthattheremaybetworeasonscausingROEdeclining over theperiod.These are:
Theassetwas notutilizedeffectivelythatmeansthecapabilityof makingrevenueper oneu n i t assetdecreasing.Theratioofnetsaleto totalassetdeceaseddramaticallyfrom1,67in 2014t o
0 , 8 6 i n 2 0 1 5 Accordingto theannualfinancialreportofyear2015,HVG’stotalassetincreasedsignificantlyfrom VND9.025 billion intheendofyear2014toVND14.446 billion.
Thelargeproportionincreasedin theshort- termreceivablefromcustomersandinventories,whichincreased49,1%and62,9%respectively.Incontr ast,therevenuein2015declinedincomparisonwithlastyear,down20,9%.This leads to therationetsaleto totalassetdropd r a m a t i c a l l y in 2015.
The ASEAN security report highlights that the fishery industry faced significant challenges between 2013 and 2015, primarily due to tariff barriers and dumping laws in major export markets According to the General Department of Vietnam Customs, the total export revenue for the fishery industry in 2015 was USD 6.57 billion, reflecting a 16% decline compared to 2014 The report predicts that in 2016, the industry will continue to encounter difficulties related to pricing, exchange rates, tariff barriers, and international dumping regulations These challenges are indicative of the broader external environment affecting all companies within the industry.
Poor management of costs and expenses can lead to a decline in profit margins, encompassing both the cost of goods sold (COGS) and operational expenses such as machinery depreciation, location fees, transportation, and delivery According to Hansen et al., effective pricing, product decisions, and strategic profitability analysis require the allocation of all traceable costs to the product, which includes not only manufacturing costs but also non-production costs like research and development, administrative, and selling expenses In the case of HVG, both COGS and financial expenses have consistently increased over time, with the growth rate of financial expenses significantly outpacing revenue Conversely, other expenses related to selling and administration show a downward trend.
In 2015, Intermof experienced a slight increase in the percentage of Cost of Goods Sold (COGS) relative to revenue, rising from 91.62% in 2014 to 91.98%, while financial expenses surged by 8.92% during the same period HVG, a major player in the industry, operates a closed system encompassing breeding, aquaculture, processing, cold storage, and exporting, which allows the company to self-supply raw materials This self-sufficiency enables HVG to maintain strict control over quality and operational costs, suggesting that the issues may stem more from rising expenses rather than COGS.
(ii) Intermoffinancialexpense:As it canbeseenintheTable6 that the companyuses av e r y highcapitalstructure,totaldebtincreasedfromVND3.804 billion in2012 to
VND11.138b i l l i o n i n 2 0 1 5 , t h e t o t a l debtwas1.75 timeshigherthantotalequityin 2012 and totaldebtkeptincreasingandwasover3 timeshigherthantotalequityin 2015 On theotherhand,thecapitalstructureratios show thatHVGincreasedthepercentageof debtbyborrowingmoneyfromfinancialinstitutesinsteadofraisingitsequity.Thepercentageofshort- term debt in totalassetincreasedhighlyfrom 88.2% in 2014 to 93.0% in2015.Althoughlong- termdebt to total assetratiodecreasedin 2015, totaldebtovertotalassetandequityincreasedsignificantlyfrom68.4%and 216.3%in 2014 to
Table6:HVG’sdebtand BEP ratio 2013-2015
AccordingtothefisheryindustryreportinApril2016byAseanSecurity,thetypicalcharacterofthe fisheryindustryisthatmaterialexpenseaccountshighlyintherevenue,mostoft h e corporatesintheindust ryusemuchshort-termdebttosponsortheoperatingactivities,theaverageshort- termdebttototaldebtratiois79.1%andtheaverageofcapitalstructureis0.61.Incomparisontotheindustr y,HVGhasshort- termdebttototaldebtratioandcapitalstructurem u c h higher,valued92.96%and0.77in2015respectiv ely.Additionally,HVG’sfinancialleverageis5.74whilefinancialleverageofmostcorporateinindustr yis3.65inaverage.Thisleadstothefinancialexpenseincreasingrapidlyduringthetimeandthenaffectingo ntheprofit.S h u b i t aetal.
(9)arguedthatthehigherthedebtratio,thegreatertherisk,andthushighertheinterestratewillbe.Atthesa metime,risinginterestratesoverwhelmthetaxadvantagesofdebt.Coricellietal.
(10)alsostatedthatnetbenefitstodebtfinancingriseforcompanieswithlowdebtbutdecreaseasleverageb ecomeshigh,implyingthatnetbenefitsareanon- monotonicfunctionofleverage.Theyalsoarguedintheirresearchthatatlowlevelsofleverage,higherlev erageislikelytobeassociatedwithhigherTFPgrowthasthebenefitstoleverageoutweight h e costsand debtisusedtofinanceproductiveinvestment.Asleverageincreases,thecostsofdebtbecomelargerander odethenetbenefitstoleverage.
Short-term debt(BillionVND) Short-term debt/Totaldebt (%)
Table7: Capitalstructureof 4biggest corporatesinthefishery industry in2015
Incomparisonwiththecompetitors,HVG’sshort– termdebtincreasedgraduallyoverthet i m e withamuchhighergrowthrateincomparisonwiththeothercor porates.Highlyshort-termdebtinthetotaldebtseemsatypical characteroftheindustry,however,thisratioofHVGwashighertheaverageoftheindustry(79.1%).Intermof capitalstructure,HVGalsoshowedthe up-wardtrendoverthetimeandwasthehighestamongthefourcorporates.
Anotherevidencetopursuethereasonrelatedtothefinancialexpensehasbeenconductedthroug hananalysisbasedontheBasicEarningPower(BEP)ratiowhichindicatesbasicprofitabilityofassetsand isusefulincomparingfirmswith differentdegreeofleverage.Theformulatocalculatethisratiois
EarningsBeforeinterestandtax(EBIT)/Totalassets(TA).RobertB.Burneyetal.
TA).AsshowedintheTable6,HVG’sBEPratiodecreasedsignificantlyfrom9.47%in2012to6.18%an deventostill3.3%in2015.ThisisquitelowincomparisonwiththeinterestcostthatHVGhastopaytosome financialinstitutesandevenlower thantheaverage interestrateof savingintheVietnam’smarketwhich is approximately6.5%.ThismeansthemoreHVGusesdebtforfinancingitsoperatingactivitiestheworstth e
22 profitrateis.ThisisinorderwiththefindingofShubitaetal(9)thatanincreaseindebtpositioni s associated withadecreaseinprofitability;thus,thehigherthedebt,thelowertheprofitabilityo f thefirm.
2.4.2 -deepon-the-fieldinterviewfor moreunderstandingthe causes
Inorder to identifytherealofproblemofHVG, asurveyofdeepinterviewHVG’sstaffandafinancialanalystsofSaigonSecuritiesIncorporation(SSI)h avebeenconducted.
MrTuanVu,anexperience accountantofHVG, statedthatthemostworryingpoint is thee x p a n s i o n o f HVGtoo fast accompanythe total short and long- termdebtincreasedfrom2,958b i l l i o n in 2012 to 8.355billionin2015(accountingfor 58 %of totalassets)hascreatedconsiderablepressureoninterestrates.Interestexpense isalwaysatthehighlevel,2015recorded239 billion.
Thuy, a financial staff member at HVG, explained that the company's profit decline, despite an increase in revenue, can be attributed to both internal and external factors Externally, the market has been unstable in recent years, leading to heightened competition in the pangasius sector, a steady decrease in prices, and reduced demand from key foreign markets such as the USA, ASEAN, Mexico, and particularly Europe, where exports have significantly dropped due to anti-dumping regulations Internally, the challenges stem from high-growth investments and the use of substantial leverage, affecting both short-term and long-term financial stability.
The growth rate of cost and expenses greater than this of revenue. Highly increase in COGS
HVG’s performance efficiency decreasingThe decline of performance efficiency over the time
High financial leverage (Main cause)
The fluctuation and decrease of HVG’s stock price
Mr Tuan Vu highlights that HVG is facing significant challenges, including a substantial increase in accounts receivable, which rose from 1,854 billion in 2012 to 5,641 billion in 2015, resulting in bad debt provisions of up to 347 billion in 2015 Additionally, HVG's inventory has shown an upward trend during this period, alongside investments that have led to a steady increase in fixed assets Consequently, while total assets have significantly increased, net profit has declined, indicating a decrease in revenue generation efficiency per unit of asset.
Afterthe meetingandin-depthinterviewwiththecompany’sstaffandbaseonsymptom;data collectedfromcompetitors.Fromthatresult,theconcisecause-effecttreeof this divisionproblemisgeneratedinFigure1 below:
HVG’scompetitorscouldmaintainedthegrowthrateofprofithigherthan HVG’sprofitgrowthrate even thoughboth valueand thegrowthrateofrevenueof HVGaremuch higher.On theotherhand, HVGusedfinancialleveragemuchhigherthan itscompetitorsandtheaverageofindustry.Thecauseof this incident is duetointernalof HVGratherthan theexternalenvironment.
Therefore,thegeneralproblemHVGcouldbe pointedasthat usinghighfinancialleveragecausesdecreasingthe profitabilitywhichleadtoROEandROAdecreasedsteadily.Thisusedtob e proposedbyMyers
(3)suggestsanegativerelationshipbetweenprofitabilityandleverage,becausehighlyprofitablefirmsth atgeneratehighearningsareexpectedtouselessdebt capitalt h a n thosethatarenotveryprofitable.Langetal.(12) foundthatleverageisnegatively relatedw i t h futuregrowth.Inotherwords,firms withhigherleverageratiosappear to exhibitlowerfuturegrowthrates.
Therefore,the main issueforsolvingtheproblemis how todecidethevolume ofdebtin aneffectivecapitalstructureandtrytomaintainit at thesamelevel.This is theonlywaythat thefinancingcostsandtheweightedaveragecostofcapital(WACC)areminimizedtherebyincreasingfir mvalueandcorporate performance.
In another study, Do Xuan Quang & Wu Zhong Xi () stated that the higher firms’
The capital structure refers to the combination of debt and equity that a firm utilizes in its operations, making the determination of an optimal capital structure a critical decision for financial managers Changes in the leverage ratio can influence a firm's financing capacity, risk profile, cost of capital, investment strategies, and ultimately, shareholder wealth According to Utkarsh Goel et al., financial leverage illustrates the relationship between borrowed funds and owner's equity within a firm's capital structure, encompassing debt, common equity, and preferred equity used to finance total assets and growth A key aspect of an effective capital structure is selecting the right balance between debt and equity, ensuring that earnings before interest and taxes (EBIT) exceed interest expenses to leverage advantages The primary benefit of debt financing lies in the tax deductibility of interest charges, leading to a reduced cost of capital, as noted by Krishnan and Moyer However, Jensen's research highlights that the costs associated with debt, including bankruptcy and agency costs, must also be considered Therefore, the decision regarding leverage is essentially about balancing the costs and benefits at varying levels of debt.
Thereareanumbersof studies on theeffectofoptimalcapitalstructureoncorporate’sROE andROA.Vătavua(16) researchedonmanyRomanianmanufacturingcompaniesandgot thefinalfindingthat themostprofitablemanufacturingcompanies werethosemaintainingahighproportionof equityin theircapitalmix,avoiding borrowedfunds.Theresearcheralsostatedt h a t shareholders’equityhasapositiveimpactonperform anceindicators,whiletotaldebtandshort-termdebt havenegativerelationshipswith ROAandROE.
26 profitableis,themoretheytendtoprioritizeusingendogenousfunds(suchasretainedearnings)t h a n debts comparedwithfirmswithlowerprofitability.CauseMyers(3)pointsoutinhisresearchthatthereareaconfl ictionbetweeninsiders(managers)andoutsideinvestorsindecidingt h e capitalstructure.Onthefactthatb usinesspricingrelatingtotheissuanceofnewshares—atransferringstepfromoldtonewshareholders— maybeharmfultotheexistingshareholders.Therefore,toavoidthatnegativeimpact,managerswillpriorit izeusingendogenoussources(suchasretainedearnings),thendebtsandfinallyequitiesissued.Thisresultal socanbefoundinthestudyofMyers(3)thatcorporatefinancingpracticedoesnotconformwithasimpletrad eoffmodelandhesuggestedtheexistenceofa―peckingorder‖amongthefinancingsourcesusedbyfirms.I nternallygeneratedcashisatthetopofthepeckingorder.
Thestudyrefersto the problemthatHVGhasbeenfacedishighdebtoverwhelmingthet a x advantagesandefficientoperation ofbusinessesdeclinedover theyears.Thestudyalsopreferredto thepossiblesolution forreconstructing aneffectivecapitalstructure,improvingoperationalefficiencyare:
1) Maintaining thedebtpercentageinthe capitalstructureasthelevelofaverageoft h e industry.ShubitaandAlsawalhah(9)recommend in theirresearchthatthefirmmustconsiderusinganoptimalcapitalstructure.Theoptimalcapitalstructurei ncludes somedebt,butn o t 100%debt.Inotherwords,it is a“best”debt/equityratio forthefirm,whichinturn,willminimizethecostof capital, i.e., thecostof financingthecompany’soperations andthenreducet h e chancesofbankruptcy.HVGshould maintain theratiototaldebt to totalassetortotalequityastheaverageofindustryatwhich thefirmsstillcantakeadvantageof the taxshieldfromdebt.
2) Raisingequityinsteadofraisingborrowing capital: This solutionisconsistentwitht h e peckingorder theoryofcapitalstructurewhichLi-
Research by JuChen et al (2017) indicates that firms typically prefer internal financing but will resort to issuing debt if internal resources are depleted, with new equity as a last option In contrast, Myers and Myers & Majluf argue that the pecking order theory suggests firms favor internal financing over external options, while the static tradeoff theory involves gradual adjustments toward an optimal capital structure Various methods for raising equity exist, such as increasing paid-in capital, utilizing undistributed earnings, and issuing new shares, each with its own set of advantages and disadvantages.
Paid-incapital,alsoreferredto ascontributedcapital, is the amountthatthecorporationreceivefromstockholderswhenthecorporationissueitsstock.Paid- incapitalis alsoreferredto as permanentcapital.Theformofenterprisedetermines thecharacterandform of raisingthecapital.Forstateenterprises,theinitialcapitalis investedbytheStateandtheowneris theStateGovernment.Forenterprisesareestablishedaccordingtothecorporatelaw, theownermusthavean initialcapitalneededtoapplyforregistrationoftheestablishmentof enterprises.
As joint stockcompanies,forinstant,capitalcontributionsfromshareholdersis thedecisivefactorforcompanyformation.Eachshareholderis an owner ofthecompanyandtakel i m i t e d responsibilitybase on thevalueofsharestheyhold.Inothertypesofenterprises,suchasl i m i t e d l i a b i l i t y companies orcompanieswithcapitalforeigndirectinvestment,paid- incapitaliscontributedbytheownerorpartners
Accumulatecapitalfromundistributedearningsis apartofprofit usedto reinvest.Thesizeo f the initialcontributedcapitalofemployersis thekeyfactor,however,thiscapitalshould beincreasedaccordingto thesizeof thebusinessdevelopment.Duringthe timeofoperation,ifenterprises operateefficiently,theenterprisewillhave favorableconditionsforcapitalgrowth.
Reinvestment strategies play a crucial role in the profitability of businesses, particularly for state-owned enterprises, where state policies significantly influence reinvestment decisions In contrast, joint-stock companies often allocate a portion of their profits for reinvestment rather than distributing them as dividends This approach leads to an increase in shareholders' equity, encouraging long-term investment in shares However, it can also diminish the attractiveness of the shares, as shareholders receive smaller dividends.
Thepaid-incapitalandretainedearningsiscalledthe self-financingof the business.Thisformhas anumber ofadvantagesanddisadvantages follows:
- Enterprisesthat do not relymuchon outsidecapitalsuchasborrowingdebtfromfinancial institutesor issuingnewshareforraisingcapitalfromthemarket…etc.
- Retained earningshaveahugeimpact on businesscapital,the companyprovidesopportunitiesforhigherprofitsin thefuture.
Disadvantages:When businesses do not paydividends toshareholdersandretainedprofitscanmakestockpricesonthemarketdecreased,adverselyaffectthebu siness.Retainedearningscanonlybeusedto reinvest if thebusinessisoperatingeffectivelyandmust beapprovedbyshareholders.
Thismethoddependson thedividendpolicyof thecompany.Thepolicydetermineshowpercentageofprofitneedtoberetainedto increasecapitalforbusinessexpansionandhowmuchi n c o m e will bedistributedto theshareholders.Wehavethe ratio of retainedearnings(Retainedearnings)=Thelevel ofretainedearnings/after-taxincomeandDividendpayoutratio =Thetotalvalueofdividends/After- taxincome.
Retained earningsratiois too low will makegrowthrateofthefirmslow,thisleadstodecreasethefirm’sprofitability,increasetheriskofbankru ptcy.Conversely,if theratioretainedearningsis toohighwillreduceshareholders'earningsandlead tomarketsharepriceof thec o m p a n y decrease.
Stocksarecertificatesorbook-entryconfirmation ofownershiprightsand legalinterestsoft h e ownerofthecapitalstock oftheissuer.Enterprisescanissuethefollowingclasses ofshares: C o m m o n stock:
Atypeofsharestobeissued fromretainedearningscapitalorotherlawful owner’s capitalo f thecompanyandnospecialpriorityinthepaymentofdividendsorliquidationassetswhenthec o m p a n y wentbankrupt.
Advantages:Not refunded to thebuyerofshares,dividendis not thefinancialburdenfort h e corporationin theyear whichtheycouldnotgetprofit.Thismethodnot onlyincreasesthe sizeofcapitalbutalsoincreasestheabilityofborrowingin thefuture.
Disadvantages:Thecostofissuingnewshareis highandwould dilute theownershipofenterprises,reducethe dividendpershare(Earningpershare).
Thesharestobeissuedbyretainedearningscapitalorotherlawful owner’scapitalofthecompany,butthereis a special priorityin thepayment ofdividendsorliquidationwhenthec o m p a n y goesbankrupt.
Whenissuingpreferredshares,theenterprise canincreaseequitybut do notsharetherightt o controltheoperation,theissuanceis stillattractiveto investorsbecausedividendyieldisguaranteedrelativelystable.Typicallypreferredsharesaccountfor onlyasmallproportionofthesharecapitalof thecompany.
Advantage:Thecapitalfrom thissourceis stableandnotrepayments.Thisdo notdistractcontrolbyraisingthecapital.
Disadvantage:Thecostofissuanceis high,dividendspayabletoshareholdersis thefinancial burdenin theyearunprofitable,andbyissuingpreferredsharesreducetheamountofdividend pershare. From analyzedabove,thebestsolutions to theproblemofimprovementofHVG’sp r o f i t a b i l i t y is reconstructingthecapitalstructurebyreducingthe percentageofdebtin thecapital structure.Causemost of thestudiesfound anegativerelationshipbetweenprofitabilityand debtfinancing(Myers&
Majluf(18);Daskalakis&Psillaki(19)).HVG shouldmaintaintheratiototaldebt to totalassetortotalequityastheaverageofindustryatwhich thefirmsstillcant a k e advantageof thetaxshieldfromdebt.Inaddition,HVGshould prioritizeusingendogenous sources(suchasretainedearnings)to response thedemandofcapitalforoperation,thendebtifinternalfinanceisexhaustedandthelastalternativewould beissuenewequity.For this solution,managersofHVGlaymoreemphasison howHVGcanraise thecapitalforworkingcapitaldemand.
Increasing capital through retained earnings is the most advantageous option for HVG, as profitable firms typically accumulate more retained earnings and rely less on external financing While raising capital through paid-in capital is a short-term solution, it is limited and insufficient for high-growth enterprises Modigliani and Miller suggest that tax subsidies on debt interest payments can enhance firm value when equity is exchanged for debt However, Hamid and Masdiah highlight potential conflicts between shareholders and debt-holders, as debt-holders prioritize profit to meet obligations, potentially leaving no excess cash flow for dividends Myers further emphasizes the importance of balancing these interests in capital structure decisions.
Majluf(18),issuingnewstock mayleadsto afirm’sstockpricedecline.Additionally,accordingt o Bhaduris(21)dividendpaymentsdecreasethea mountofinternalfundsandincreasetheneedf o r externalfinancing.Dividend policyallowsforreleasingofresourceswhen afirmhasnoprofitableprojectsandconveysinformationaboutafirm’sfutureexpectations tocapitalmarkets
Retained earnings: best altanative capital for debt
Paid-in capital: there are limits to utilize
EXTERNAL FINANCE Issuing new equity: this can decrease the stock price and dividend payments may increase debt andFrankandGoyal(22)statedthat thereisapositiverelationshipbetweenpayoutratioanddebt.Therefore,sharesissuedmaynot thesuitableoptionforraisingequitywhileHVG’sstockpricefluctuatedanddecreasedsteadilyasmentio nedinthecompany’ssystems.
Buildingcapitalmobilization,utilizationplantradingcapitalalwaysplaysadecisive roletot h e survivalanddevelopmentof thecompany.Toutilizetradingcapital,expandmarketorincreasecompetitivecapabilities,sufficientca pitaliscrucial.Consequently,buildingareasonable capitalmobilizationandutilizationisnecessaryforcontributingtomotivateefficientu s e oftradingca pitalaswellasproductivityofthecompany.Therefore,toutilizecapitalr e a s o n a b l y andsafely;tom inimizeexpensesandmaximizethecompany’svalue,itneedstoimplementthefollowings:
To ensure smooth operating activities, it is crucial for a company to accurately identify its capital needs and forecast minimum requirements to prevent both capital shortages and redundancies Additionally, recognizing the working capital needs is essential for the production process Regular monitoring and quarterly adjustments of capital requirements will help optimize the use of mobilized capital while considering the relationship between assets and revenue As sales of goods and receivables increase, capital in cash, buffer inventory levels, work-in-progress, finished goods, and payables will also rise Finally, estimating next year's trading capital based on the proportion of items that directly impact revenue is vital for effective financial planning.
The company offers various capital mobilization options based on its capital needs, allowing it to identify accessible and reasonable sources of capital while minimizing mobilization expenses Between 2012 and 2015, the company's interest expenses increased, prompting HVG to seek medium- to long-term capital sources that provide stability to support its future development strategy and enhance equity capital This approach grants the company greater financial discretion and significantly reduces exposure to interest rate fluctuations Additionally, leveraging the positive effects of equity capital enables the company to meet capital needs promptly, save time, lower mobilization costs, avoid liquidity pressures, and seize business opportunities in a timely manner.
To optimize capital distribution and utilization, the company must develop an effective plan following capital mobilization For short-term assets, it is essential to conduct market analysis and research to adjust inventory levels quarterly, ensuring timely turnover to prevent capital stagnation and mitigate interest rate fluctuations Regarding fixed assets, implementing a robust investment strategy and adopting modern production processes can significantly enhance productivity, reduce operating costs, and ultimately strengthen the company's competitive position in the market.
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Person1:MrTuan Vu,anexperienceaccountant of HVG
Question: WhydoestheHVG’sprofitdecreasesteadilywhileitsrevenue increaseata h i g h growthrateinthelast fiveyears?
MrTuanVu: Thereasonisthatthecostof expandingtheareafarmedtoo fast andpangasiusproductsundercompetitivepressureaswellasthe anti-dumpingdutyin theUSmarket.Inaddition,themostworryingpoint is theexpansion
40 ofHVGtoofastaccompanythetotalshort and long-termdebtincreasedfrom2,958 billion in 2012 to8.355billion in 2015
(accountingfor 58 %of totalassets)hascreatedconsiderablepressureoninterestrates.Intereste x p e n s e isalwaysat thehighlevel,2015recorded239 billion.Additionally,anotherproblemwhich HVGfacingis quitelarge accountsreceivableincreasedfrom1.854billion in 2012 to5,641billion in
2015makesprovisionforbaddebts of up to 347 billionin2015.This alsoeffectson theprofit.
Question1: What isyour evaluationaboutthepositionofHVGinthe industry?
MrsNgoc Thuy:HVGhasover13yearsoperation in thisindustry.Therefore,itbranding hasbeen builtbasedon itsproduct’squalityandquantityexported.
HVG hasinvestedcompletelyproductionchainstagesfromseed,animalfeedandproductexports,this help theenterprisecansupplyrawmaterialactivelyandcontrolthequalityo f product.Incomparisonwith therivalsin theindustry,HVG’s sizearebiggerandalsoHVG’smarketsharearemuch higher.Itcan besaid thatHVGis oneof theleadingenterprisesin thefisheries industry.
Question2: WhydoestheHVG’sprofit decreasesteadilywhileitsrevenue increasea t a highgrowthrateinthelast fiveyears?
Mrs Ngoc Thuy highlights that HVG's profit decline, despite rising revenue, is attributed to both internal and external factors Externally, the pangasius market has faced instability, increased competition, and declining prices, particularly affecting exports to key markets like the USA, ASEAN, Mexico, and Europe, where stringent dumping regulations have significantly reduced export values Internally, HVG's aggressive investment strategy and high leverage have led to a sharp rise in both short-term and long-term debt, resulting in financial expenses consistently consuming a larger portion of revenue For instance, financial expenses rose from VND 235 million, accounting for 2.61% of revenue in 2015, to 2.86% in the first three quarters of 2016.
MrMinhQuan:ThepriceofHVGhasdecreasedsteadilysince2014.IntheJulyoftheyear2014,th epriceofHVGhasgetthehighestpointatVND22.000pershareandthisdecreasedsteeplytounderVND1
4.000intheMayofyear2015.ThenItincreasedbackandfluctuatedaroundVND17.000inthelastmontho fyear2015.Afterthat,HVG’priceshowedasteadilydecreasedtothelowestpointatVND8.500intheFeb ruaryofyear2016.Sincethen,Ithasrecovered andfluctuatedaroundVND10.000 untilnow.Ingeneral,thepriceofHVGshowsa down-wardtrendovertheperiodof2014–2016.
MrMinhQuan:StockpricesreflectthemostnegativeHVG'sbusinessresults.Firstofa l l,HVG hasmetrisksfromtradebarriersfrommainmarketlikeUSandEurope,ithasbeenbeatenhighlydumpingd uty.Thenthecausesfrominsideofthecompany,thegrowthrateofreceivablesissohighandfollowedtheg rowthrateofrevenue.Thisleadtoincreasehighlye x p e n s e s whenHVGmustreserveforbaddebt.Ad ditionally,highlyexpandinginvestmenthavem a k e thepressureontheinterestexpensesforborrowin gdebt,bothshort-termandlong–term debt.Insum,thequalityofaccountsreceivable,inventory,andfinancialpressuresaretheproblem sthatinvestorspayattentionwheninvestinginthisstock.
Feed Factory (fish cattle and poultry )