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 various determinants of firm profitability, such as control-ownership disparity, industry characteristics, and firm-specific attributes In firms with significant control-ownership disparity, controlling shareholders often exert influence while owning only a small portion of the cash flow, which can lead to conflicts of interest and diminished performance, as noted by Shleifer and Vishny Additionally, Joh and Sung Wook emphasize that factors like industry dynamics, macroeconomic conditions, and firm attributes—including financial structure, size, market share, and business strategy—also play crucial roles in profitability They point out that while increased debt can elevate default risk, it may also compel firms to reduce wasteful investments to enhance performance and ensure survival Conversely, high debt levels can exacerbate conflicts of interest between creditors and equity holders, potentially pushing equity holders to support riskier projects due to their limited liability.
The issues faced by HVG may stem from firm attributes and expense management, as indicated by various symptoms To further investigate the existing problems within the company, a thorough analysis of competitors and the market will be conducted As illustrated in Figure 1, HVG holds a dominant market share and consistently achieves the highest revenue growth rate in the industry From 2012 to 2015, HVG's revenue increased steadily, creating a significant gap compared to other companies However, despite this revenue growth, HVG's profit margin has gradually declined, contrasting with 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, remains a valid tool for assessing profitability through the analysis of Return on Equity (ROE) and Return on Investment (ROI) The Return on Equity is broken down into three key components: Net Profit Margin, Total Asset Turnover, and the Equity Multiplier, which can be clearly defined in the 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.
According to the ASEAN Fisheries Industry Security Report, the fishery sector encountered significant challenges from 2013 to 2015 due to tariff barriers and dumping laws in major export markets The General Department of Vietnam Customs reported that the total export revenue for the fishery industry in 2015 was USD 6.57 billion, reflecting a 16% decline compared to 2014 The report also predicts that in 2016, the industry will continue to struggle with issues related to pricing, exchange rates, tariff barriers, and international dumping regulations This indicates that external environmental factors are a common challenge faced by all companies in the industry.
Poor management of costs and expenses can lead to a decline in profit margins, as these encompass the cost of goods sold and operational expenses such as machinery depreciation, location fees, transportation, and delivery According to Hansen et al., for effective pricing decisions and strategic profitability analysis, all traceable costs must be assigned to the product This includes not only manufacturing costs but also non-production costs like research and development, administrative, and selling expenses In the case of HVG, both its cost of goods sold and financial expenses have steadily increased over time, with the growth rate of financial expenses surpassing that of its revenue Conversely, other expenses related to selling and administration have shown a downward trend.
In the analysis of Intermof's cost of goods sold (COGS), it is evident that the percentage of COGS in revenue slightly increased from 91.62% in 2014 to 91.98% in 2015, while financial expenses saw a significant rise of 8.92% during the same period HVG, a leading corporation in the industry, operates a closed system encompassing breeding, aquaculture, processing, cold storage, and exporting, allowing the company to self-supply raw materials This self-sufficiency enables strict control over quality and operational costs, suggesting that the issues may not stem from COGS but rather from specific financial expenses.
(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 increasing revenue, is attributed to both internal and external factors Externally, the unstable market over recent years has made the pangasius industry highly competitive, leading to a steady decrease in prices and a narrowing demand from key foreign markets, including 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.
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
According to Mr Tuan Vu, HVG is facing significant challenges with its accounts receivable, which rose from 1,854 billion in 2012 to 5,641 billion in 2015, leading to provisions for bad debts of up to 347 billion in 2015 Additionally, HVG's inventory has shown an upward trend, accompanied by high growth investments that have steadily increased fixed assets over the years As a result, while total assets have significantly increased, net profit has decreased, indicating a decline in revenue generation 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 mix 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 leverage ratios can significantly impact a firm's financing capacity, risk, 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, which encompasses debt, common equity, and preferred equity used to finance total assets and growth An effective capital structure hinges on the balance between debt and equity, ensuring that earnings before interest and taxes (EBIT) exceed interest rates, allowing firms to leverage their positions The primary advantage of debt financing is the tax-deductibility of interest charges, leading to a reduced cost of capital, as noted by Krishnan and Moyer However, Jensen highlights that the costs associated with debt include bankruptcy and agency costs, suggesting that the decision to leverage is fundamentally about balancing costs and benefits at various 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 Ju Chen et al suggests that firms typically prefer internal financing but will resort to issuing debt if internal resources are depleted, with equity issuance as a last option Conversely, Myers and Myers & Majluf argue that the pecking order theory indicates firms favor internal financing over external, while the static tradeoff theory involves gradual adjustments towards 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 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 decisions at state enterprises are influenced by both business profitability and the state's reinvestment policy In contrast, joint-stock companies often retain a portion of their profits for reinvestment instead of distributing them as dividends This approach increases shareholders' ownership of the company's share capital, encouraging long-term shareholding However, it can also diminish the attractiveness of the shares, as shareholders receive smaller dividend payouts.
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 may be the most advantageous option for HVG, as profitable firms typically have higher retained earnings and rely less on external financing While raising capital through paid-in capital offers a short-term solution, it is limited and may not meet the demands of high-growth enterprises Modigliani and Miller argue that tax subsidies on debt interest payments can enhance firm value when equity is exchanged for debt However, Hamid and Masdiah highlight a potential conflict between shareholders and debt-holders, as debt-holders prioritize profit to meet obligations, while shareholders seek returns If profits are only sufficient to cover debt obligations, excess cash flow for dividends may be nonexistent, as debt-holders take precedence over shareholders.
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, a company must accurately identify its capital needs, avoiding both shortages that can hinder operations and redundancies that lead to waste It is crucial to assess working capital requirements, as they significantly impact the production process Regular monitoring and quarterly adjustments of capital needs will help optimize the use of mobilized capital while considering the relationship between assets and revenue As sales and receivables grow, capital in cash, buffer inventory, work-in-progress, finished goods, and payables will also increase Therefore, estimating next year's trading capital based on the proportion of items that directly influence revenue is essential for effective financial planning.
To effectively address its capital needs, the company should explore reasonable capital mobilization options that are accessible and identify current capital surpluses By strategically deciding on its capital structure, the company can minimize mobilization expenses Given the increase in interest expenses from 2012 to 2015, HVG should seek medium to long-term capital sources that offer stability, aligning with future development strategies and enhancing equity capital This approach will provide the company with greater financial discretion while significantly reducing exposure to interest rate fluctuations Additionally, leveraging the benefits of equity capital will help meet capital requirements promptly, save time, lower mobilization costs, alleviate liquidity pressures, and seize business opportunities as they arise.
To optimize capital distribution and utilization, companies must develop effective strategies following capital mobilization For short-term assets, it is essential to conduct market analysis and research on consumer needs, updating inventory data quarterly to accurately estimate stock levels and improve turnover rates, thereby preventing capital stagnation and minimizing interest rate fluctuations Regarding fixed assets, implementing a robust investment plan and utilizing modern production processes can enhance productivity, reduce operating costs, and ultimately lower the cost of goods, strengthening 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 revenues, stems from both internal and external factors Externally, the pangasius market has become increasingly competitive, with prices steadily decreasing and demand from key foreign markets like the USA, ASEAN, Mexico, and particularly Europe narrowing due to stringent dumping regulations Internally, high growth investments and increased leverage have led to a significant rise in both short-term and long-term debt Consequently, financial expenses have consistently represented a high percentage of revenue, with financial expenses rising from VND 235 million (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 )