Microsoft Word Debt financing MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECNOMICS HOCHIMINH CITY NGUYEN THI THANH THAO DEBR FINANCING – A CASE STUDY Ò AMATA POWER (BIEN HOA) LIMITED MASTES’S THE[.]
MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECNOMICS HOCHIMINH CITY K - ng hi ep w n lo ad ju y th NGUYEN THI THANH THAO yi DEBR FINANCING – A CASE STUDY Ò AMATA POWER (BIEN HOA) LIMITED pl n ua al n va fu ll MASTES’S THESIS In Banking Ology code: 60.31.12 oi m at nh z z ht vb Supervisor: Dr.TRUONG TAN THANH k jm om l.c gm n a Lu n va Ho Chi Minh City – 2010 y te re th ng ACKNOWLEDGEMENT hi ep The research is completed due to the contribution of many people First of w n all, I would like to express my deepest gratitude to my supervisor, Dr Truong Tan lo Thanh, for all he has done for me The thesis could not been finished without his ad y th great encouragements and kind helps Again, I would like to extend my sincere ju appreciation to him yi I would like to express my thanks to Dr Nguyen Minh Kieu for his valuable pl al advices He always took care, encouraged and supported us during our course n ua I acknowledge all instructors at Faculty of Banking Finance and n fu knowledge va Postgraduate Faculty, University of Economics of Ho Chi Minh for their valuable ll My gratitude is extended to my classmates for their enthusiastic supports in m oi conducting the research, especially Ms Nguyen Thi Kim Dung and Mr Duong at nh Binh Hung z Finally, I sincerely thank my parents and my husband who have always tried z vb their best to help me overcome difficulties during the time of attending the course as k jm ht well as preparing the thesis om l.c gm n a Lu n va y te re ac th ng hi ABSTRACT ep The economy has been developing more and more strongly, the competition w n among firms is fiercer and fiercer In order to run the firm’s business operation in lo ad the competitive market, capital is one of necessary elements to speed up the y th development It likes the blood of the firm There are three financing alternatives to ju set up the capital which are retained earnings, capital from shareholders and loans yi pl from credit institutions The choice of internal or external financing is an extremely ua al vital decision Some of firms like the internal financing (retained earnings, capital n from shareholders) due to avoiding the financial risks Some of firms prefer the n va external financing (loans from credit institutions) due to taking advantages of tax ll fu shield and controlling management position However, too much debt can result in m increasing dramatically capital costs due to financial distress in terms of increased oi bankruptcy and agency costs So, the careful consideration to the advantages and nh at disadvantages of each financing resource should be conducted to balance between z returns and risks And financial analysis should be done in order to minimize z ht vb financial risks in case of debt financing jm The purpose of this thesis is to evaluate the effectiveness of debt financing k process of a defined firm, Amata Power (Bien Hoa) Limited The research is gm conducted by collecting and analyzing the empirical data in order to understand om l.c debt repayment ability as well as the impacts of debt on expenses and profits n a Lu n va y te re ac th ng hi TABLE OF CONTENTS ep Acknowledgement Abstract w n Table of contents lo ad Abbreviation y th List of figures ju List of tables yi pl Chapter 1: Introduction ua al 1.1 Introduction n 1.2 Research problem 10 n va 1.3 Methodology 11 ll fu 1.4 Significance and scope of the study 11 oi m 1.5 Structure of the study 12 Chapter 2: Theoretical background 14 nh at 2.1 Introduction 14 z 2.1.1 The Miller and Modigliani theory 14 z ht vb 2.1.2 The trade-off theory 17 jm 2.1.3 The pecking order theory (Myers, 1984) 18 k 2.2 An overview of debt financing 19 gm 2.3 Financial ability to repay debt 21 l.c 2.4 Financial risks of debt financing in a foreign currency 27 om 2.4.1 Interest rate risk 27 a Lu 2.4.2 Foreign exchange risk 27 n 2.5 Conclusion 28 ac 3.2.2 Activity 30 th 3.2.1 Liquidity 29 y 3.2 Analysis of debt settlement ability 29 te re 3.1 Introduction 29 n va Chapter 3: Research methodology 29 ng 3.2.3 Debt management ratios 30 hi ep 3.2.4 Earnings ratios 31 3.2.5 Profitability measurement ratios 31 w 3.3 Analysis on financial risks of debt financing in a foreign currency 34 n lo 3.3.1 Interest rate risk 34 ad 3.3.2 Foreign exchange risk 34 y th 3.4 Impacts of debt financing on profit 34 ju yi 3.5 Conclusion 35 pl Chapter 4: Introduction to Amata Power (Bien Hoa) Limited 37 al n ua 4.1 An overview of Amata Power (Bien Hoa) Limited 37 va 4.2 Financial performance 38 n 4.2.1 Capital structure 38 fu ll 4.2.2 Business operation 39 m oi 4.2.3 Profitability measurement 41 at nh 4.2.4 Debt management policy 43 z 4.3 Recent development and outlook 43 z Chapter 5: Analysis on debt financing of Amata Power (Bien Hoa) Ltd 45 vb jm ht 5.1 Introduction 45 5.2 An overview of debt financing of APBH 45 k gm 5.2.1 Short-term borrowings 45 5.2.2 Long-term borrowings 45 l.c om 5.3 Analysis on debt settlement ability 48 a Lu 5.3.1 Debt settlement ability 48 5.3.2 Debt control method 50 n 5.4.1 Impact of debt on expenses 55 ac th 5.4.2.1 Foreign exchange risk 57 y 5.4.2 Risks related to debt in a foreign currency 57 te re 5.4 Analysis on debt impacts 55 n va 5.3.3 Method of cash flow management 52 ng 5.4.2.2 Interest rate risk 60 hi ep 5.4.3 Impact of debt on profits 61 5.5 Conclusions 65 w Chapter 6: Research conclusion 66 n lo 6.1 Summary of study 66 ad 6.2 Implications and recommendations 67 y th 6.3 Future research and limitations 69 ju yi Bibliography 70 pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th ng hi ABBREVIATION ep w n APBH Amata Power (Bien Hoa) Limited AP Amata Power Limited lo Amata Viet Nam Joint Stock Company BP Banpu Public Company Limited BIDV Bank for Investment and Development of Vietnam ad Amata VN ju y th yi Deutsche Investitions - Und Entwicklungsgesellschaft MBH Earnings before interest and tax KfW ua al EBIT pl DEG ROA Return on assets ROE Return on equity ROIC Return on invested capital ROS Return on sales TIE ratio Times-Interest-Earned ratio VCB Bank for Foreign Trade of Vietnam (Vietcombank) n Kreditanstalt fur Wiederaufbau n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th ng hi LIST OF FIGURES ep Figure 2.1: Effect of leverage on the value of a firm’s stock 18 Figure 2.2: Liquidity analysis 25 w n Figure 2.3: Analysis on debt repayment ability 26 lo ad Figure 4.1: Structure of shareholders of APBH as of December 31, 2009 39 y th Figure 4.2: Growth of assets and resources of APBH from 2005 to 2009 40 ju Figure 4.3: Growth of revenue and profit/loss of APBH from 2005 to 2009 41 yi pl Figure 4.4: Profitability ratios of APBH from 2002 to 2009 41 ua al Figure 4.5: Profitability of APBH from 2004 to 2009 42 n Figure 5.1: Liquidity ratios of APBH from 2002 to 2009 48 n va Figure 5.2: Growth of current assets and current liabilities 50 ll fu Figure 5.3: Debt management ratios of APBH from 2002 to 2009 51 m Figure 5.4: Earnings coverage ratios of APBH from 2002 to 2009 52 oi Figure 5.5: Cash conversion cycle of APBH from 2002 to 2009 53 nh at Figure 5.6: The cash conversion cycle model in 2009 54 z Figure 5.7: Assets – equity turnover of APBH from 2002 to 2009 55 z ht vb Figure 5.8: Financial expenses of APBH from 2008 to 2010 56 jm Figure 5.9: Impact of debt on expenses of APBH from 2002 to 2009 57 k Figure 5.10: Interest rate risk of APBH from 2005 to 2009 60 om l.c gm n a Lu n va y te re ac th ng hi LIST OF TABLES ep Table 2.1: Summary of financial ratios from the lending viewpoint 22 Table 2.2: Summary of financial ratios from the investors’ viewpoint 23 w n Table 2.3: Financial ratios combining ratio analysis with cash-flow analysis 24 lo ad Table 2.4: Foreign exchange risk of Pha Lai Thermal Power JSC 28 y th Table 3.1: Financial analysis of APBH from 2002 to 2009 33 ju Table 4.1: Capital Structure of APBH as of December 31, 2009 39 yi pl Table 4.2: Growth of assets and resources of APBH from 2005 to 2009 40 ua al Table 4.3: Growth of revenue and profit/loss of APBH from 2005 to 2009 40 n Table 4.4: Profitability ratios of APBH from 2002 to 2009 41 n va Table 4.5: Comparison ROE and free-risk interest rate 42 ll fu Table 5.1: Loan disbursement and repayment schedule of APBH 47 m Table 5.2: Liquidity ratios of APBH from 2002 to 2009 48 oi Table 5.3: Growth of current assets and current liabilities 50 nh at Table 5.4: Debt management ratios of APBH from 2002 to 2009 50 z Table 5.5: Earnings coverage ratios of APBH from 2002 to 2009 51 z ht vb Table 5.6: Activity ratios of APBH from 2002 to 2009 52 jm Table 5.7: Assets – equity turnover ratios of APBH from 2002 to 2009 55 k Table 5.8: Costs structure of APBH from 2008 to 2010 56 gm Table 5.9: Impact of debt on expenses of APBH from 2002 to 2009 57 l.c Table 5.10: Foreign exchange rate (USD/VND) on settlement date to creditors 59 om Table 5.11: Interest rate of creditors and two banks in Vietnam 60 a Lu Table 5.12: Comparison with firm in the same industry in 2009 62 n Table 5.13: Components of return on equity for APBH 62 n va Table 5.14: Extended Dupont System Analysis for APBH: 2002-2009 63 y te re ac th ng hi CHAPTER ep INTRODUCTION w n lo 1.1 INTRODUCTION ad The globalization has brought countries together and made countries y th integrate deeply into the world Nowadays the economic competitiveness does not ju yi limit in the national border, it has extended to the international market The capital pl is means to create favourable conditions for the successful business Most firms al ua prefer the capital mobilization from debt There are many kinds of debt which are n bank loans, sponsor loans, bonds, and account payable va n In comparison with equity, debt is cheaper and has more tax advantages In ll fu the upturn, using leverage helps companies to maximize their profit But in the oi m downturn, the debt management becomes more difficult Facing with huge debts, wrong, but too much debt is problematic at nh only a little downtrend can lead to insolvency Borrowing to run business is not z z Brigham and Ehrhardt (2002, p.619) also indicated that debt has two vb ht important advantages First, the interest paid is a tax deduction, which lowers debt’s jm effective cost Second, debt holders get a fixed return, so stockholders not have k to share the profits if the business is extremely successful However, debt also has gm disadvantages as following: First of all, the higher the debt ratio, the riskier the om l.c company, hence the higher its cost of both debt and equity Secondly, if a company falls on hard times and operating income is not sufficient to cover interest charges, a Lu its stockholders will have to make up the shortfall, and if they cannot, bankruptcy n In this thesis, debt financing in form of loans from credit institutions and ac th financial analysis The goal of analysis is to assess an obligor from a financial y the company needs to demonstrate its financial solidity to its bankers by the te re parent companies is mainly discussed In order to get bank loans and sponsor loans, n va will result ng trading range for the dong has been moved to VND18,364-19,500 per dollar due to hi ep maintaining the daily trading band of per cent As Standard Chartered Bank forecasted that the VND-USD exchange rate w would be VND19,900 in the last quarter of 2010, VND20,000 in the first quarter of n lo 2011 and VND20,400 in the second quarter of 2010 ad Due to changed exchange rate, many firms whose activities related to y th foreign currency have to face many difficulties The firms have to pay many costs in ju yi dollars, but not all of customers pay them in dollars Only exporters have certainly pl benefited from the dong’s devaluation However, the additional money earned from al n ua dollar payments through exports was not so significant, because input cots for n Tung, 2010) va materials, employees, petrol, water and electricity have already soared (Thanh fu ll APBH have also meet with many difficulties due to borrowing loans in US m oi dollar Exchange rate between USD and VND experienced a strong increase in two at nh last years In the period of USD shortage, to fulfill obligations with creditors, firm z had to buy USD with extremely high prices In order to avoid the regulations of z State Bank, firm had to buy USD with the offered exchange rate, but commit vb jm ht withdrawing deposit prior to term with no-term interest rate or sign consultancy contracts or other service contracts k om l.c gm n a Lu n va y te re ac th 58 ng Table 5.10: Foreign exchange rate (USD/VND) on settlement date to creditors hi ep AP, BP Date Amount % n lo % 14,487 Dec-00 14,524 0.26% Jun-01 14,606 0.56% Dec-01 15,063 3.13% Jun-02 15,319 1.70% ad ju y th yi 15,110 1.40% Dec-02 15,405 0.56% Jan-03 15,433 0.72% Jun-03 15,489 0.55% Jul-03 15,502 0.45% Dec-03 15,695 1.33% Jan-04 15,663 1.04% Jun-04 15,780 0.54% Jul-04 15,737 0.47% Dec-04 15,791 0.07% Jan-05 15,787 0.32% Jun-05 15,867 0.48% Jul-05 15,885 0.62% Dec-05 15,908 0.26% Jan-06 15,914 0.18% Jun-06 15,985 0.48% Jul-06 15,993 0.50% Dec-06 z 0.72% Jan-07 16,070 0.48% Jun-07 16,120 Jul-07 16,138 0.42% Dec-07 16,037 Jan-08 15,986 -0.94% Jun-08 16,300 1.64% Jul-08 16,848 5.39% Dec-08 16,986 4.21% Jan-09 17,481 3.76% Jun-09 17,793 4.75% Jul-09 17,802 1.84% Dec-09 18,025 1.30% n ua al 15,322 nh pl Aug-02 Amount Jun-00 w Jan-02 DEG, KfW Date n va ll fu oi m at z 0.12% jm ht vb 16,100 k -0.51% om l.c gm n a Lu Source: Applications for transfer of APBH (2000-2009) n va y te re ac th 59 ng hi ep 5.4.2.2 Interest rate risk Table 5.11: Interest rate of creditors and two banks in Vietnam w Date DEG AP-BP VCB BIDV lo 4.9% 5.3% 11.4% 5.6% Dec'05 6.3% 5.7% 6.1% 5.6% 5.6% Jun'06 7.3% 6.8% 7.2% 6.7% 6.7% Dec'06 8.1% 7.5% 7.9% 7.3% 7.4% 8.0% 7.5% 7.9% 7.4% 7.4% Dec'07 8.1% 7.5% 7.9% 7.5% 7.4% Jun'08 7.5% 7.0% 7.4% 8.0% 10.0% Dec'08 5.8% 5.3% 5.7% 7.5% 7.0% Jun'09 5.0% 4.5% 4.9% 5.5% 5.0% Dec'09 3.9% 3.4% 5.5% 6.2% ad 5.4% y th n Jun'05 KFW ju yi pl n ua al Jun'07 n va ll fu oi m nh Source: Debit notes of DEG, KfW, AP, BP (2005-2009) at z Figure 5.10: Interest rate risk of APBH from 2005 to 2009 z ht jm 12.0% k 10.0% gm 8.0% 6.0% l.c Percentage vb Interest rate risk 4.0% om 2.0% Jun'05 Dec'05 Jun'06 Dec'06 Jun'07 Dec'07 Jun'08 Dec'08 Jun'09 VCB BIDV 60 ac VCB also lent money with the interest rate dominated in SIBOR plus 2% or 1.85% th of 2005 to 2007 was quoted in SIBOR (six months) plus 2% In the same period, y The interest rate at which BIDV granted the long-term facilities from the end te re Source: Debit notes of DEG, KfW, AP, BP (2005-2009) n AP-BP va KFW Dec'09 n Date DEG a Lu 0.0% ng From 2008 up to now, BIDV and VCB have offered the definite interest rate for a hi ep definite time It was adjusted every three or six months In comparison with overseas borrowing in period of 2005-2007, the long- w term interest rate of these banks was lower From the above figure, interest rate n lo policy of two these banks is unstable The interest rate changes suddenly While ad borrowing from overseas banks, the interest rate is dominated in LIBOR or SIBOR y th plus a fixed number of basis points LIBOR or SIBOR is rather stable and change of ju yi them is not much From 2008, APBH paid lower interest expenses compared to pl borrowing by foreign currency from domestic banks al n ua SIBOR is set daily by the Association of Banks in Singapore (ABS) The va SIBOR serves as a benchmark, or reference rate for borrowers and lenders that are n directly or indirectly involved in an Asian financial market Because of its location, fu ll political stability, strict legal and regulatory environment as well as the volume of m oi business undertaken in Singapore, the city state is regarded as a major hub of Asian at nh finance LIBOR is fixed on a daily basis by the British Bankers' Association The z LIBOR is derived from a filtered average of the world's most creditworthy banks' z interbank deposit rates for larger loans with maturities between overnight and one vb jm ht full year The LIBOR is the world's most widely used benchmark for short-term interest rates It's important because it is the rate at which the world's most preferred k gm borrowers are able to borrow money It is also the rate upon which rates for less preferred borrowers are based [2] l.c om 5.4.3 Impact of debt on profits a Lu In comparison with other firms (Thac Ba Hydropower Joint Stock Company – TBC, Can Don Hydro Power Joint Stocks Company – SJD, Thac Mo Hydro n profitability of APBH is higher y te re – PPC) in electricity industry, the debt ratio of APBH is a medium level, the n va Power Joint Stock Company – TMP, Pha Lai Thermal Power Joint Stock Company 61 ac http://www.topmba.vn/forum/index.php?PHPSESSID=ed189e23588753c185491d6dcac3c616&topic=1174.msg241 94#msg24194 th [2] ng Table 5.12: Comparison with firm in the same industry in 2009 hi ep APBH TBC SJD TMP PPC w n lo Debt ratio 25.36% 8.72% 57.11% 42.92% 63.23% ROA 21.69% 15.38% 10.48% 11.57% 7.58% ROE 29.01% 16.85% 24.44% 20.27% 20.61% ad Source: Financial statements of APBH in 2009, Analysis reports on Thac Ba Hydropower Joint y th Stock Company – TBC (Habubank securities, 2010), Can Don Hydro Power Joint Stocks Company ju – SJD, Thac Mo Hydro Power Joint Stock Company – TMP, Pha Lai Thermal Power Joint Stock yi pl Company – PPC (Artex securities, 2009) Ratios 2005 2006 2007 2008 2009 Times 0.47 0.57 0.66 0.66 1.01 1.33 1.52 1.38 % 2.76 4.02 5.97 10.52 8.57 11.76 12.63 15.69 1.29 2.29 3.94 6.96 8.68 15.65 19.17 21.69 9.31 7.90 5.62 4.01 2.99 2.10 1.62 1.34 11.99 18.10 22.19 27.89 25.91 32.78 31.03 29.01 % Times oi % m - Return on equity (ROE) 2004 ll - Financial leverage multiplier 2003 fu - Net return on assets (ROA) 2002 n - Net profit margin (ROS) Unit va - Total assets turnover ratio n ua al Table 5.13: Components of return on equity for APBH nh Source: Audit reports of APBH (2002-2009) at z In accordance with The Dupont System, ROE can be broken down into ratios z that are net profit margin and equity turnover Equity turnover ratio equals total vb jm ht assets turnover times the ratios of total assets to equity Combining these two breakdowns, ROE is composed of three ratios as follows (Reilly and Brown, 2006, k gm p.322) ROE = Net profit margin x Total assets turnover x Financial leverage multiplier l.c om Net profit margin and total assets turnover ratio experienced a considerable a Lu increase from 2.76% to 15.69% and from 0.47 time to 1.38 times, respectively Net return on assets is the combination of these two ratios, which also increased rapidly n A financial leverage multiplier in 2002 of around 10 indicates that one-tenth y te re profitable and managed its assets to generate sales more productively n va from 1.29% to a peak value of 21.69% It means that the firm became more 62 ac been financed with debt While this ratio in 2009 of 1.34 indicates that for every th of total assets were financed with equity, and nine-tenths of total assets must have ng 1.34 VND of assets there is one VND of equity and 0.34 VND of assets was hi ep financed by debt It showed that debt was reduced significantly from 2002 to 2009 Return on equity rose stably from Y2002 to Y2007 with a total range of w 11.99% to 32.78% due to the increasing return on assets and the declining financial n lo leverage After that, it fall to 29.01% in Y2009, although return on assets also went ad up and financial leverage multiplier still went down y th In order to make clearer the impact of debt on profit, the extended Dupont ju yi System is considered pl Table 5.14: Extended Dupont System Analysis for APBH: 2002-2009 Unit 2002 2004 2005 2006 2007 2008 2009 9.65 11.49 17.46 13.95 15.75 15.18 17.31 0.47 0.57 0.66 0.66 1.01 1.33 1.52 1.38 5.73 5.50 7.59 11.55 14.12 20.96 23.05 23.92 4.44 3.65 4.59 5.45 4.45 2.66 1.11 1.29 2.29 6.96 8.68 16.51 20.39 22.81 9.31 7.90 5.62 2.99 2.10 1.62 1.34 11.99 18.10 22.19 27.89 34.59 33.01 30.50 100.00 100.00 100.00 100.00 100.00 94.78 94.00 95.09 11.99 18.10 22.19 27.89 25.91 32.78 n va 12.29 k (1) 2003 nh % Notes n ua EBIT / Sales al Ratios Times (2) EBIT/Total assets % (3)=(1)x(2) % (4) % (5)=(3)-(4) Times (6) % (7)=(5)x(6) % (8) % (9)=(7)x(8) ll fu Sales / Total assets / Earning before tax) om Common equity l.c Net income / 25.91 gm 100% - (Income tax jm / Common equity 4.01 ht Earnings before tax vb Common equity 3.94 z Total assets / z / Total assets 3.21 at Earnings before tax oi Total assets m Interest expense / 31.03 29.01 a Lu Source: Investment analysis and portfolio management, Frank K Reilly and Keith C.Brown (2006); Audit reports of APBH (2002-2009) n obtained a peak of 23.92% in 2009 It was mainly affected by the steady rising of ac 63 th whereas gross ROS was unstable Gross ROS fell to the lowest level of 9.65% in y total assets turnover ratio which went up from 0.47 to 1.38 within eight years te re and total assets turnover ratio The gross ROA experienced an stable increase and n va The gross return on assets (ROA) is a product of gross return on sales (ROS) ng 2003, then increased and got a peak of 17.46% in 2005; after that declined to a low hi ep point of 13.95% in 2006, increased to a new peak of 15.75% in 2007, and finally reached another peak of 17.31% in 2009 after decreasing in 2008 w Besides, gross ROA is also combined by interest expense rate and earnings n lo before tax dividing total assets Interest expense rate accounted for rather high ad percentage of gross ROA from 2002 to 2004 After that, the ratio of earnings before y th tax dividing total assets rose quickly and accounted for over half of gross ROA ju yi from 2005 to 2009 Row of the above table reflects the firm’s operating pl performance before impact of financial leverage multiplier and taxes Row al n ua reflects the impact of debt financing on the firm’s operating performance The ratio va increased quickly from 1.29 to 22.81 due to the decrease in interest expense over n years Namely, financial leverage multiplier also fallen rapidly from 9.31 to 1.34 It fu ll means that the lower the ratio of assets to equity, the lower the proportion of debt to m oi equity at nh Lower corporate income tax rate leads higher tax retention rate Tax z retention rate was 100% in 2002-2006 Under the terms of APBH’s Investment z Licence, APBH has an obligation to pay the government income tax at the rate of vb jm ht 10% of taxable profits The provisions of APBH’s Investment Licence allow APBH to be exempt from income tax for four years commencing from the profitable year k gm (2002) and receive a 50% reduction in income tax for the four succeeding years (2006 to 2009) Because some expenses were not accepted by General Department om l.c of Taxation, the corporate income tax rate is greater than 5% a Lu Using debt financing leads the tax savings However, during the period of 2002-2009, APBH was in the period of four tax-exemption-years and four 50%-tax- n n va reduction years So, APBH did not take many advantages of tax savings due to y te re financial leverage ac th 64 ng 5.5 CONCLUSIONS hi ep The above analyses show that APBH has good debt repayment ability during borrowing process The credit-worthiness is reflected through three elements as w following: n lo • Liquidity of APBH from 2002 to 2009 maintained a good level with the high ad ratios APBH can fulfill its short-term liabilities and overcome difficulties in the y th ju uncertain conditions of business environment which affects profitability of firm yi • The firm has controlled debt efficiently Debt ratios reduced quickly during pl the period of 2002 – 2009 al n ua • Business activity of firm is more and more profitable due to the efficiency of n over years va using assets and equity Fixed assets turnover and total assets turnover moved fast fu ll Debt impacts the firm’s financial performance through three aspects as oi m followings: at nh • Debt creates the interest expenses which makes the reduction in profit z Although using debt financing has a advantage of tax savings, APBH was in the z vb time of four tax-exemption-years and four 50%-tax-reduction years during the jm ht period of 2002-2009 So, APBH did not gain many advantages of tax savings due to financial leverage k gm • Debt in a foreign currency causes the financial risks as following: l.c o In comparison with the interest rate of two big state-owned banks in a Lu overseas banks and two parent companies in Thailand om Vietnam, APBH does not have to face interest rate risk when borrowing from two n o The table 5.11 shows that the foreign exchange rate risk is not clear n va although the exchange rate between USD and VND in two last years changed so ac 65 th increases, when the financial leverage decreases y • The outcomes of the above analyses indicate that the return on equity te re much ng hi CHAPTER ep RESEARCH CONCLUSION w n lo This chapter will draw conclusions from the data analysis, present ad recommendations as well as the limitation of the study The first section y th summarizes the conclusion of the research The second section presents the ju yi implication of the study and some recommendations The last section ends with the pl limitation of the study ua al n 6.1 SUMMARY OF STUDY va n Electricity industry plays a key role in the country It is less affected by ll fu turmoil of economy like other industries, because its supply ability has not still met oi m enough demand yet Although the firms in the industry have to operate with nh maximum capacity, Electricity of Vietnam has still bought from outside firms The at tariff of the firms in industry is fixed in the agreement with Electricity of Vietnam, z z so there is not any competition between the electricity firms However, the vb jm materials shortage, the damages of engine ht electricity firms have to incur the changes in tariff of input data Risks are the k APBH is a joint-venture company which operates in the power market in gm Vietnam APBH monopolizes the electricity supply in Amata industrial park with om l.c the tariff considered by Electricity Regulation Authority of Vietnam and approved by Dong Nai People’s Committee The particular risks of APBH in business activity a Lu are the changes in EVN tariff, fuel prices, foreign exchange rate, and the number of n APBH is a typical case study in terms of debt financing due to the initial ac 66 th annual installments are the huge burden to the company However, during eleven y owners (USD4,428,571) is 2.46 times Under the rather high debt ratio, the semi- te re ratio of total long-term borrowings (USD10,900,000) and total equity from the n va running hours ng years APBH not only paid off over a half of loan and interest but also accumulate hi ep profits to expand business operation As of 31 December 2009, APBH has repaid USD8,842,112 The balance is USD2,057,888 will be paid within four periods from w 2010 to June, 2011 Total of accrual interest was paid with the amount of n lo USD4,537,282 The findings in chapter reflect APBH has managed debt ad efficiently y th In accordance with the traditional Dupont system, the return on equity is ju yi improved when the firm becomes more profitable, efficient and leverage However, pl the findings in chapter indicate that return on equity of APBH increases overtime ua al due to: n • Increase in net profit margin va n • Increase in total asset turnover ratio fu ll • Decrease in financial leverage multiplier m oi The outcome is consistent with the extended Dupont system because the at nh extended model shows that high financial leverage does not always increase ROE z The higher financial leverage may offset the benefits of higher leverage due to z higher interest expense rate jm ht vb 6.2 IMPLICATIONS AND RECOMMENDATIONS k gm According to the analysis on debt financing of APBH and findings in chapter 5, to use debt efficiently, the firms should understand thoroughly their own financial l.c om ability, prepare a definite disbursement plan as well as have a debt repayment policy a Lu in detail The results in chapter also shows that APBH has managed liquidity n comprehensively because the firm has set up and applied sound and prudent ac th deposit with term of three months Because the interest rate of fixed deposit with y be better if the firm invests the idle cash in other business operations instead of te re liquidity demands well, APBH uses idle cash in banks rather conservatively It will n va liquidity policies Although APBH has monitored, measured and controlled the term of three months is not high 67 ng Another factor affecting debt repayment ability is inventory management hi ep Product of APBH is the power, producing or buying and selling the power occur at the same point of time So APBH does not have to tie up money due to storing w goods in process, and finished goods Inventories of the firm are mainly raw n lo materials (fuel oil, diesel oil, lubricant, chemical, …) and spare parts for ad maintenance APBH always concentrates on the raw materials, controls them rather y th tightly and maintains them at low level, but still insures that the low stock keeping ju yi is not affected the production schedules However, the figures in the reports during pl eight years indicate that the spare parts are stored too much in the long time So al n ua APBH should decrease the level of spare parts on hand by considering the balance va of the costs of spare parts with the benefits of spare parts, namely estimating exactly n the true costs of carrying spare parts such as direct costs of storage, insurance, taxes fu ll and the cost of money tied up in spare parts Otherwise, keeping spare parts too m oi much in the long time leads many obsolete spare parts; that is inefficient and costly at nh and the firm can not maximize profits z Analyzing the financial risks in chapter indicates that foreign debt has z more benefits than local debt because its interest rate is rather stable However, vb jm ht foreign debt will be more options for APBH as well as other firms if the foreign exchange risk can be managed In the recent years, a large difference between the k gm foreign exchange rate stipulated by the State Bank of Vietnam and the market foreign exchange rate causes many difficulties for APBH in buying USD to repay l.c om the interest and principal to foreign creditors In order to avoid in a passive position a Lu in buying foreign currency, the firm should find some big banks in Vietnam and has a good business relationship with these banks When a foreign currency deficiency n n va in the market occurs, these banks always reserve the definite amount of foreign Besides, the government should support the firms in repaying foreign debt as ac 68 th exchange policies One of the policies is foreign exchange rate stabilisation The y well as settling the other costs to foreign suppliers by creating more flexible foreign te re currency for their important customers ng difference between the foreign exchange rate stipulated by the State Bank of hi ep Vietnam and the market foreign exchange rate should be as narrow as better w 6.3 FUTURE RESEARCH AND LIMITATIONS n lo Due to the limit of time as well as the difficulties in finding the financial data ad from electricity firms which operate from loan capital in a foreign currency, the y th study is only conducted at APBH Because it is just a case study, the result of the ju yi study can not be applied to other firms pl The study mainly conducted time-series analysis or comparing with its past al n ua performance The results should be compared with the aggregate economy, its n va industry or industries, its major or competitors within the industry ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th 69 ng hi BIBLIOGRAPHY ep Vietnamese w Nguyen Minh Kieu (2008) Tai Chinh Doanh Nghiep Nha Xuat Ban Thong Ke n lo Nguyen Thi Ngoc Trang and Nguyen Thi Lien Hoa (2007) Phan Tich Tai 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