Factors Affecting The Profitability Of Chemical Manufacturing Enterprises Listed On The Vietnam Stock Exchange.pdf

HO CHI MINH UNIVERSITY OF BANKING

GRADUATE THESIS

FACTORS AFFECTING THE PROFITABILITY OF CHEMICAL MANUFACTURING ENTERPRISES LISTED ON THE

VIETNAM STOCK EXCHANGE

MAJOR: FINANCE – BANKING CODE: 7340201

NGO NGUYEN ANH THU

HO CHI MINH CITY, 2024

HO CHI MINH UNIVERSITY OF BANKING

GRADUATE THESIS

FACTORS AFFECTING THE PROFITABILITY OF

CHEMICAL MANUFACTURING ENTERPRISES LISTED ON THE VIETNAM STOCK EXCHANGE

MAJOR: FINANCE – BANKING CODE: 7340201

Student’s Full Name: NGO NGUYEN ANH THU Student’s ID Code: 050608200691

Class for activities: HQ8-GE08 SUPERVISOR

PhD DO THI HA THUONG

HO CHI MINH CITY, 2024

ABSTRACT

The purpose of conducting the thesis “Factors affecting the profitability of

chemical manufacturing enterprises listed on the Vietnam Stock Exchange” is to

identify the determinants influencing the profitability of chemical manufacturing enterprises listed on the Vietnam Stock Exchange The paper provides an overview of the results of previous studies from trustworthy journals in the past few years Based on the overview, the author suggested six factors that have a possibility to affect the profitability of the chosen enterprises, including firm size, financial leverage, liquidity, firm growth, debt ratio and total assets turnover The data which is used for the calculation in the research is collected from the financial statements of 23 companies related to the chemical industry listed on the Vietnam Stock Exchange from 2018 to 2022 and imported to Stata 15.0 to run the regression models and perform tests to find defects of the model For the result of the final model, the author used the Feasible Generalized Least Squares (FGLS) estimation method to eliminate defects and test the impact directions of factors affecting the firm profitability According to the result, the only factor that has a positive effect on the changes of the profitability of the businesses, measured by Return on Assets (ROA), is firm growth, while financial leverage and debt ratio are negatively related to the dependent variables For the remaining variables, including firm size, liquidity, and total assets turnover, their relationships with ROA are not statistically significant in explaining the profitability of listed chemical companies on the Vietnam Stock Exchange At the end of the thesis, the author provides recommendations for each factors having statistically impact on the profitability of companies in terms of the analysis results, together with the limitations and new approaches for further studies

Key word: profitability, factors, chemical, companies, chemical, firm size,

leverage, liquidity, growth, debt ratio, total assets turnover

My full name is: Ngo Nguyen Anh Thu

I hereby declare that the graduate thesis “Factors affecting the profitability of

chemical manufacturing enterprises listed on the Vietnam Stock Exchange” has

been written solely by me under the guidance Ms Do Thi Ha Thuong and it contains no material previously published or submitted for publication by any other person The data presented in the report is truthful and the information in the graduate thesis is guaranteed to be adequately cited and referenced the original sources

I have attempted to accept all the risks related to this research that may arise in conducting this research

Ho Chi Minh City, 25th April, 2024

STUDENT

First of all, I would like to express my sincere gratitude to all of the teachers in Ho Chi Minh University of Banking who have conscientiously taught me useful knowledge and given practical advice based on their experience during the lectures, which are really meaningful for me to have a solid foundation in my major to do this thesis

Additionally, I would like to say my special thanks to Ms Do Thi Ha Thuong for supporting me throughout the study Thanks to her consistent guidance and thoughtful feedback during this project, I am able to complete this graduate thesis as well as possible

Last but not least, I would like to thank my friends and my family from the bottom of my heart Without their unwavering support, it would have been hard for me to finish my studies over the past four years

Nevertheless, due to my lack of knowledge and experience about this field, it would be inevitable to contain some errors in this research I am looking forward to receiving any opinions in order to refine the thesis further

Ho Chi Minh City, 25th April, 2024

STUDENT

ABSTRACT i

DECLARATION ii

ACKNOWLEDGEMENT iii

LIST OF TABLES viii

LIST OF FIGURES viii

CHAPTER 2: THEORETICAL BASIC AND LITERATURE REVIEW 7

2.1 OVERVIEW OF THE CORPORATION’S PROFITABILITY 7

2.1.2 Measures of a corporation’s profitability 8

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 52

5.1 CONCLUSION 52

5.2 RECOMMENDATIONS 53

5.2.1 For firm growth 53

5.2.2 For financial leverage 54

5.2.3 For debt ratio 54

5.3 LIMITATIONS OF THE THESIS AND NEW APPROACHES 55

5.3.1 Limitations of the thesis 55

5.3.2 New approaches for future studies 56

SUMMARY OF CHAPTER 5 57

REFERENCES 58

APPENDIX 65

Table 2.1 - Table of previous researches 19

Table 3.1 - The expected impact direction 33

Table 4.1 - Descriptive statistics of variables 36

Table 4.2 - Correlation matrix of variables 38

Table 4.3 - Multicollinearity Test 40

Table 4.4 - Model Estimation Pooled OLS 41

Table 4.5 - Model Estimation FEM 42

Table 4.6 - Model Estimation REM 43

Table 4.9 - Autocorrelation Test 45

Table 4.10 - Heteroskedasticity test 46

Table 4.11 – Table of FGLS estimation 47

Table 4.12 – Summary of research results 50

LIST OF FIGURES Figure 1.1 - The growth index and export turnover of the chemical industry from 2016 to 2021 1

Figure 3.1 - Framework of hypotheses 34

Figure 3.2 - Research process 23

Appendix 1 - List of chosen chemical corporations listed on the VNX 65

Appendix 2 – ROA of 23 chemical firms from 2018 to 2022 67

Appendix 3 – Firm Size of 23 chemical firms from 2018 to 2022 69

Appendix 4 – Financial Leverage of 23 chemical firms from 2018 to 2022 71

Appendix 5 – Liquidity of 23 chemical firms from 2018 to 2022 73

Appendix 6 – Firm Growth of 23 chemical firms from 2018 to 2022 75

Appendix 7 – Debt Ratio of 23 chemical firms from 2018 to 2022 77

Appendix 8 – Total Assets Turnover of 23 chemical firms from 2018 to 2022 79

Appendix 9 – Descriptive Statistics 81

Appendix 10 – Correlation Matrix at P-value = 1% 81

Appendix 11 - Correlation Matrix at P-value = 5% 82

Appendix 12 - Correlation Matrix at P-value = 10% 82

Appendix 13 – Regression Results of Pooled OLS Model 83

Appendix 14 - Regression Results of Fixed Effects Model 83

Appendix 15 - Regression Results of Random Effects Model 84

Appendix 16 – Hausman Test 84

Appendix 17 – VIF Test 85

Appendix 18 – Wooldridge Test 85

Appendix 19 - Breusch and Pagan Test 85

Appendix 20 – FGLS Estimated Model 86

Appendix 21 – Summary of Estimated Models 87

Abbreviations Full meanings

GAAP Generally Accepted Accounting Principles

NAICS North American Industry Classification System

VSIC Vietnam Standard Industrial Classification

CHAPTER 1: INTRODUCTION 1.1 THE NECESSITY OF THE RESEARCH

Profitability is defined as an ability to make profit from all the business operations of an organization or an enterprise with efforts of the business’s management (Dave, 2012) Therefore, it is one of the most important criteria when evaluating a business’s potential from investors and business managers’ perspective To help them get a clear picture and make suitable decisions, the author need to figure out the economic factors affecting the profitability, and that is the aim of this study

In the present age, the chemical industry receives a lot of attention from the State and businesses because it plays an essential role not only to the domestic economy but also to the country's industrialization and modernization As a matter of fact, according to the Ministry of Industry and Trade, the average total amount of Vietnam’s chemical output makes up approximately 11% of the GDP of Vietnam and 13% - 14% of the total industry Moreover, in recent years, the growth of the export turnover of the chemical industry have increased dramatically to over 30% thanks to the innovative technology during the 4.0 industrial revolution, except for the slumps in 2019 and 2020 because of COVID-19 epidemic

Figure 1.1 - The growth index and export turnover of the chemical industry from 2016 to 2021

Source: General Department of Vietnam Customs

There have been many previous studies relevant to investigating the factors affecting the profitability, from domestic studies to overseas studies For instance, Tarihoran and Endri (2021) obtained 19 listed companies on Indonesian Stock Exchange from 2015 to 2020 as samples for the study On the other hand, Alghusin (2015) research was based on the data of almost 25 listed enterprises in Jordanian for the time between 1995 and 2005 In case of domestic studies, there was a research done by Linh and Nga (2022) with the data of 79 companies listed on HOSE and HNX from 2016 to 2020 Trang and Phuong (2018) also used 474 companies listed on HNX and HOSE over the period of 2010 to 2015 However, as far as I found, there has been no thesis related to factors affecting the earnings power of chemical companies listed on the Vietnam Stock Exchange This is the

reason why the author chooses the topic “Factors affecting the profitability of

chemical manufacturing enterprises listed on the Vietnam Stock Exchange” so as

to study what and how these economic influences affect the profitability of chemical enterprises and propose some suggestions to improve the businesses’ current financial situation

1.2 RESEARCH OBJECTIVES 1.2.1 General objectives

The general objectives of the research are to figure out and analyze the determinants that affect the profitability of chemical manufacturing companies listed on the Vietnam Stock Exchange After that, the author would base on the results to provide some practical suggestions to business administrators and governments in order to enhance the profitability of those chemical manufacturing corporations listed on the Vietnam Stock Exchange

1.2.2 Specific objectives

With the aim of achieving general objectives, the author makes a list of specific objectives that need to be accomplished:

To begin with, determining the factors influencing the profitability of chemical manufacturing enterprises listed on Vietnam Stock Exchange

In the next step, evaluating the impact level of the components that affect the profitability of chemical producing enterprises listed on Vietnam Stock Exchange

Lastly, giving some recommendations to increase the profitability of the companies according to the results after evaluating

1.3 RESEARCH QUESTIONS

Research questions lay the groundwork for the thesis and help the researchers focus on the specific aspects of their subject that they are investigating Therefore, the following questions have to be solved in this study:

First of all, what are the determinants which affect the earnings power of chemical manufacturing companies listed on the Vietnam Stock Exchange?

Secondly, what level of impact do these factors influence the profitability of the chemical enterprises?

Last question, what recommendations should be proposed to boost the profitability?

1.4 SUBJECT AND THE SCOPE OF RESEARCH 1.4.1 Research subject

The research subjects are the profitability and factors that affect the profitability of chemical producing companies listed on the Vietnam Stock Exchange

1.4.2 The scope of research

The geographic scope: The research collects data from financial statements of

chemical corporations listed on both the Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) After the author excluded some companies due to

not satisfying requirements for the research’s data, only 23 chemical companies listed on VNX are appropriate to be chosen to collect secondary data for the study

The time scope: The data is taken during the period between 2018 and 2022 so

as to collect a sufficient number of samples for analyzing process Besides, this is a period when the economy’s fluctuations were noticeable due to COVID-19 epidemic, which means the impact levels might be clearer to analyze

1.5 METHODOLOGY

The thesis applies the quantitative methods together with the qualitative methods to evaluate the factors influencing the efficiency of the companies more comprehensively To be specific:

The qualitative methods: The author reviews previous studies with similar

subjects on credible international and Vietnam’s journals and magazines to find out the possible factors affecting the profitability of the listed chemical companies on the Vietnam Stock Exchange After that, the thesis suggests a research model to calculate the relationship between those factors and the profitability of chemical enterprises

The quantitative methods: These methods are used to measure the variables

from the information in the past, analyze the relationship between the dependent variables (the profitability) and the independent variables (the factors) along with the relationship among the independent variables to the others By applying regression model such as Pooled OLS Model, FEM, REM through the software Stata 15.0, the model may be used practically to anticipate the future value of the data and show the fundamental characteristics of the data

1.6 IMPLICATION’S CONTRIBUTION

In scientifically practical implication, the paper will aid in providing additional experimental evidence on factors affecting the profitability of chemical companies for further researches in the future The thesis is meant to provide some

key information for the business managers and decision-makers with the impact level between the corporations’ profitability and other macro and micro factors, which helps them make strategic decisions to improve the current situation based on the results after analyzing On the other hand, by understanding the connection between the profitability and what affects it, investors are able to evaluate which companies’ shares are potential and make informed investment decisions whether to buy or not, while policymakers can adjust their policies, abolish some regulations unsuitable for the economy nowadays

1.7 STRUCTURE OF THE THESIS

Apart from the declaration, the acknowledgement and the abstract, the research is divided into five chapters:

Chapter 1: Introduction

The first chapter consists of the reason of choosing the topic as a research subject, the aims the author need to achieve through the thesis, the scope of the data and what methods are used to measure it, the contribution of the thesis in both academic and practical ways and the basic structure of the research

Chapter 2: Literature review

Chapter 2 provides the concepts and theories of the profitability, the factors that affect it and the formula for calculating them Aside from this, chapter 2 also gives a summary of the research outcomes of previous empirical studies on the factors affecting the profitability of enterprises from various but trustworthy sources in and outside the country, then identifies the gaps that the study aims to address

Chapter 3: Research methodology

According to the results when summarizing studies in the past few years, the author would suggest a theoretical model, sort out which are dependent variables and which are independent variables and assume the correlation between the independent and the dependent variables Besides, this chapter also explains the

process of selecting the samples, how to collect data on financial statements as well as the techniques of analyzing the collected data in detail

Chapter 4: Research results and discussions

Chapter 4 presents the outputs of the data analysis to interpret the identified relationship between the factors and the earnings power of the listed corporations, including descriptive statistics, correlation coefficient analysis, multicollinearity test, serial correlation and heteroskedasticity test FGLS technique is used to address the defects of the model and guarantee the model’s effectiveness as the outcome of the thesis as well

Chapter 5: Conclusions and suggestions

The last chapter provides a comprehensive discussion of the research findings, comparing them with previously published researches, then concluding the elements impacting the financial performance of the chemical manufacturing companies listed on Vietnam Stock Exchange After that, the author makes some practical suggestions for the companies and the governments considering the study's conclusions Lastly, identify the limitations of the result and propose directions for further research

SUMMARY OF CHAPTER 1

Chapter 1 sets the necessity to choose the topic “Factors affecting the

profitability of chemical manufacturing enterprises listed on the Vietnam Stock Exchange”, along with research questions, motives and practical implications that

the research aims for when conducting this research In addition, this chapter identifies the scope of research in terms of geographic and time scope After that, based on the structure and research methods (both qualitative and quantitative methods), the author would go further into detail about the factors affecting the profitability of chemical companies listed on the VNX in next chapters

CHAPTER 2: THEORETICAL BASIC AND LITERATURE REVIEW

The content of chapter 2 contains the foundational concept of the profitability and some chosen determinants The author also summarizes previous researches and their results about the relationship between the profitability and its impact factors From there, the thesis will clarify current gaps and develop a research model in the next chapter

2.1 OVERVIEW OF THE CORPORATION’S PROFITABILITY 2.1.1 The definition of the profitability

Ben (1977) claimed that profit is the net flow of income, which means it shows the difference between the amount of total revenue and total expenses The expenses contain manpower, materials, interest on debt and other fees The business owners can use the profit to distribute to stakeholders as reward or invest it in either the enterprise’s projects for more earnings or the assets of the company for further company growth However, when the costs are higher than the earnings, profit will turn into a “loss”

According to Amit (2005), profitability is an ability of a business to generate profits after paying its expenses so as to enhance shareholders’ value Amdemikael (2012) defines profitability as a financial measure used to assess how efficient a business makes use of available resources to gain earnings after deducting its total costs incurred in the specific period of time As Toshniwal (2016) mentioned, the term “profitability” is the combination between the word “profit” and “ability”, with the term “profit” reflects to how much a business manages to earn from all operating activities, while the word “ability” reflects how well a company to earn returns after removing the costs and taxes

Profitability is one of the most vital criteria when investors and business administrators evaluate a company’s performance The higher the profitability ratio is, the efficiently a corporation can utilize its funds to make profit at the level of

sales, assets and capital stock The purpose of profitability is to see how effectively an enterprise manages during operating activities so as to suggest proper solutions to improve the firm growth and remain competitive in the market

2.1.2 Measures of a corporation’s profitability

There are three ways which are often used to calculate the profitability of one firm, including ROA, ROE and ROI

2.1.2.1 Return on Equity

Return on Equity (ROE) is defined as a measure that performs the link between a corporation’s profit and an investor’s return (Ahsan A., 2012) To put it simply, it shows the ability of a company’s performance that can use how much money shareholders invest to generate profits Therefore, the higher ROE is, the more efficient a company is at turning funds into earnings

ROE is measured by different formulas, but the most common formula is dividing annual net income by equity of shareholders The net income refers to a firm’s profitability after subtracting from costs, namely taxes, interests, depreciation, et cetera Meanwhile, shareholders’ equity is the amount after removing a firm’s total liabilities from its total assets The following formula is shown below:

Return on Equity = Net Income

Above is the formula of ROE Which means, the higher the Return of Equity is, the better a company is at making money Nevertheless, a high ROE does not always mean it is positive, and a negative ROE cannot be used to evaluate since it results in a net loss or the negative shareholders’ equity

2.1.2.2 Return on Assets

Beside ROE, Return on Assets (ROA) is another ratio which is commonly used for the same purpose as ROE, specifically for evaluating how efficiently a company uses its assets to generate profits in a given period without taking taxes into account In other words, the higher ROA is, the more productive a firm is at utilizing its total assets to gain earnings Despite having the same purpose, ROE use shareholders’ equity to calculate, whereas ROA uses the total assets of a firm as a dividend in the formula The following formula is shown below:

Return on Assets = Net Income

Based on this indicator, the higher the Return of Assets is, the better a company is at generating for each VND of its property The drawback here is that it cannot be used to compare among different industries, as the assets bases of companies in this industry is not the same to those in another industry

2.1.2.3 Return on Investment

Unlike ROA and ROE, Return on Investment (ROI) is a less favorable choice when evaluating a firm’s performance On the other hand, this percentage is useful since it shows the comparison between the amount an investor has paid for and how much that person has earned back on a business project, according to George and Franklin (1996) Thus, ROI helps investors, individuals or businesses figure out a project is potential enough or not to make an investment

ROI is determined by subtracting cost of investment from the gain and dividing the deduction by the cost of the investment The cost of investment includes purchase price, commissions, maintenance fee and any operating expenses regarding the investment The following formula is shown below:

Return on Investment = Gain from Investment - Cost of Investment

ROI can be positive, negative or it equals 0 In case of being negative, it means that the costs already exceed the returns, leading to a net loss If there are a lot of options, investors can depend partly on this measure to eliminate the negative options and choose the best ones However, there are some noticeable limitations of ROI that need to be considered, which are time is not taken into account by ROI and ROI does not mention any kind of assessment for risk to investors and businesses

And based on previous reference literatures and profitability measures mentioned above, the author makes a decision to use ROA for calculating the profitability of chemical manufacturing enterprises

2.2 RELATED THEORIES 2.2.1 Economies of Scale theory

Economies of Scale theory is an economic theory that shows the relationship between the scale of producing goods and cost advantages achieved by companies To be specific, economics of scale happens when an enterprise increases the size of manufacturing products or services, often measured as the amount of output produced per unit of time, together with lowering the average expenses, it will result in the rise in profitability and competitiveness

The original concept of this theory is from Adam Smith (1776) with the idea to obtain larger production returns by labor division and specialization Letting an employee do a specific task to improve skills or hire specialized labor can help the company produce more goods within less time and money Other sources consisting of buying inputs in bulk at a volume discount; investing on advertising or management quality appropriately; or utilization of technology can also lead to the occurrence of economies of scale

However, bigger does not always mean better At this rate, the balance between demand and supply might become weaker Also, large companies may find less flexible and hard to adapt to changes in the market Scaling up also results in a

high risk of diseconomies of scale, which occur when the average producing costs begin to rise as output increases

2.2.2 Trade-off theory

Taking M and M theory (Modigliani and Miller, 1958) as a theoretical background, trade-off theory was first given by Kraus and Litzenberger (1973) and refined by Myers (1977) as a more complete version because they considered the existence of taxes, bankruptcies and other imperative aspects when explaining a corporation’s capital structure, not just analyzing benefits in the assumption of a perfect market and ignoring the expenses like in M and M theory

According to the recent concept, financial leverage can have a positive relationship with the profitability at first, since the more debt the company takes on for stimulating the growth rate, the greater the value of the company rises thanks for the tax benefit Nonetheless, after going up to a certain level of limit and exceeding the break-even point, in which agency and bankruptcy costs of debt’s tax benefit may be outweighed by its presence, the connection gradually becomes negative In an empirical study in the UK market of Banerjee et al (2000), they also supported the trade-off theory that the growth of financial leverage is found for a positive effect on the profitability to certain limits, but the relationship will be inverse once it exceeds that level of limitation This result implies that a firm may be beneficial if it increases its liabilities reasonably

2.3 FACTORS THAT INFLUENCE ON A FIRM’S PROFITABILITY

After looking into previous researches such as Alghusin (2015), Trang and Phuong (2018), Charles et al (2018), Linh and Nga (2022), etc., the author realizes that this topic pays considerable attention not only in Vietnam but also in other countries, thus a wide range of determinants affecting the profitability have been found out and demonstrated Generally, those factors are divided into two main categories: internal factors and external factors Nevertheless, in the author’s

research, the theories and related studies of internal factors influencing the profitability of an enterprise would be focused on, including firm size, financial leverage, liquidity, firm growth, debt ratio and total assets turnover

2.3.1 Firm size

Firm size is defined by the company’s total assets or total sales it receives every year performed on its annual financial statements and market value of its equity (Frank and Chongyu, 2013) Based on Frank and Chongyu’s study (2013), total sales is the most appropriate measure to calculate firm size To be specific, firm size is measured by the natural logarithm of a firm’s annual total sales

In the investigation of Akinyomi and Adebayo (2013), the profitability was proved to affect positively on firm size by applying regression analysis A large firm size tends to be less risky than smaller ones since the ability to access loans for investments is easier, because the creditors believe that it has adequate assets and ability to pay back the loans it borrows Also, a large corporation often goes together with its high value and has specific position in the market, as well as is meant to have higher survival rate than the smaller one However, some other studies by Abeyrathna and Priyadarshana (2019) on listed manufacturing companies in Sri Lanka or Amato and Wilder (1985) on the US manufacturing firms show no sign of impact between the firm scale and the profitability

2.3.2 Financial leverage

Erza Solomon (1963) stated: “Leverage is the ratio of net returns on shareholders equity and the net rate of return on capitalization” If a business is leveraged, we can say that firm takes loans to purchase assets A financial leverage is measured by dividing the percentage change in EPS by the percentage change in EBIT

Thus, the higher financial leverage is, the more a company relies on borrowed loans to gain earnings, leading to the increase in financial risk There are several

studies in line with the results that financial leverage affects negatively the profitability, such as Han et al (2021) and Charles et al (2018), whereas Alpi (2018) concluded that there was no connection between financial leverage and the profitability

2.3.3 Liquidity

Liquidity is a term related to a firm’s capability to pay off its short-term liabilities such as accounts payable that comes due in less than a year (Kasmir, 2008) The more liquid assets your company has, the more flexible and agile your business is, which would help the business overcome some unexpected situations Liquidity is measured by dividing current assets by short-term liabilities

A high volume of liquid assets is also helpful if you find a firm needs to apply for business loans since creditors would base on this volume to judge a company’s solvency Many studies such as Han et al (2021) and Nurlaela et al (2019) support the argument that a high liquidity results in a high profitability of the firm On the contrary, Charles et al (2018) and Wilson (2004) found that liquidity influenced conversely on the profitability due to its loss of rate of return and purchasing power for a long period

2.3.4 Firm growth

A company growth refers to a change of a specific variable in a given period of time In this situation, the growth rate will be measured by dividing the deduction of revenue between two consecutive years by the revenue of the year before the year n, then multiplying it with 100% to get the percentage

Investors and businesses often apply this metric to estimate the near future growth so as to make an appropriate plan for boosting the growth rate Many studies such as Charles et al (2018) and Alghusin (2015) support the argument that a high growth rate of the company results in a high profitability of the firm On the contrary, Biger et al (2008) as well as Trang and Phuong (2018) found that firm

growth influenced conversely on the profitability The reason for this is that with a high growth rate, companies are likely to spend more money on resources and operating activities, aside from that, they have to face the fierce competitiveness with other companies in the same sector and struggle to find new customers on the new market, all of these are elements contributing to the erosion of an enterprise’s profitability

2.3.5 Debt ratio

Debt plays a vital role in an enterprise, since debt can be used to finance its operating activities and investing activities A firm can charge its bills or invoices and purchase assets by debt without issuing shares and liquefying shareholders’ earnings In the research of Nassar (2016), debt ratio is a measure the amount of leverage used by a company in terms of total debt to total assets A debt ratio is measured by dividing the total debt by total assets

According to Margaritis and Psillaki (2010), there was a positive effect between the debt ratio and the profitability of a company, while Mohammad and Jaafer (2012) opposed the argument that the debt ratio affected in a positive way on the profitability Since the more loans the firm borrows, the more interest payments it needs to paid, thus lowering the credit ratings, which can further increase interest expenses and reduce profitability

2.3.6 Total assets turnover

According to Kasmir (2015), total assets turnover is a ratio used to measure the turnover of all assets owned by the company and measure how much sales are obtained from the assets In other words, this ratio also offers information about how big the contribution of each total asset in generating sales Total assets turnover is measured by dividing current sales by total assets

Some studies proved that total assets turnover significantly influenced the profitability (Nurlaela et al, 2019; Aang, 2019; Mohammad and Jaafer, 2012)

Otherwise, Hasna (2019) disagreed with those studies above and claimed that no connection was found between the total assets turnover and the profitability

2.4 LITERATURE REVIEW

Because the profitability is always one of the top priorities that every business and investor pays attention to when evaluating the business’s performance, there are a vast number of researches analyzing this topic, not only in foreign nations but in Vietnam as well

2.4.1 Domestic literature

Trang and Phuong (2018) studied the determinants affecting the firms’ earnings quality by taking data from 474 companies listed on Ho Chi Minh and Ha Noi Stock Exchange over the 6-year period from 2010 to 2015, leading to 2507 observations The study used Dechow and Dichev’s accruals quality model (2002) to measure the profit quality of firms As for the panel data, the authors used pooled OLS, REM and FEM to calculate The results indicated that maturity, financial leverage and capital intensity had positive effects on the profit quality while growth affected contrarily Meanwhile, firm performance and firm size were not the influencing factors in this case

Huy et al (2020) pointed a study on the determinants influencing the profitability of 35 food-processing firms on the Vietnam Stock Exchange from 2012 to 2018 with 245 observations By applying regression models consisting of the Pooled Ordinary Least Squares Model (pooled OLS), Random Effects Model (REM) and Fixed Effects Models (FEM), the study found that fixed assets to total assets and firm size influenced though not significantly, debt ratio showed a negative impact on the profitability, while total-debt-to-total-equity and long-term-debt had positive influence on profitability The rest variables firm age, GDP growth and inflation rate had no impact on the profitability

Han et al (2021) performed a study on 26 listed companies of steel industry on

Vietnam’s stock market between 2016 and 2020 so as to find out factors affecting the profitability of this industry Using the GLS model as the way to examine data, the authors proved that firm size, growth rate and liquidity had positive impacts on the profitability On the contrary, corporations having high financial leverage tended to have low profitability The article in the end proposed some suggestions to investors and firm administrators based on the results they analyzed

2.4.2 Foreign literature

Charles et al (2018) carried out a study to check the level impact of enterprise characteristics on the consumer goods enterprises in Nigeria Only 18 out of 22 selected companies met the conditions to be chosen for the analysis The secondary data was acquired from audited financial statements during the period of six years, from 2011 to 2016 Hausman specification test was used to confirm whether the random effects model suitable for the study or not and panel data techniques (FEM and REM) were utilized to check the influence of these characteristics on profitability The results pointed out that firm size, sales growth, and financial leverage were substantial factors of profitability, in contrast to firm age and liquidity Alghusin (2015) investigated the relationship between the profitability and financial leverage, firm growth and firm size based on the sample of 25 Industrial companies listed on Amman Stock Exchange in Jordan from 1995 to 2005 With the aid of regression model techniques, the results showed the similar effects as those in the study of Charles et al (2018) Hence, the author suggested that company administrators should improve the earnings quality of their companies by reducing the debt ratio and increasing financial assets compared with total assets

Nurlaela et al (2019) did an investigation into the impact of liquidity, assets turnover and capital structure on 28 consumption industry sector corporations listed on the Indonesia Stock Exchange in the period from 2016 to 2018, reflecting 84 observations The measure represented the profitability was ROA After conducting the multiple linear regression analysis by using SPSS, the authors proved that all

three factors including capital structure, liquidity and total assets turnover had significantly positive impact on financial performance The studies of Weston and Thomas (1992) as well as Aang (2019) also supported the opinion that the higher total assets turnover was, the better companies could manage assets to get higher profits Nevertheless, Sunjoko and Arilyn (2016) indicated no effect toward total assets turnover in their researches into the listed pharmaceutical companies on the Indonesian Stock Exchange

Beside those researches mentioned above, there are other studies conducted investigations to find and examine various determinants affecting the profitability For example, Matthijs (2018) carried out the test by using OLS regression analysis to determine the factors influencing the profitability of 250 selected manufacturing companies on the New York Stock Exchange between 2012 and 2017 Results showed that Research and Development intensity, firm growth, employee productivity, financial leverage, current ratio had positive effects on profitability, while net assets turnover had the opposite effect on profitability On the other hand, there was no statistically significant link between the profitability and firm age along with firm size Hasna (2019) examined debt ratio, debt to equity ratio and total assets turnover and concluded that none of these variables affecting on the profitability of pharmaceutical sub-sector corporations listed on the Indonesian Stock Exchange In China, there was a study done by Alarussi and Gao (2023) whose purpose was to identify the determinants that affected profitability in 100 Chinese listed companies over the period of three years from 2017 to 2019 The special thing in this study is that they used intangible assets, an independent variable hardly seen in any related researches The results concluded that firm size, working capital and intangible assets influenced positively on profitability, whereas the relationship between liquidity and profitability was strongly negative, which meant the companies suffered low profit due to inefficient use of liquid property

The following table will summarize the factors and the outcomes of those studies:

Table 2.1 - Table of previous researches Effects

Factors

Leverage

Kartikasari and Marisa (2016) Rajan and Zingales (1995) Nurlaela et al (2019) Charles et al (2018)

Alghusin (2015) Firm size

Charles et al (2018) Tarihoran and Endri (2021) Linh and Nga (2022) Alghusin (2015) Kartikasari and Marisa (2016) Matthijs (2018)

Firm growth

Charles et al (2018) Trang and Phuong (2018) Lee et al (2006) Alghusin (2015) Biger et al (2008) Liu et al (2017) Han et al (2021)

Liquidity

Lan and Cong (2019) Charles et al (2018) Linh and Nga (2022)

Nurlaela et al (2019) Alarussi and Gao (2023) Debt ratio

Wippern (1966) Anandasayanan (2013) Margaritis and Psillaki (2010) Mohammad and Jaafer (2012) Total assets turnover

Aang (2019)

Source: combined by the author

In conclusion, studies of factors affecting the profitability of companies in various sectors collected secondary data from many countries with different economic periods For this reason, the results give different opinions on the factors impacting the capability of firms to gain profits, together with the direction of these factors However, in spite of a wealth of research that has been stated on the table above, there still remains a research gap in terms of understanding regarding the relationship between the determinants affecting the profitability and the profitability of companies in chemical industry listed on the Vietnam Stock Exchange Therefore, the author decides to work out this gap in this study with the aim of fulfilling the research scopes of this topic

SUMMARY OF CHAPTER 2

Chapter 2 presented the overview of theoretical basis of the profitability, the theories related to the topic (such as Economics of Scale theory, Trade-off theory, and Pecking Order theory) and its three common metrics (ROA, ROE, and ROI) In addition, several theories from Vietnam and overseas related to the topic about the determinants affecting the profitability of firms were interpreted thoroughly and summarized in the table The author also addressed the foundational issues surrounding these six chosen factors, such as their definitions, formulas, along with their impact directions on the profitability in different studies, whether they were negative, positive or having no connection with the ability of gaining profits These played a core role as a foundation to find a research gap and help the author develop the research model in the following chapter

CHAPTER 3: DATA AND METHODOLOGY

According to the information and analysis from previous researches in chapter 2, this part will indicate the system of calculating the data and suggest a research model with variables, explain which shown in the model and describe the data collecting method

3.1 RESEARCH PROCESS

After finding out the topic for the research and giving an outline of previous studies, accompanied by the proposed research model, the author carries out the analysis of regression model via Stata 15.0 software according to the data collected from 23 companies in the chemical field listed on the Vietnam Stock Exchange during the period from 2018-2022 The following is a detailed process of how to do research on selected companies:

Step 1: Give an overview of the theoretical basis and summarize previous studies in various countries related to the research topic After that, identify the gaps among the chosen references and expect the directions of factors towards the profitability for the topic

Step 2: Based on the theoretical basis and experimental evidence that have been stated in Step 1, the author proposes a research model, along with explaining the variables and writing hypotheses for the research

Step 3: Determine the research sample and research methods which are suitable for the research purposes and subjects, then collect secondary data from audited financial statements on reliable websites and calculate the data according to the proposed research model

Step 4: Analyze the descriptive statistics in the model and the correlation coefficient of the regression model between a dependent variable and one or other independent variables and between an independent variable and other independent ones

Step 5: Estimate the regression coefficient by using three widespread models such as Pooled OLS, Fixed Effects Model (FEM) and Random Effects Model (REM) on Stata software

Step 6: Select the appropriate model according to the results of the regression analysis by using the Hausman test to choose the appropriate model between the FEM and REM models

Step 7: Examine for defects in the selected model by testing for autocorrelation with Wooldridge model, multicollinearity with VIF model and heteroskedasticity with Breusch-Pagan model

Step 8: If the regression model violates defects, the author will proceed to solve them by using the FGLS method

Step 9: The author will acquire from the regression results and compare the research results with the proposed hypotheses Lastly, analyze the research results and come to appropriate conclusions based on theoretical basis and practical results, as well as provide some managerial implications to boost the profitability of chemical corporations listed on VNX

Figure 3.2 illustrates the research process with nine steps in order, according to the detailed description above:

Figure 3.1 - Research process

Source: combined by the author

3.2 METHODOLOGY

The author applied quantitative methods in the research by a statistical software to compute the data The following parts are four major stages to calculate and analyze data via Stata 15.0 software: descriptive statistics, correlation coefficient, regression analysis and defect testing

Identify the topic of the research

Propose research model

Choose research methods and collect data

Analyze descriptive statistics and correlation

Estimate the regression coefficient

Select a suitable regression model

Examine for defects

Remove the defects

Analyze the results and make recommendations

3.2.1 Descriptive Statistics Analysis

The purpose of doing descriptive statistics analysis is to provide basic features related to the dataset This step consists of calculating the average of the data (Mean), creating a table that show the frequency of each value in the dataset (Frequency Distribution), finding the gap between the maximum or minimum values (Range), measuring how spread out the values are from the Mean, and determining the average distance of data points from the Mean

3.2.2 Correlation Analysis

Correlation analysis is used to evaluate how strongly a dependent variable affects to other independent variables, and how an independent variable affects each other By using a Pearson's correlation, the results will show whether correlation coefficients are statistically significant at a particular level of 1%, 5%, and 10% or not A result is closer to +1 that there is a positive correlation, while a result is closer to -1 means that there is a negative relationship between two variables A value near 0 indicates that there is almost no correlation between the two variables

3.2.3 Regression Analysis

This is the most important step in this analysis process Regression analysis is a set of statistical methods which is used to estimate the degree of influence between a dependent variable and one or more independent variables Understanding the relationships can help business administrators or investors know how to make improvements effectively, and boosting the profit returns of firms The set consists of Pooled OLS model, FEM and REM On the next step, the author uses Hausman test to select a suitable model between FEM and REM.

3.2.4 Defects Testing

The purpose of doing a defects test is to identify any defects that can cause the decrease in reliable results and check proposed hypotheses after conducting some diagnostics in Stata software Three kinds of defects that typically happen in most

of regression models are heteroskedasticity, multicollinearity and autocorrelation, along with three testing models, including Breusch - Pagan test, VIF test and Wooldridge test respectively In case there does have a defect, for example, a heteroskedasticity, in a regression model, FGLS method would be used to overcome defects, hence improve validity and reliability of regression estimations

3.3 RESEARCH MODEL 3.3.1 Empirical model

The references of the author’s model in this research are mainly based on Lan and Cong (2019) and Nurlaela et al (2019) Regarding the dependent variable, after summarizing the literature reviews, the author selects ROA as the representation the profitability of enterprises On the subject of independent variables, the author intends to use firm size (SIZE), financial leverage (LVR), liquidity (LIQ), firm growth (GR), debt ratio (DR) and total assets turnover (TAT) After that, the author will apply the quantitative method into the regression model by collecting the necessary data and testing them on STATA through many steps to judge the level of impact of these independent variables on the profitability (measured by ROA) of 23 different companies related to chemical industry between 2018 and 2022

To sum up, based on the theoretical foundation presented by the author in Chapter 2 together with the suggestion of multivariable regression model above, the empirical model is indicated as follows:

ROAt = α0 + α1SIZEit + α2LVRit + α3LIQit + α4GRit + α5DRit + α6TATit + Uit

Where:

α0: intercept term

α1 - α6: Regression coefficients of independent variables

ROA: A dependent variable, the abbreviation of the return of assets and is

calculated by Net Income / Average Total Assets

SIZE: An independent variable, reflecting the corporation’s scale and is

calculated by Ln (Total Assets)

LVR: An independent variable, reflecting the corporation’s financial leverage

and is calculated by Percentage change in EPS / Percentage change in EBIT

LIQ: An independent variable, reflecting the corporation’s liquidity and is

calculated by Current Assets / Short-term Liabilities

GR: An independent variable, reflecting the corporation’s growth and is

calculated by (Revenue of year n – Revenue of year (n-1)) / Revenue of year (n-1)

DR: An independent variable, reflecting the corporation’s debt ratio and is

calculated by Total Debts / Total Assets

TAT: An independent variable, reflecting the corporation’s total assets

turnover and is calculated by Sales / Total Assets

U: The unexplained variation 3.3.2 Variables’ explanation

Dependent variables

Among three indicators that have been mentioned in Chapter 2, the chosen one to be a dependent variable is ROAt, which is the abbreviation of Return on Assets and is calculated by dividing Net Income by Total Assets, then multiplying with 100% In fact, many authors in previous studies have applied ROA, for example, Kartikasari and Marisa (2016), Muhammad et al (2016), Trang and Phuong (2018), Huy et al (2020), Tiffany and Sufiyati (2023) as a measure of the firm’s profitability The following formula is the one used to measure ROA:

ROA = Net Income

Independent variables

Due to the limitations of the geographic scope and the time scope, the author will analyze independent variables having impacts on the profitability of chemical

joint stock enterprises listed on the Vietnam Stock Exchange from 2018 to 2022 Variables being used consist of:

▪ SIZE:

Independent variable SIZE represents for firm size The firm size is a quantifiable measure in terms of scale that a business operates (Brigham and Houston, 2006) The scale of a firm is a representative of a firm’s position in the market and its creditability towards other businesses, banks, and the public Despite having many factors to measure such as total assets, total sales, and market value of equity, the most common formula of firm size is the natural logarithm of total assets Since total assets of each company differ from each other, using total assets to calculate can give clearer value than the other two In regard to the theory above, firm size is measured by the following formula:

▪ LVR:

Independent variable LVR represents for financial leverage Initially, leverage is a word borrowed from physics and commonly used as an economic term at the present time In general, financial leverage is a percentage of changes in operating profit or EBIT on the levels of earning per share (EPS) Financial leverage is useful for financial managers to choose the optimal capital structure of the corporation It is usually considered as an investment strategy that allows corporations to collect capital at short notice and expect for higher return than the debt the corporations have to pay back Based on the theory above, the factor is measured by dividing the change in percentage of EPS by the change in percentage of EBIT, like the following formula:

Financial Leverage = Percentage change in EPS

Where:

Percentage in EPS = Increase in EPS

Liquidity = Current Assets

▪ GR:

Independent variable GR represents for firm growth Firm growth is generally described as a change in an investment, or a firm’s revenue In this study, the author assumes growth rate is the annual change of a company’s earnings as a percentage Business administrators can examine this ratio to determine current performance of the corporation and predict the performance in the near future In regard to the theory above, growth rate is measured by dividing the gap between the revenue in two consecutive years by the revenue of the year before year n, then multiplying with 100%, like the following formula:

Firm Growth = Revenue of year n - Revenue of year (n-1)

Revenue of year (n-1) * 100% (3.7) A growth rate can be positive, negative or equal 0 A firm growth is positive indicating that the variable is rising over time and vice versa in case of a negative growth rate If the growth rate equals 0, it means the variable is stable over time

▪ DR:

Independent variable DR represents for debt ratio According to Kasmir (2014), debt ratio is defined as a difference between the total debt and total assets, reflecting how much the firm’s debt affects the assets management If the debt ratio is over 100%, it means that the amount of debt already exceeds the assets and vice versa The investors can base on this percentage to judge a company’s risk level In regard to the theory above, debt ratio is measured by the following formula:

Debt Ratio = Total Debt

A ratio greater than 1 shows that the company has more liabilities than assets, resulting in the risk of default on its loans if interest rates suddenly go up A ratio less than 1 shows that the company has more assets than liabilities, thus has lower chance of insolvency

▪ TAT:

Independent variable TAT represents for total assets turnover According to

Investopedia, total assets turnover expresses the interaction between a company’s

sales and its assets It can be used as an indicator to determine the efficiency level of a firm to generate profits from the assets as well Investors can depend on total assets turnover ratio to compare corporations in the same sector or industry For instance, investors can compare Long Chau Company’s total assets turnover with Pharmacity company’s total assets turnover since they are both in pharmaceutical sector In regard to the theory above, total assets turnover is measured by the following formula:

Total Assets Turnover = Sales

3.3.3 Hypothesis

❖ Firm size (SIZE)