Financial statements analysis at huu nghi food joint stock company

DECLARATION I hereby declare that this is my independent scientific research with the support of my supervisor and that I not copy the work of others The data and research results in the thesis are honest and have clear origins I take full responsibility for this pledge! Thesis author Do Phan Thuy Chi TABLE OF CONTENT CHAPTER 1: INTRODUCTION 1 General research background on the Confectionery manufacturing industry and Huu Nghi food JSC 1.1.1 General research background 1.1.2 About Huu Nghi Food JSC 1.2 Research aims and research questions 1.2.1 Research aims 1.2.2 Research questions 1.3 Scope of research and methodology 1.3.1 Scope of research 1.3.2 Research methodology 1.4 Limitations during the research 1.5 Structure of the thesis CHAPTER 2: LITERATURE REVIEW 2.1 Preview of previous studies 2.2 Theoretical preliminaries 2.2.1 Definition 2.2.2 Objectives 10 2.3 Sources of information 12 2.3.1 Balance sheet 12 2.3.2 Income statement 13 2.3.3 Statement of cash flows 14 2.3.4 Related documents 15 CHAPTER 3: DATA AND METHODOLOGY 17 3.1 Research type 17 3.2 Research methods 18 3.3 Justification of chosen methods 18 3.4 Data collection and analysis 20 3.5 Methodological limitations 21 3.6 Data Sources and Interviewees’ Profiles 22 3.6.1 Data Sources 22 3.6.2 Interviewees‟ Profiles 23 3.7 Data analytical framework 23 CHAPTER 4: RESULTS AND FINDINGS 25 4.1 Content Analysis 25 4.1.1 Financial Analysis 25 4.1.2 Common–Size Analysis 29 4.1.3 Ratio Analysis 31 4.1.4 Horizontal Analysis 40 4.2 Semi–Structured Interviews 42 4.2.1 Interview Questions 42 4.2.2 Interviewee Profiles 44 4.2.3 Interview Response Analysis 45 4.3 Benchmarking 50 4.4 Major Findings of the Study 53 4.4.1 Achievements 53 4.4.2 Limit and causes 54 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 57 5.1 Conclusion 57 5.2 Recommendations 58 REFERENCES 66 LIST OF TABLES Table 1: Statement of Huu Nghi Food Financial Position 26 Table 2: Statement of Profit and Loss 27 Table 3: Statement of Cash Flows 28 Table 4: Liquidity Ratios 31 Table 5: Extracts from Huu Nghi Food financial reports 33 Table 6: Operating Asset Management 33 Table 7: Financial risk 35 Table 8: Profitability 37 Table 9: DuPont Analysis 39 Table 10: Horizontal Analysis of Huu Nghi Food 41 Table 11: Interviewees‟ s Profiles 44 Table 12: Extract from financial statements 48 Table 13: ROE - benchmarking 51 Table 14: ROA -benchmarking 51 LIST OF FIGURES Figure 1: Process of analyzing financial statements 23 Figure 2: Huu Nghi Food‟s Liquidity financial ratios 32 Figure 3: Huu Nghi Food‟s Financial Risk Financial Ratios 35 Figure 4: Huu Nghi Food's Profitability Financial Ratios graph 37 Figure 5: ROE -benchmarking 51 Figure 6: ROA - benchmarking 52 CHAPTER 1: INTRODUCTION General research background on the Confectionery manufacturing industry and Huu Nghi food JSC 1.1.1 General research background In recent years, Vietnam has constantly promoted opening cooperation with countries in the region and the world It has made vital development steps in all aspects, including the economy, politics, culture, etc Therefore, the development and competition among domestic enterprises are becoming increasingly fierce The harsh elimination requires businesses to consider their strategies and steps carefully Thus, “strength wins, weakness loses” is an inevitable rule of today‟s economy with many opportunities and challenges Analyzing financial position and performance is an effective tool to help managers and external partners with economic and legal relations with the business make the right and most appropriate decisions According to the Ministry of Industry and Trade, the revenue growth of the confectionery group is about 15 %/year, with the total market sales estimated at 51 trillion VND The development orientation of the Vietnamese confectionery industry to 2030 is to innovate modern production equipment, automate, and improve quality, food safety, and hygiene Invest in building a stable raw material area to produce high-class confectionery products Besides some famous confectionery brands in the country and abroad, such as Hai Chau, Hai Ha BiBica, Kinh Do, Trang An, and Meiji Within Vietnamese Confectionery manufacturing, Huu Nghi Food is proud to be one of the biggest and most prestigious confectionery manufacturers and traders in Vietnam and the region 1.1.2 About Huu Nghi Food JSC Source: website Huu Nghi Food Huu Nghi Food JSC (HUUNGHI FOOD), formerly Huu Nghi Premium Confectionery Factory, was established and officially operated on December 8, 1997 In 2006, after nine years of operation, Huu Nghi High-class Confectionery Factory was equitized and renamed to Huu Nghi High-class Confectionery JSC In the same year, Huu Nghi built a distribution system in the North according to a modern and professional model After one year of implementation, in 2007, Huu Nghi made a distribution system in 32 provinces and cities from Hue to the North 2008 marked the milestone of Friendship in the South, deploying the distribution system in the Central, Central Highlands, and the South In June 2009, to follow the development trend of the market and expand its business lines, Huu Nghi High-class Confectionery JSC officially changed its name to Huu Nghi Food JSC Also, Huu Nghi formally implemented the construction of the first Huu Nghi Bakery system in Hanoi In 2010, Huu Nghi continued to upgrade the domestic distribution system, established an export department, and expanded the Bakery system In May 2015, Huu Nghi established the sales department for the MT and Horeca channels In 2017, Huu Nghi Food JSC officially participated in distributing sauces and condiments After 20 years of accompanying Huu Nghi, in April 2018, Vietnam Tobacco One Member Company Limited successfully divested from Huu Nghi JSC From 2013 up to now, Huu Nghi‟s revenue and profit have continuously increased over the years Huu Nghi Food JSC has two branches, factories in Hanoi, Ha Nam, and Binh Duong, a thriving distribution network with hundreds of distributors, and more than 140,000 retail stores nationwide Huu Nghi‟s products include many types of confectionery, such as Tipo custard, Kexo, Bolero, Salsa, Arita, Suri, and Joli candies, moon cakes, cakes, jams, and other processed foods JSC Huu Nghi is developing dry cake product lines to meet customer's tastes Along with the dried bakery products that have existed for a long time, the fresh products under the Huu Nghi brand have been finding their place in the market with strategic developments such as Lucky, Staff, Braha, and Sandwich In 2006, Huu Nghi‟s Staff cake was the first product on the market to hit the salty cake segment After more than 20 years with many changes, Huu Nghi fresh cake has always been a favorite product of consumers For a long time, the Huu Nghi brand has become a familiar name to consumers and gradually asserted its leading position in the Vietnamese confectionery industry To that, Huu Nghi has conquered the market with quality product lines and traditional values Currently, Huu Nghi Food is the leading manufacturer of mooncakes and Tet jam in Vietnam and has supplied to big customers such as Samsung, Foxconn, Canon, Viettel, Vietcombank, etc Vision: To become the leading trademark in spreading typical values of each Vietnamese families to the region and the whole world Mission: To create products that connect family members and deliver familiar feelings to each customer and Vietnamese family Up to now, the manufacturing facilities of Huu Nghi Food have been accredited for compliance with FSSC 22000, ISO 220000:2018, and Halal standards Our products have also been certified as High-Quality Vietnamese Goods for many consecutive years Since its establishment, Huu Nghi Food has received numerous awards and merits from the Prime Minister, the Ministries, and the Government, such as:  The Emulation flag of the Ministry of Industry and Trade in 2016;  The Emulation flag of the Ministry of Industry and Trade in 2015;  The Emulation flag of the Government in 2014;  The Emulation flag of the Ministry of Industry and Trade in 2013;  Certificate of Merit awarded by the Minister of the Ministry of Industry and Trade in 2012;  The Emulation flag of the Ministry of Industry and Trade in 2011;  The Second-class Labor medal of the President in 2011;  The Third-class Labor medal of the President in 2001, 2003;  The Excellent emulation flag by the Ministry of Trade from 1999-2007 Like most businesses, at Huu Nghi Food JSC, the financial position, and performance analysis through financial statements analysis only focus on calculating general indicators, not specifically analyzing weaknesses and strengths of the Company‟s financials Therefore, the analytical information used or provided by the Company to the outside is not convincing Stemming from the above situation, the topic: “Financial statements analysis at Huu Nghi JSC” was selected by the author to carry out the Master„s thesis decreased since 2017 However, on the front, Huu Nghi Food‟s performance was still considered at its best around 2017-2019, with impressive performance and financial figures published on the market during Covid-19 4.4.2 Limit and causes 4.4.2.1 Limit: Besides the advantages, the Company still has the following disadvantages: About the liquidity of short-term assets The analysis results show that there is an improvement in the current ratio, which leads to the ability of the business to meet its debts in the high, but this result is only the initial recovery, not yet firm, showing that long-term solutions are still required to improve the liquidity of short-term assets, especially is the risk without ensuring cash for the payment About profitability The company„s profitability indicators such as return on assets (ROA) (decreased 3,53% to 3,03%), and return on equity (ROE) (decreased 16,91% to 10,22%) over the years are not stable and are at a very low level It can be said that in 2021 the profit margin of revenue was only 3,03% times, while in 2017 it was only 3,53% times This shows that the efficiency of asset use, poor equity, and poor cost management lead to low profits About operating assets management The calculated ratios present similar overall trends in Huu Nghi Food‟s operating assets Specifically, all three turnovers show a tendency of decline over the period from 2017 to 2021, whereby inventory turnover sharply increased from 8,7 to 12,8 in 2019, but in 2021 this ratio decreased to 7,7 Receivables turnover also decreased halved, and payables turnover almost 54 declined halved with a sudden peak in 2021 These indicate that there is potentially a problem in inventory management About the financial structure In terms of capital structure, short-term debt accounts for a very large proportion of total capital, while short-term solvency is just enough to show the risk of future payment Huu Nghi Food‟s net income in 2017 was 49 billion VND and 52 billion VND by 2021 At the same time, the owner‟s capital has drastically increased from 301 billion VND in 2017 to 536 trillion VND in 2021 Therefore, it can be seen that even though the monetary values of both net income and shareholder‟s equity have both significantly increased, the percentage return on equity significantly decreased This indicates inefficiency in income generation and failure to utilize invested capital to the fullest potential and is likely to lead to financial issues in the near future 4.4.2.2 The cause of the limitations: - Subjective reasons: Firstly, due to the manager„s point of view and attitude; company managers not have the right view of the importance of financial statement analysis This is also the common position and performance of many Vietnamese enterprises today Therefore, from the organization of analysis work to the organization of personnel for analysis work, there has not been any attention and clear orientation The analysis of financial statements has not been carried out regularly and continuously Second: Due to the qualifications of analysts, the company does not have a full-time officer in charge of financial statement analysis, and there is 55 no financial analyst, but the assessment of the company‟s financial position is done by the chief accountant The company does not have a process to analyze and evaluate the financial position and performance on a quarterly and annual basis and has not assessed limitations in financial management at the company There has not been a flexible combination between accounting, auditing, and analysis and evaluation - Objective reasons The legal document system often changes, there is no mandatory regulation on analyzing the financial position and performance of enterprises; Our country has no statistics on the industry average financial indicator system; There is no unified regulation on analytical content, analytical criteria, or how to determine analytical criteria based on different points of view, so the company still has difficulties in choosing analytical criteria as well as target determination formulas 56 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 5.1 Conclusion After the process of information research, data collection, data processing, and data analysis on financial statements, I have accomplished three goals: Firstly, by the method of studying documents, I have systematized the theory of analyzing the financial position and performance of enterprises in enterprises Secondly, by analytical methods, I have learned and evaluated the status of the financial statements of Huu Nghi Food JSC, such as the balance sheet, business results report, statements of cash flows, and notes to the financial statements, etc The achievements and remaining limitations of the Company‟s financial position can be drawn from that Third, from the assessment of the current situation, some solutions are proposed to overcome the limitations and improve the financial position and performance of the Company However, due to limited knowledge and too short a time, it is difficult for my report to avoid errors, subjective assessments, and impractical solutions Finally, with the initial knowledge of analyzing the financial position and performance of enterprises, I tried my best to find out and come up with solutions based on my research, assessment, and suggestions Despite our best efforts, due to our research capacity and short research time, the content of the thesis cannot avoid shortcomings I look forward to receiving comments and guidance from teachers, teachers, and colleagues to improve the content of my thesis 57 5.2 Recommendations 5.2.2.1 Adjustment of financial structure To overcome the limitations of financial structure and improve its financial position and performance, the coming time, Huu Nghi Food JSC needs to restructure according to the following contents: Firstly, building a financial restructuring model suitable to the characteristics of the Company Specifically: - In Current assets, receivables account for a large proportion In addition, the Company operates in the field of confectionery production, so it has a considerable inventory value, accounting for a high proportion of total Current assets Besides, the analysis data shows that most receivables over the years are very high - In long-term assets, most are fixed assets and other long-term assets because enterprises only focus on purchasing tangible fixed assets to serve production and business activities during the period - Data analysis shows that all of these current liabilities are primarily invested in current assets, such as inventory investments and customer appropriation Huu Nghi Food Joint Stock needs to cut unnecessary expenses, limit loans to invest in unsuitable projects, and boost revenue by increasing product consumption At the same time, the Company should directly negotiate with creditors through solutions such as converting debt into contributed capital, selling debt to other creditors, rescheduling payment terms, and allowing additional terms to be added A reasonable addition to the contracts to minimize the loan interest payable, etc., to avoid falling into insolvency when the loan contracts become due 58 - For Huu Nghi Food JSC in the process of business expansion: The Company needs to re-evaluate the business size In this case, although the internal capital has been mobilized to the maximum, it cannot meet the requirements, forcing the Company to increase capital mobilization from outside, such as borrowing through the commercial banking system, issuing bonds, and using trade credit from excessive suppliers Secondly, debt restructuring towards increasing long-term debt ensures the safety and stability of the Company‟s funding Unreasonable use of debt in investment is the cause of poor performance at Huu Nghi Food JSC in recent times Therefore, debt restructuring needs to be suitable to the actual circumstances of the building confectionery business unit, specifically: (i) For Huu Nghi Food JSC, which has difficulties paying due debts but still can operate, it is necessary to apply measures to improve solvency, such as negotiating Negotiate with creditors to reduce interest rates, freezing debts, and rescheduling debts The above criteria will help the unit reduce payment pressure and focus on improving business performance to have a source of the debt payment To this, the unit must have a business recovery plan and a reasonable debt repayment plan to convince creditors (ii) For Huu Nghi Food JSC, which has an unsafe financing policy, due to the use of short-term debt to invest in long-term assets, it can be restructured by negotiating to adjust the debt maturity to ensure that it is suitable for the time of asset use, to avoid the imbalance of capital sources, and contribute to the healthy financial position and performance of the unit 59 5.2.2.2 Strengthen the management capacity of the finance and accounting staff Building a management and control system in the Company should have a plan and assign specific responsibilities to each relevant officer The Board of members and the director should pay attention to directing and assessing the situation and activities of governance control, making this system more and more complete to improve its financial capacity Management information systems must be built and used synchronously to provide operators with the highest quality Executives also need to put in the effort and exploit active management information This system includes all parts, such as people, software, equipment, facilities, and operating principles To regularly have sufficient information and data to serve the management system, the data collection, processing, and provision must ensure synchronization Therefore, attention should be paid to training, advocacy, and strict regulations on management information systems Improve the organization and personnel to analyze the financial position and performance Currently, the analysis of the Company‟s financial position is performed entirely by the accounting department staff, who are the creators of the financial position and performance Therefore, a particular subjectivity exists in analyzing the financial position, performance, and financial form Consequently, it is necessary to have other personnel with professional qualifications in analyzing the financial position and performance to advise, inspect and participate in the financial position and performance analysis Analyzing enterprises' current financial position and performance is still almost exclusively in charge of the chief accountant This duality leads to the 60 following consequences: Analysis results and reports are not objective because the primary information used in the analysis is accounting information; did not detect errors in the data, leading to inaccurate results This job must be assigned to an independent and knowledgeable person in charge of finance and the Company‟s situation to make more objective comments and assessments The Company must regularly improve the professional qualifications of its officers and employees, have an incentive regime and reward policy, and pay attention to the material and spiritual life of the employees 5.2.2.3 Completing the process and applying information technology in analyzing the financial position and performance of the Company Completing the Company‟s analyzing financial position and performance process Huu Nghi Food JSC has not developed a standard process for analyzing its financial position and performance To analyze the financial position and performance with high efficiency, save time and costs, and achieve highquality analytical information for management, the Company should soon develop and issue documents on the financial position and performance analysis process, which stipulates each step of analyzing the financial position and performance, a clear assignment of personnel at each stage of implementation, a clear source of analytical data, etc each individual or department concerned *Accounting Software: The current accounting software does not meet the management requirements at the Company, such as operating fixed assets, calculating production and business expenses, etc Especially the extraction of financial statements has not been updated according to the decision The Company 61 needs to request the accounting software supplier, a service technology company, to edit and update the software according to the new decision 5.2.2.4 Completing the analytical methods in the financial position and performance organization The current situation of financial position and performance in businesses is concurrently by the finance-accounting department An analyst is a person involved in the collection and financial position and performance of financial information However, today‟s company still ignore this The work of financial analysts is extremely important as their recommendations assist the business in making financial decisions That requires analysts to read many times to grasp relevant information, legal issues, market fluctuations, operational situations published in financial magazines, books, and newspapers, etc so with the current situation, businesses should focus on issues such as: Selecting employees for the finance department must have basic qualifications in finance and must have long-term experience in the industry Financial accounting partner of the company, constantly training specialized departments through training courses of the Ministry of Finance, educational centers of specialized universities, promptly receiving changes of the government accounting books and new accounting standards Supplementing knowledge of laws and financial policies through information in newspapers, gazettes, and related websites, encouraging finding out domestic and foreign economic information from all published sources It is possible to send or create conditions for employees to participate in short-term and long-term courses in countries around the world with knowledge of modern corporate finance and management, computerization of financial staff, regularly send them to attend professional seminars, etc 62 However, to fulfill this requirement, there must be efforts from the company The company needs to seriously implement accounting and auditing work according to the newly promulgated accounting regime, Vietnamese accounting and auditing standards, and the economic legal system To obtain valuable accounting information, enterprises should have internal control or audit measures In addition, attention should be paid to the following issues: Firstly, supplementing financial statements in addition to the mandatory financial reporting system of the Ministry of Finance to serve the full flow of information for analysis As income statement analysis is very important and is used in most financial positions and performance used in capital structure decisions, capital use, investment decisions, and use of leverage Almost businesses today no longer use it Second, improve the qualifications and qualities of managers All decisions on business, finance, and management of the enterprise are made by managers Therefore, their qualifications, capacity, and ethics determine the effective operation of the enterprise, the financial performance, and the analysis of the financial position of the enterprise Third, improve the qualifications of full-time staff and finally regularly exchange external information about the economy, finance, market, and web or other forms In the process of analyzing the financial position and performance of Huu Nghi Food JSC, the Company mainly uses traditional analytical methods such as the comparative method and the ratio method When using the comparative method for analysis, the Company has wellsolved problems such as: satisfying the conditions for comparison, 63 determining the origin, choosing standards for comparison, and performing well the comparison technique, specifically: - Regarding the conditions of comparison and the comparative origin: The comparative indicators have the same units of measure and agree with each other regarding content and calculation methods, but based on the comparison, the Company usually only compares the previous year with the following year or compared with the plan set for the same year without making comparisons over many years or periods - Comparative techniques: The Company mainly uses absolute number comparison, relative number comparison, vertical comparison, and horizontal comparison Due to the main use of traditional analytical methods such as the comparative method and the proportional method, the new analysis results reflect the scale and fluctuations of the analytical criteria and also show the proportion of constituent elements of the analytic indicator without seeing all the relationships between those variables or which factors will have a major impact on the volatility of the logical indicators Therefore, the Company needs to use a combination of analytical methods, such as the graph method, the Dupont method, etc., so that the analysis results can fully, comprehensively, and accurately reflect the analytical criteria The Company‟s analytical processes and methods are currently not scientifically organized However, the analysis results have not been made into a separate report, with specific explanations in writing and attached documents Expanding the scope of analysis: The financial and performance evaluation criteria should be correlated with enterprises in the industry, especially those with a similar level of activity or a similar amount of capital, 64 etc., and compared with the industry average to see the position of the business better Use other analytical methods to see, more specifically, the financial position of your unit This method must be consistent with the content of the analysis The Company that uses additional analytical content will have a corresponding analytical way for that content In particular, the use of the factor analysis method is beneficial for analyzing the factors affecting the analytical criteria, thereby helping the analyst to see the causes 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