báo cáo tài chính analysis of financial statements of thacogroup in vietnam

Understanding the performance of such a powerful automotive corporation is vital for the overall industry development therefore this topic is considered highly significant and important

VIETNAM NATIONAL UNIVERSITY, HANOI INTERNATIONAL SCHOOL

He ee eae ee ae ale ae ae He he He he

MAI DUC THAO

ANALYSIS OF FINANCIAL STATEMENTS OF

VIETNAM NATIONAL UNIVERSITY, HANOI INTERNATIONAL SCHOOL

He ee eae ee ae ale ae ae He he He he

MAI DUC THAO

Analysis of financial statements of Thacogroup in vietnam

PHAN TiCH BAO CAO TAI CHÍNH CUA TAP DOAN THACO, VIET NAM

Major: Master in Financial Management Code: 8340202.01QTD

MASTER THESIS Supervisor: Dr Nguyen, Thi Kim Oanh

HA NOI - 2020

ABSTRACT Thesis Title: Analysis of financial statements of Thacogroup in Vietnam

Pages: 66

University: Vietnam National University, Hanoi

Graduate School: International School

Date: Octorber, 2019 Degree: Master

Graduate Student: Mai, Duc Thao Supervisor: Dr Nguyen, Thi Kim Oanh Keywords: financial analysis, ratio analysis, automobile industry

Thacogroup is the largest automotive corporation in Vietnam and has shown immense success of the last few years Understanding the performance of such a powerful automotive corporation is vital for the overall industry development therefore this topic

is considered highly significant and important within industry financial management This research aims at analyzing Thacogroup financial performance over the the last 5

years from 2014 to 2018, in order to assess the corporation’s profitability, liquidity,

solvency, asset management, short term and long term financial position, as well as to make recommendations to any red flags identified during the analysis The quantitative financial analysis flagged up a number of main areas that required further investigation: cash management, return on equity, operating efficiency, inventory management, and accounts receivable These issues were then further investigated using semi — structured interviews The red flags raised during the financial analysis were adequately explained by the interviewed individuals, who were all senior management

at Thaco The interviewees recommended three way for improving business performance of Thaco: (1) more comprehensive information systems for a more decentralized management, (2) less bureaucratic procedures regarding completion of paperwork and processing of requests as well as payments, and (3) the need to reduce and eliminate resistance to change and fear of the unknown

ACKNOWLEDGEMENT

By extending my most sincere appreciation to International School, Vietnam National University, Thacogroup Vietnam, and my supervisor Dr, Nguyen, Thi Kim Oanh, I would like to express my thanks and gratitude for their input in helping me complete this master thesis

Thank you!

Mai, Duc Thao

TABLE OF CONTENTS

1.2.2 Research question 14 1.3 Scope of research and methodology 14 1.3.1 Scope of research 14 1.3.2 Research methodology 14 1.4 Limitations during research 15 1.5 Structure of the thesis 15

2.1 Definition and objectives of financial statement ataÏyS1s - «5s se se se ceeees 16

2.2 Sources of information 18 2.2.1 Balance sheet 18

2.2.3 Statement of cash flows 20 2.2.4 Related documents 21 2.3 Financial statement analysis framework 22

3.4 Data collection and analysis

3.5 Methodological limitations 33

4.1 Data Sources and Interviewees’ Profiles 34

4.2 Content Analysis 34 4.2.1 Financial Analysis 34 4.2.2 Common — Size Analysis 39 4.2.3 Ratio Analysis 40

4.3 Semi — Structured Interviews 48 4.3.1 Interview Questions 48 4.3.2 Interviewee Profiles 49 4.3.3 Interview Response Analysis 50 4.3.3a Cash Management issue 51 4.3.3b Return on Equity issue 52 4.3.3c Operating Efficiency issue 52 4.3.3d Inventory Management issue 53 4.3.3e Accounts Receivable issue 54 4.3.3f Overall financial performance 54

LIST OF TABLES

Table 1: Consolidated Statement of Financial PoSILIOII ác sssersrrexsres Table 2: Consolidated Statement of Profit and LLOSS ác sisererrrsrrex Table 3: Consolidated Statement of Cash FIOWS HH,

Table 5: Extracts from Thacogroup Íinancial T€DOFẨS ác cv sisererrrerree

Table 7: Financial risk

Table 8: Profitability

Table 9: DuPont Analysis

Table 10: Interviewees’ Profiles

Table 11: Extract from financial statements (profit and loss accoun†)

LIST OF FIGURES

Figure 1: Thacogroup's Liquidity Financial Ratios graph

Figure 2: Thacogroup Financial Risk Financial Ratios

Figure 3: Thacogroup's Profitability Financial Ratios graph

CHAPTER 1: INTRODUCTION

1.1 General research background on automobile industry and

Thacogroup

1.1.1 General research background

Financial analysis provides managers with the reality aspect of their business

by way of evaluating fluctuations in financial indicators; advantages and disadvantages of current financial position, business performance, debt situation, among others Based on preliminary evaluations, comprehensive and effective measures as well as strategies are given to improve profitability, liquidity, or other business goals, thus to create value for shareholders The analysis of financial statements not only provides financial information for managers and shareholders

but also brings usefulness to other stakeholders such as investors, customers,

suppliers, lenders, workers, regulatory agencies Financial analysis is particularly crucial for organizational decision making and forecasting

The automobile industry in Vietnam ranks fourth in the ASEAN region, only

after Indonesia, Thailand, and Malaysia (Vietnamnews, 2019) Experts claim that

Vietnam is a highly potential market for automobile growth whereby production in

2018 constituted 2 per cent of that produced globally and is expected to grow 10 per cent in 2019 (Nguyen Thanh Dam, 2019) On a monthly basis, in 2018, the average car sales in Vietnam have risen 17% (Hockey, 2018) Within the Vietnamese automobile industry, Thacogroup is a key player constituting almost half of market share, therefore it is noteworthy that its financial performance significantly affects the overall performance of the industry More detailed introduction of the company follows later in this thesis

1.1.2 About Thacogroup

Thacogroup was established in April 1997 with the founder being Mr Tran

Ba Duong, who now (2019) holds the position of Chairman of Board of Management It is the largest automotive corporation in Vietnam and has shown immense success of the last few years This enterprise manages the manufacturing

and assembly of passenger cars, trucks, and buses in Vietnam at market share of 40% and localization rate of 16-50% Thaco vehicles are considered quality and affordable cars for the Vietnamese, whilst having scored top of Vietnam Automobile Manufacturers’ Association sales charts in 2014-2015 It continues to place in the top two rank as the most profitable private companies in 2017 Beside the continuous goal to maintain its mountaintop position domestically, Thaco aims

to expand its operations to the ASEAN region, and even further internationally with the vision to utilize modern technology in their products, create a global platform, and spread its wings to become a multi-industry conglomerate on a regional scale Thaco’s focus of operations currently lays in two main areas being: manufacturing and maintenance of their vehicles The enterprise’s owned passenger car brands currently include South Korean Kia, Japanese Mazda, and French Peugeot As of

2019, Thaco employs approximately 22 thousand employees across the country Thaco’s corporate culture takes employees as the core of the sustainable development Employees are encouraged to have strong ambitions, positive work attitude, creativity, and continuous personal development The highlight feature of Thaco’s corporate culture is the 8T principles (T being the first letter of the 8 principal words in Vietnamese): “Dedication - Honesty - Intelligence - Confidence - Respect - Prestige - Commitment - Convenience” Due to the nature of manufacturing and maintenance industry, Thaco’s employees are trained to perform work with utmost discipline to ensure high quality and corporate vision, which constitutes one of the company’s biggest intangible assets Apart from adequate and systematic training, Thaco’s corporate culture is also manifested by way of compensation and benefits In terms of corporate social responsibility, Thaco supports social community through various channels such as national defense,

social welfare, traffic safety, education, culture, musical, sports, charity Through

their active involvement and significant contributions to the social community, in

2015, Thaco has been acknowledged and honored by the following awards: Certificates of Merit from the Prime Minister, Excellent Emulation Flags from the

Government; Certificates of Merit from the Ministry of Transport; Certificates of Merit from Quang Nam provincial People's Committee; Certificates of Merit from Dong Nai provincial People's Committee; Excellent Emulation Flags from Dong Nai provincial People's Committee in 5 consecutive years; Certificates of Merit from Dong Nai Youth Union; Top 10 Gold Star Award; Top 10 Vietnam Brand Award; Vietnam Strong Brand award; "Asia Pacific's Best sales growth distributor" from Hyundai Motors, among others

The background information about Thacogroup was obtained from the company’s website (Thaco, 2019) Truong Hai Automobile Co., Ltd was established on 29 April 1997, headquartered at 19 Street No 2A, Bien Hoa II Industrial Zone, Dong Nai Province The founder is Mr Tran Ba Duong, who is now THACO’s Chairman

Vision: To be a conglomerate and a leading Vietnam enterprise in ASEAN region

Mission:

- THACO is a Vietnam brand bringing pride to the nation

- Providing values to the customers, the society, and Vietnamese economy

- Creating a distinctive and optimal working environment for the employees

to maximize their competence, best meeting the requirements of integration and contributing to the human resource development of the country

Thaco LOGO meaning: The logo is designed modern and harmonious with stylized font, showing Truong Hai uniqueness, strong and industrialized yet elegant Blue was chosen as the dominant color This is the color of the name Truong Hai Blue is also one of three primary colors symbolizing the environmental friendliness and sustainability Additionally, “Truong Hai Auto" in red is selected as the foundation, representing the passion to lead Vietnam's automobile industry and the direction of enhancing Vietnam’s automobile industry position in the region The strongest contrasting colors, red and blue, used in the logo bring a balance of

structure and represent its strong idea In addition to representing THACO brand - Truong Hai Auto, the logo also represents the business philosophy of the corporation: Caring for our products, services, every employee, and the community Furthermore, Truong Hai strives to improve the STATUS of the company and its employees in the society to become a strong corporation representing the automotive industry of the country In order to actualize the company philosophy toward the development of a sustainable corporate culture, Truong Hai proposes

eight criteria, including DEDICATTION, HONESTY, INTELLIGENCE,

CONFIDENCE, RESPECT, PRESTIGE, ENTHUSIASM, and CONVENIENCE

THACO

TRUONG HAI AUTO

In 2007, Truong Hai Automobile Co., Ltd changed to become Truong Hai Auto Corporation (THACO) Currently, the company has three administrative offices located in Ho Chi Minh City, Hanoi, and Chu Lai (Quang Nam) Particularly, Chu Lai - Truong Hai Auto Manufacture and Assembly Complex (Quang Nam) which was established in 2003 on an area of nearly 600 hectares,

consists of 24 subsidiaries and affiliated factories

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LOGISTICS ĐẦU TƯ XÂY DỰNG CƠ KHÍ VÀ ÔTÔ NÔNG NGHIỆP THƯƠNG MẠI

THACO currently operates in auto manufacture, assembly, and distribution; provides auto spare part and maintenance services, including manufacturing, trading, and distributing commercial vehicles (trucks and buses), manufacturing and trading passenger cars from the brands including Kia (South Korea), Mazda (Japan), and Peugeot (France -Europe) As to April 2016, the distribution system consists of

89 showrooms and 53 dealers nationwide and the company now has 14,900 employees

At the present time, THACO is the only enterprise in Vietnam that manufactures and assembles all 3 car lines including passenger cars, trucks, and buses with the localization rate from 16%-50%, providing Vietnamese people with diversified, quality, and affordable cars In 2014 and 2015, THACO has topped the sales chart of Vietnam Automobile Manufacturers' Association (VAMA)

As the leading auto manufacture, assembly, and distribution company in Vietnam, THACO aims to maintain its position and expand its market to the ASEAN region, enhance international cooperation to select appropriate technology, increase the local content, and join the global value chain creating platform to become a multi-industry conglomerate in the region

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Besides manufacture and business activities, THACO also builds a healthy corporate culture environment, forming THACO's feature culture based on the business philosophy "Creating the contribution values, improving service values through products and services" and the principle of "8Ts" "Dedication - Honesty - Intelligence - Confidence - Respect - Prestige - Commitment - Convenience" This

is the core value of THACO culture, the intangible asset to create motivations for development THACO's culture is also manifested by the fact that compensations and benefits (salary, bonuses, insurances, allowances, etc.) are always adequately implemented

With the viewpoint "THACO embraces its social responsibilities", annually, THACO always supports many social community activities to share its responsibilities in various fields including: National Defense, Social Welfare,

Traffic Safety, Education, Culture - Music, Medical, Sports, For the

underpriviledged, scholarships, etc From achivements in business and contributions

to the social community, in 2015, THACO has been acknowledged and honored by the following awards: Certificates of Merit from the Prime Minister, Excellent Emulation Flags from the Government; Certificates of Merit from the Ministry of Transport; Certificates of Merit from Quang Nam provincial People's Committee; Certificates of Merit from Dong Nai provincial People's Committee; Excellent Emulation Flags from Dong Nai provincial People's Committee in 5 consecutive years; Certificates of Merit from Dong Nai Youth Union; Top 10 Gold Star Award; Top 10 Vietnam Brand Award; Vietnam Strong Brand award; “Asia Pacific's Best sales growth distributor" from Hyundai Motors, etc

Since its establishment, THACO has received numerous awards and merits from the Prime Minister, the Ministries, the Ministerial-level Agencies, and the

Provincial Authorities of Dong Nai, Quang Nam, Dong Thap, Lam Dong, Hanoi, and Ho Chi Minh City on the following aspects:

- “Patriotic Competition” movement, welfare for employees;

- Completion of tax obligations and social insurance;

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- Contribution to the socio-economic development of many provinces, and creation of Chu Lai Open Economic Zone;

- Outstanding achievements in community activities, sports and athletics engagement, cultural organization, and “Good People, Good Work” initiatives;

- Outstanding contributions to the nation’s development and security Thacogroup is considered a corporate giant in Vietnam and has secured its rank as the second most profitable private company in 2017 (Thaco, 2017) To achieve such a financial success corresponds with adequate planning, control, and forecasting Moreover, with IFRS adoption soon being implemented for Vietnamese listed companies by 2025 (Vietnam News, 2016), it is of even higher importance that Thaco’s financials are thoroughly analyzed to ensure in-depth understanding of the company and best prepare for the upcoming international accounting standards adoption This thesis looks closely at the most recent 5-year period from 2014-2018 This particular period has been selected for research due to its recent nature whilst

2019 reports are not yet published

1.2 Research aim and research question

1.2.1 Research aim

Having recognized the importance of financial analysis as well as the position that Thaco holds in the Vietnamese market, this thesis aims to analyze Thacogroup financial performance over the recent years, specifically over the last 5 years from 2014 to 2018, in order to assess the corporation’s profitability, liquidity, solvency, asset management, short term and long term financial position, as well as

to make recommendations to any red flags identified during the analysis By way of conducting the fore-mentioned financial analysis, the research aim is to investigate, synthesize, and evaluate Thaco’s financial position over a 5-year period from 2014-

2018 Basing on the company’s financial data and using suitable analysis tools to evaluate the company’s financial position, profitability, liquidity, and solvency, it is possible to provide recommendations that would help improve any drawbacks in the financial performance of the company in the past, present, and future

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1.2.2 Research question

The focal aim of this thesis is to answer the following two questions:

- What was Thacogroup’s financial situation in the period 2014-2018?

- What could the company improve in near future in terms of its financial performance?

1.3 Scope of research and methodology

1.3.1 Scope of research

Scope refers to how far the research area has explored and parameters in with the study will be operating in The scope of this research covers the financial performance of one case study company, being Thacogroup, during a 5-year period from 2014-2018 This period has been selected as it is the most recent available period before the IFRS adoption, a major financial reporting point, and at the time

of this thesis write up (2019), 2018 was the latest year with full published annual reports This thesis will analyze financial performance of Thacogroup during this period in Vietnam

1.3.2 Research methodology

Research methodology is the specific procedures or techniques used to identify, select, process, and analyze information about a topic In a research paper, the methodology section allows the reader to critically evaluate a study’s overall validity and reliability (Wilkinson, 2002) Mixed-method has been deemed most suitable for this research Quantitative secondary data will be collected through archival documents of a case study company being Thacogroup This financial data will then be analyzed using various financial analysis tools such as financial ratios, common-size analysis, vertical and horizontal analysis, among others Moreover, qualitative primary data will be collected through interviews with staff at Thacogroup to investigate their perceptions on the company’s performance and company’s future prospects at the moment and once IFRS is adopted These mixed- methods will together shed light on Thaco’s financial position and prospect in order

to draw recommendations

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1.4 Limitations during research

This research’s major shortcomings lay in data limitations, in terms of time lengths and sample size Despite having chosen the most accessible and appropriate methodology for the research topic, the author acknowledges that for more accurate results, the studied time period could be extended further back into the past in order

to recognize any trends or impact of historic events, which could be useful for future decision making Moreover, the sample size of interviewees could be extended beyond the company’s staff to other stakeholders, which could give a more representative view of the results

1.5 Structure of the thesis

The remainder of this thesis is structured into 4 main parts: (Chapter 2) Literature Review, (Chapter 3) Methodology, (Chapter 4) Results and Findings, and (Chapter 5) Conclusion and Recommendations

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CHAPTER 2: LITERATURE REVIEW

This chapter proceeds to establish a background context for the study by gaining an insight into existing literature and providing conceptual and theoretical ground for this research The chapter is divided into 3 main parts, whereby the first part provides definition and objective of financial statement analysis, the second part shows the sources of data and information and the third part looks at the financial statement analysis framework

2.1 Definition and objectives of financial statement analysis 2.1.1 Definition

Thanh, T B., Nguyen, T D K (2011) defined that financial statement

analysis is a set of concepts, methods and tools that allow the analysts to collect and process accounting information and other management information The result of this process is to assess the financial situation and potential risks, evaluate performance, ability and quality of enterprises, and help users to make appropriate financial decisions and management decisions

The primary concern of financial analysts is the assessment of bankruptcy risk affecting businesses whose expression is solvency, appraise of capital balance, operational capacity as well as profitability of businesses On that basis, financial analysts continue to study and make predictions about the overall performance and profitability of the business in the future In other words, financial analysis is the basis for financial prediction - one of the business prediction directions Financial analysis can be applied in various different ways: operational purposes (internal decisions), research purposes, information collecting purposes (for external users) Phuc (2013) defined financial statement analysis as the process of reviewing, examining, and comparing financial data between the current period and past periods of enterprises Analysis of financial statements will provide information that can examine the potential, performance and future financial risks of the business as well Analyzing financial statements not only provide useful information for corporate governance but also for non-business Besides, financial statement

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analysis can be defined as a process of using appropriate analytical techniques to process data from financial statements and other related documents, creating a financial indicators system to make assessment and prediction future financial resources Thus, financial analysis is primarily about transferring financial data on financial statements into useful information This process can be done in many different ways depending on the analyst's goal

2.1.2 Objectives

According to James et al (2006), financial statement analysis is viewed as a three-legged stool The three-legged stool represents analysis objectives based on the following:

- Determining the economic characteristics of the industry in which a company participates and the relationship of those economic characteristics to the financial ratios

- Describing the strategies which a company pursues to distinguish itself from rivals as a basis assessing the company's competitive advantages, the sustainability of the company's earnings, and risks

- Evaluating financial statements including accounting concepts and methods, and the quality of the information they provide

In a different light, Ciaran (2006) claimed that the role of financial statement analysis is taking prepared financial reports, combined with other data and information, in examining the past, current, and prospective performance and financial statue This is done for the goal of making investment, credit, and other economic decisions The authors emphasized that there are certain concepts in financial analysis Generally, analysts tend to examine the performance of firms, forecast the potential opportunities and financial position Analysts are also concerned about factors that may create the risks in the company’s future performance Financial analysis will provide systematic and scientific evidence for users Corporate finance activities involve many entities such as managers,

investors, banks, suppliers, state authorities, etc so there are different analysis

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objectives for each object (Thanh, 2011) For instance, lenders often provide in two forms short-term and long-term debt For short-term debts, sponsors often pay attention to current financial statue, the liquidity of floating assets and the asset turnover By contrast, for the long-term one, analysts often aim to predict cash flows and assess the profitability of businesses in long term period However, lenders whether short-term or long-term are interested in capital structure because capital structure includes both potential risks and safety for lenders In addition, the major concern of managers from a financial analysis is to clarify financial structure, business efficiency and risk issues However, there is a different consideration between owners and managers Normally, the owner is concerned about profitability of their investment, how to increase owners’ equity, attain higher return from invested capital Therefore, financial analysis from the perspective of owners

is more synthetic than that from managers In general, the goal of analysis ultimately depends on the economic interest of individuals and organizations related

to the business As the result, applying in practice analysis requires the flexibility of analysts in each stage

2.2 Sources of information

Subramanyam (2009) discussed in great detail the four main sources of

financial information as following: balance sheet, income statement, statement of cash flows, notes to financial statements Each of the subsections below will in turn

discuss these sources in more details

2.2.1 Balance sheet

The balance sheet presents the resource of a firm (assets) and the claims on those resources (liabilities and shareholders’ equity) as of a specific date The balance sheet derives its name from the fact that it is reports the following equation:

Asset = Liabilities + Shareholders’ Equity Assets arte future economic benefits that can be acquired or controlled by a specific entity as a result of past transactions or events (Harrison, 2006) Assets are sources that have the potential to bring a company future economic benefits: the

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ability to generate cash flows in the future (such as accounts receivable, inventories and investment securities) or to reduce future cash outflows (as prepaid) or to afford potential service for operating activities (such as with assets and equipment) Liabilities are the future sacrifices of economic benefits arising from the current obligation of a specific entity to transfer assets or provide services to other entities of transactions or events in the past (Botosan et al, 2005) Hence, liabilities represent a current obligation of a company to make payments by cash, goods or services in predictable quantities at a predictable time Liabilities reflect managers’ expectation of future sacrifices resources to meet existing obligations

The shareholders’ equity in a company is a residual interest or claim That is, the owner has a claim for property not required to satisfy the requirements of creditors (Fernandez, 2002) Therefore, the valuation of assets and liabilities in the balance sheet will determine the value of the total shareholders’ equity

Typically, analysts often evaluate the relationship between items in the balance sheet when assessing the financial situation and credit risk of a company (Palepu and Healy, 2013) For instance, exceeding current assets over current liabilities suggests that a company has sufficient liquid resources to pay short term lenders (Penman and Penman, 2007) A relatively low percentage of long term debt

to shareholders’ equity indicates that a company is likely to have long term assets to repay long term debt at maturity, or at least an ability to borrow new debt financing using use of long term assets as collateral to repay debt coming due (Dewatripont and Tirole, 1994)

2.2.2 Income statement

The income statement provides information about a company's profitability

in a period of time (Palepu and Healy, 2013) Analysts and investors usually use the terms net income, earning, and profit interchangeably when referring to the bottom- line amount in the income statement (Hillman and Keim, 2001) The income statements mainly reflect the results of operating decisions (for example, product mix and pricing, sourcing of production and marketing, and use of plants and

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equipment) It also reports the amount of money involved in investing decisions such as interest and dividends income and financing decisions such as interest expenses Other comprehensive income items, which are reported as a part of comprehensive income in the shareholders’ equity statement, reflect profits and losses from changing in value of some assets and liabilities which are not recorded

in net income until you those profits and losses are realized

2.2.3 Statement of cash flows

Statement of cash flows reports for a period of time net cash flows from three main business activities: operating, investing and financing (Palepu and Healy, 2013) The purpose of this statement is simple but important: providing the sources and use of cash for financial statement users The statement of cash flows provides information to complement the income statement, and to demonstrate how cash flows differ from accrual-based income (Carslaw and Mills, 1991) Because the cash flow statement shows how companies are generating and using cash, it is also an advantageous tool to assess how they implement financial strategies (Mills and Yamamura, 1998) Cash flows are the connecting device between operating, investing and financing activities They allow each of these three activities continue smoothly and efficiently The statement of cash flows can also be helpful in assessing a company's past ability to generate free cash flow and predict free cash flow in the future

The statement of cash flows classifies cash flows as relating to three separate types of activities: operating, investing or financing activities

Operating: Selling goods and services is one of the most important ways a company generates cash Assessing cash flow from operations for several years shows which activities have provided the necessary cash to maintain operating capacity (and the extent to which companies must rely on other cash resources) (Broome, 2004)

Investing: The acquisition of long-term assets, especially property, plant and equipment, often represents major ongoing using cash If companies are to grow,

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they must have acquired additional long-lived productive assets (Palepu and Healy, 2013) Companies get a portion of the cash needed to acquire those types of asset from the sale of assets Such cash flows are rarely enough to cover cost of new purchasing, though

Financing: A company obtains cash from short term and long-term loans and from issuing preferred and common stock It uses cash for these loans, paying dividends, and reacquiring shares of outstanding preferred and common stock (Subramanyam, 2009)

2.2.4 Related documents

Notes to financial statements

Financial statements report the accounts and amounts in balance sheet, income statement, and cash flow statement, but they do not explain how to determine those accounts and the amount (Subramanyam, 2009) The notes would provide important details about the accounting methods and principles that the

company has used to measure assets, liabilities, revenues, costs, profits and losses

They generally provide a summary of the key accounting principles used by the company Furthermore, the notes also indicate important details about important

financial statement estimates, such as the fair values of investment securities,

income taxes and intangible assets (Fraser et al, 2010)

Management discussion and analysis

Many companies accompany the financial statements and notes with extensive narrative and quantitative discussion and analysis from managers (Smith and Taffler, 2000) The management discussion and analysis of the financial statement provides insight management strategies and assessments of the company's performance In some cases, this paper also provides a glimpse of managers' expectations about the future of the company

Managers’ and independent auditor’s attestations

Managers’ attestation and the independent auditor’s attestation provide a statement of (and take responsibility for) the quality and effectiveness of internal

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control system and the fairness of the financial statements and notes in reporting a company’s financial situation, performance and cash flows The independent audit adds credibility and reliability to financial statements and notes prepared by management (Wright and Davidson, 2000)

2.3 Financial statement analysis framework

Charles (2012) has designed a framework for analyzing financial statements

as per the following table:

Phase Sources of information Output

1 Articulate the purpose

and context of the analysis

The nature of the analyst’s

function, such as

evaluating an equity or debt investment or issuing

a credit rating

Communication with client or supervisor on needs and concerns

Institutional guidelines related to developing specific work product

Statement of the purpose

or objective of analysis

A list of specific questions

to be answered by the analysis

Nature and content of report to be provided Timetable and budgeted resources for completion

2 Collect data Financial statements,

other financial data,

questionnaires, and industry/economic data

Discussions with management, suppliers,

customers, and

competitors

Company site visits

Organised financial statements

Financial data tables Completed questionnaires,

Common-size statements Ratios and graphs Forecasts

published reports Recommendation

regarding the purpose of the analysis, such as whether to make an investment or grant credit

6 Follow up Information gathered by Updated reports and

periodically repeating recommendations above steps as necessary

to determine whether changes to holdings or recommendations are necessary

Step 1: Articulate the purpose and context of analysis

It is essential to clarify the purpose when conducting an analysis Understanding of purpose is especially important in analyzing financial statements because there are many available techniques and significant amounts of data Some analytical tasks are well defined, in which case the purpose of the analysis requires little decision from analysts For instance, a periodic credit rating of an investment - grade debt portfolio or a company's equity analysis report may be guided by institutional rules such that the intention of analysis given Moreover, formats, procedures and sources of information may also be provided For other analytical tasks, determining the purpose of the analysis requires the analyst to make a decision Analysis’s aims orient further decisions on the approaches, tools, data sources, and formats to report analytical results and the relative importance of various aspects of the analysis

Step 2: Collect data

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Analysts get the data needed to answer specific questions An important part

of this step is to gain an understanding of the company's business, financial performance and financial situation (including trends over time and compared with competitors) Additionally, information about the economy and industry is essential

to understand the environment that the firm operates Analysts often adopt a top down approach whereby they get an understanding of macroeconomic such as the prospects of the economy and inflation; and identifying the prospects of the company in the expected macroeconomic environment

Step 3: Process data

After obtaining the financial statements and other information, the analyst processes this data with appropriate analytical tools For example, data processing may involve calculating ratios; preparing common-size financial statements; creating charts; performing statistical analyzes, such as Monte Carlo simulations; implementing equity valuation; or using any of the analytical tools that are suitable for the task A comprehensive financial analysis during this stage will include:

- Read and assess financial statements each time period to analysis This includes reading footnotes and understanding which accounting standards have been applied, what accounting choices have been made, and what operating decision have been made that impact on financial statements

- Make any necessary adjustments to the financial statements when occurring problems reflect differences in accounting standards, accounting choices or executive decisions

- Collect common-size financial reporting data and financial ratios (measuring of various aspects of company performance based on financial factors)

On the basis of common-size financial statements and financial ratios, analysts can assess firm’s probability, leverage, liquidity, efficiency and valuation

Step 4: Analyze/Interpret the processed data

When the data has been processed, the next step is interpreting the output The answer to a specific financial analysis question is seldom the numerical answer

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alone; the answer to analytical questions bases on interpretation of results and the use of this result to support conclusions or recommendations The answers to the specific analytical questions can themselves achieve the underlying purpose of analysis, however, a conclusion or recommendation is required To support making decision, the analysis will cite information such as target value, relative performance, expected future performance given the company's strategic, management quality and any other important information

Step 5: Develop and communicate conclusions/recommendations Communicating conclusions or recommendations in an appropriate format is the next step in the analysis An appropriate format would change by the analysis task, by firms and / or by audience

Step 6: Follow up

The process does not end with the report If a capital investment is made or a credit rating is assigned, periodic review is required to determine whether the original conclusions and recommendations are still valid Follow up may involve repeating all the above steps in the process on a periodic basis

In different aspects, James et al (2006) conducted six steps as the analytical framework for analysts to analyze and value a company

Step 1: Identify the industry economic characteristics

The economic characteristics and competitive dynamics of an industry play a major role in influencing the strategies that companies will use and therefore the kinds of financial reporting relationships that the researchers should observe when analyzing a set of financial statements In this book, the authors have shown three tools for researching the industry’s economic characteristics are value chain

analysis, Porter's five-force classification framework, and economic attributes

framework

Value chain analysis: A value chain for an industry that sets series of activities related to the creation, production and distribution of its products and

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services Analysts can use the value chain to determine the strategic position of a particular company in the industry

Porter’s five forces classification framework: Porter believes that five forces make an influence to the competitiveness and profitability of companies Three of the forces are rivals in the industry, the potential entry, and replacements which present horizontal competition between current or potential competitors and tightly related products and services The other two forces are power of buyers and power

of suppliers showing vertical competition in the value chain, from suppliers through competitors to buyers

Economic attributes framework: The authors found that the framework includes supply, demand, production, marketing and investment factors, which are useful in studying the economic attributes of an enterprise, in part because it relates

to the items reported in the financial statements

Step 2: Identify the company strategies

Companies set up business strategies to differentiate themselves from rivals, however the industry's economic characteristics impact on the flexibility of companies in designing these strategies The strategic choices confronting a specific company varies across industry The framework dealing with product and business features helps analysts review and structure the set of trade-offs and choices a company should face in which to determine the nature of product or service, the degree of integration in a value chain, the degree of geographical diversification, and the degree of industry diversification

Step 3: Assess the quality of the financial statement

The three major financial statements and related documents afford analysts with a huge amount of information to understand various aspects of a company's operating, investing and financing activities As the result, analysts must have a deeply understanding of financial statements to assess the company's financial position, performance and cash flows

Step 4: Analyze profitability and risk

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Profit can be considered as the ultimate target of an enterprise that is always associated capturing market share Hence, revenue and profit are two important factors when evaluating effectiveness and efficiency of enterprises Profitability needs to be analyzed in a comprehensive way through business activities and financial activities Furthermore, the nature of business is always risky, so any analyst attempts to discover and forecast as much as possible potential risks in business operations, capital mobilization and payment process

Step 5: Prepare forecasted financial statements

The analysts use a thorough understanding of the company’s industry, strategy, accounting quality, etc to assess the profitability and risk of the company

in the current and recent past and to begin forecasting future financial statements Forecasted financial statements rely on assumptions the analysts make about the future: Will the firm’s strategy remain the same or change? Will the firm likely gain

or lose market share relative to competitors? Will revenues grow because of increases in sale volume, prices, or both? How will its costs change? How much will the firm need to increase operating assets to achieve its growth strategies? Step 6: Value the firm

In order to develop trustworthy estimates of business value, and therefore make appropriate investment decisions, the analysts must rely on reasonable and objective forecast about profit and risks of company in the future Forecast of dividends, incomes and cash flows are the basis for the most frequently used valuation model

In some cases, analysts tend to evaluate company value by using dividend- based approach, which takes the perspective of valuing the company from the standpoint of cash that investors can expect to receive dividends Analysts also often assess company value using measures the company's free cash flow in the future that are expected to be paid as dividends after the necessary payment is made

to reinvest in productive assets and meet debt payments

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This chapter has reviewed the general literature on financial statement analysis and the frameworks commonly used to conduct a financial statement analysis In summary, the two frameworks developed by Charles (2012) and James

et al (2006) both represent 6 steps in financial statement analysis However, their approaches differ in nature, whereby Charles (2012) takes a more quantitative and numerical approach and James et al (2006) takes a more qualitative and contextual approach This thesis applies the framework developed by Charles (2012) The chapters hereafter will proceed to present the research methodology and research results obtained using the above-mentioned frameworks

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CHAPTER 3: METHODOLOGY

3.1 Research type

This research aims at analyzing Thacogroup financial performance over the recent years, specifically over the last 5 years from 2014 to 2018, in order to assess the corporation’s profitability, liquidity, solvency, asset management, short term and long term financial position, as well as to make recommendations to any red flags identified during the analysis Basing on the company’s financial data and using suitable analysis tools such as financial ratios, common-size analysis, vertical and horizontal analysis, among others, to evaluate the company’s financial position, profitability, liquidity, and solvency, it is possible to provide recommendations that would help improve any drawbacks in the financial performance of the company in the past, present, and future The selected research type of this thesis paper is mixed

- methods, which focuses on describing, interpreting, contextualizing, and gaining in-depth insight into specific concepts or phenomena (Morse, 2016) Since the purpose of this research is to investigate closely and critically scrutinize the financial performance of Thacogroup in Vietnam during 2014 - 2018, mixed — methods - that is, a balanced combination of both qualitative and quantitative methods, have been deemed a suitable choice for the researched case An in - depth justification of chosen mixed - method is presented in below sub sections In order

to obtain the best results from the chosen method, the researcher uses a wide ranges

of financial analysis tools to conduct an in - depth financial analysis and considers the perception and perspective of individuals who might influence or have close encounter with the financial data of Thaco company By conducting this research using both quantitative and qualitative methods, the researcher will have a clear and thorough view on financial analysis in the case of a giant domestic automobile corporation such as Thacogroup in Vietnam

3.2 Research methods

The primary purpose of this sub - section is to set forth and justify the mixed

- methods used in this research The first method, which is quantitative in nature, is

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content analysis of the document archives and financial reports of Thacogroup in Vietnam in the period 2014 - 2018 It was decided that this step is crucial for sufficient comprehension of the company under investigation itself The findings that follow in subsequent chapters will outline the fore - mentioned content analysis Additionally, for accurate identification of critically sensitive areas that require extensive views and perceptions of involved individuals, the quantitative method was mixed with a qualitative one

The second - qualitative method used in this research is semi-structured interviews conducted among staff at Thacogroup who have a reasonably high level

of involvement with the company’s operations and performance Ten individuals were interviewed over the course of two weeks in July 2019 and two weeks in August 2019 Eight interviews were done in person, one interview wea done via phone, and the last interview was done via email All interviewees were of

Vietnamese origin, therefore, the interviews were all conducted in Vietnamese

language, after which they were noted into English and analysed in English language

3.3 Justification of chosen methods

Mixed — methods have been chosen for this research, Quantitative method being analysis of financial data and Qualitative method being semi-structured interviews The choice of research method for this thesis has been deemed appropriate for a number of reasons The first reason is close adherence to the research aim and research questions For the topic “Analysis of financial statatements of Thacogroup in Vietnam”, the focal aim of this thesis is to answer the two research questions:

- What was Thacogroup’s financial situation in the period 2014-2018?

- What could the company improve in near future in terms of its financial performance?

In order to answer the first research question, the researcher considers a quantitative analysis of company’s financial data over the regarded period of time

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This can shed light on the past, present, as well as future financial situation of the company However, due to the nature of financial reports preparation, not everything is reflected through the analysis of mere financial data Therefore, in order to answer the second research question, the researcher considers a qualitative approach being through semi — structured interviews with relevant individuals within the company, who have reasonably high exposure to the financial reports preparation process and who have an adequate understanding of the company’s performance and future prospects It is believed that the combination of the above mentioned two methods will allow this thesis to draw adequate and meaningful conclusions regarding Thaco’s financial performance and recommendations for future improvements

The second reason for choosing mixed — method is the advantages of incorporating both qualitative and quantitative aspects to achieve a high level of scientific rigor in mixed methods research as outlined by Dewasiri et al (2018) The authors believe that a balanced combination of both methods can achieve a much more scientifically justified research results than when compared to the non — mixed one Using both financial analysis tools and semi — structured interviews can help contribute to the depth of the financial figures by attributing dry and rough figures

to the opinions and untold truths behind them

The third reason for choosing mixed — method is diversification of research methodology of this project The researcher is of the opinion that stand-alone financial analysis would not be sufficient to form a high — quality research thesis Similarly, standalone interviews of ten individuals would not suffice to make an adequate thesis Therefore, it is considered that a combination of the two supplement each other in a way that the results of this thesis can be considered and used for practice or further research

3.4 Data collection and analysis

Data collection plays a crucial part in any research paper and this thesis is no exception There are generally two main sources to gather research data which are

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