“Financial experts follow the classical view that increasing a business's financial leverage, for example increasing the proportion of debt in the business's capital structure up to a ce
Rationale
Globalization has heightened competition among economies, compelling businesses to enhance operational efficiency and profit maximization to secure their market position In Vietnam's evolving economy, directors must develop strategies to increase business value, making performance analysis essential for effective economic management Capital structure, which involves the use of capital and debt for financing assets, significantly influences financial decisions and outcomes, particularly regarding profitability Understanding the link between capital structure and business profitability is crucial for every enterprise, as highlighted by Salim & Yadav (2012) While numerous studies have explored this relationship, most have focused on industrialized nations, indicating a gap in research relevant to different economic contexts.
(1995), Chowdhury (2010), Derayat (2012), Nasimi (2016), and Detthamrong et al (2017), have demonstrated the beneficial effects of capital structures on company efficiency Conversely, research by Huang and Song (2006), Soumadi & Hayajneh (2012), Tailab
Research by Azeez et al (2015) and Tien et al (2020) highlights the negative impact of capital structures on business profitability, particularly emphasizing the significance of this relationship in the context of Vietnam's economic landscape.
The real estate industry plays a crucial role in meeting basic needs and is often governed by strict regulations in many countries Its infrastructure significantly contributes to a nation's economic growth by providing reliable and high-quality services Key factors influencing real estate demand include support for government services, population growth, electrification initiatives, and overall economic development However, challenges remain regarding operational efficiency within the sector.
Many real estate firms struggle with inadequate management and low capital investment, which significantly impacts profitability Despite the popularity of capital structure analysis in other countries, the topic remains underexplored in Vietnam, with limited qualitative and quantitative studies These gaps in research, including methodological constraints and small sample sizes, pose challenges to assessing firm performance effectively.
This research focuses on the "Impact of Capital Structure on the Profitability of Real Estate Enterprises Listed on the Vietnamese Stock Market." It examines the theoretical framework surrounding the capital structure of these enterprises and analyzes how it influences their profit margins.
Research objective
General objective
This study aims to analyze the impact of capital structure on the profitability of publicly listed real estate companies in Vietnam from 2014 to 2023 To achieve this objective, a research model will be constructed based on existing literature, enabling the evaluation of results and the formulation of relevant business recommendations for the real estate sector.
Specific objective
Based on the general objectives, the key objectives of the thesis are synthesized:
First, summarize the fundamental theories of capital structure, profitability, and the relationship of capital structure on profitability
Second, examine and assess the reality of how capital structure affects the profitability of real estate industry enterprises that are listed on the Vietnamese stock market during 2014-2023
To analyze the impact of capital structure on the profitability of companies in the real estate sector, develop a quantitative data model and utilize statistical software to perform linear regression This approach will help determine the correlation between the variables and assess the extent of their influence on profitability.
Research question
The graduation thesis provides suitable responses to a few of the following research topics in order to fulfill the aforementioned objectives:
(1) What is capital structure and firm profitability? Which criteria to evaluate the profitability of a firm?
(2) Based on previous studies, how did capital structure impact on the overall firm profitability in general?
(3) Does capital structure exert a positive or negative influence on the profitability of real estate enterprises listed on the Vietnamese stock market?
(4) Based on the results afterwards, what are the remedies that real estate enterprises should take into consideration to maximise their profitability?
Research subject and research scope
Research subject
This study investigates the impact of capital structure on the profitability of real estate companies listed on Vietnam's three stock exchanges: HNX, HOSE, and UpCom By analyzing financial data, the research aims to reveal how different capital structures influence the financial performance of these businesses within the real estate sector The findings will provide valuable insights for investors and stakeholders in understanding the relationship between capital management and profitability in the Vietnamese real estate market.
Research scope
This study focuses on 30 publicly listed real estate firms in Vietnam, which represents a modest sample size within the broader economy Due to the unique historical development of the Vietnamese stock market, the findings may not fully reflect the financial management practices of other real estate companies or sectors within the Vietnamese economy.
This article analyzes financial statements from 30 real estate businesses listed on the Vietnamese stock exchange over a decade, from 2014 to 2023 This time frame is selected to accurately reflect the current financing access of firms, especially within the real estate sector.
4 estate sector Furthermore, prior to 2014, a large number of organizations did not exist, which resulted in an unreliable amount of study observations used to construct data.
Research method
Research process
To achieve its study goals, this thesis combines quantitative and qualitative research techniques There are three primary steps involved in the research process:
First, examining the research variables' descriptive statistics In order to evaluate the correlation between the study variables in the suggested model, use correlation analysis
Second, using regression analysis to measure the influence of control and capital structure factors affecting real estate firms’ profitability that are listed on Vietnam stock market
Third, testing research hypotheses and assess whether the regression model is suitable.
Data collection method
This article explores the relationship between capital structure and profitability in the real estate sector of Vietnam, utilizing both qualitative and quantitative analysis The qualitative approach involves compiling theoretical frameworks and previous studies to develop a robust research model In the quantitative analysis, the impact of capital structure on profitability is measured for 30 publicly listed real estate companies on the Vietnam stock market, employing econometric regression models and statistical techniques via STATA 17 software The data, encompassing 300 observations, is derived from audited consolidated financial statements, including income statements and balance sheets, from the Hanoi Stock Exchange (HNX), Ho Chi Minh Stock Exchange (HOSE), and UpCom, covering the period from 2014 to 2023.
Data analysis method
Descriptive statistical analysis provided a summary of the research sample, while the Pearson correlation coefficient was employed to examine the relationships between study variables prior to incorporating them into the regression model Additionally, the Hausman and F-tests were utilized to evaluate the Pooled OLS, Random Effects Model (REM), and Fixed Effects Model (FEM), ultimately identifying the most suitable model for the analysis.
5 for the investigation Lastly, the model's autocorrelation and heteroskedasticity issues are resolved by the GLS technique to maintain the reliability of all regression results.
Thesis structure
The graduation thesis includes all 4 chapters as follows:
- Chapter 1: Theoretical basis of capital structure, business profitability and literature review on the impact of capital structure on business profitability
LITERATURE REVIEW
Theoretical background
Capital is a crucial concept in economics and finance, representing the money or assets owned or invested by individuals or businesses to facilitate operations According to Van Horne and Wachowicz (1995), capital structure includes debt, preferred stock, and common stock equity, primarily comprising long-term debt and equity, with short-term debt also considered Capital significantly impacts a business's financial health, supporting activities, investments, and expansion Each capital source has specific costs and purposes, categorized into debt capital, which requires timely repayment of loans and interest, and equity capital, representing shareholder ownership without immediate repayment obligations Additionally, capital can be classified as internal, derived from profits and reinvestments, or exogenous, sourced externally through loans, stock issuance, and trade credit, both essential for financing business activities and growth.
Businesses can raise funds through various methods, including venture capital requirements, joint ventures, supplier trade credit, and leasing property These financing options are crucial for mobilizing enhanced financial resources to support business activities effectively.
According to Vu Duy Hao (2019), financial leverage is commonly assessed through ratios such as debt to equity, debt to assets, and equity to equity, which evaluate the financial structure of enterprises Ahmad et al (2012) define capital structure as the ratio of debt to equity used to finance production and business activities Similarly, Ross A and colleagues (2003) describe capital structure, or financial leverage, as the strategic combination of debt and equity capital to support business operations Overall, experts agree that capital structure represents the balance of debt and equity utilized for financing production and business activities, along with specific indicators to measure an enterprise's profitability.
The debt to asset ratio, as described by Nguyen Thanh Cuong (2014), indicates the proportion of an organization's assets financed by debt capital, reflecting the company's reliance on borrowed funds This ratio is crucial for assessing the financial health and risk profile of a business, particularly its capacity to meet debt obligations An increasing debt ratio signifies a reduced dependence on equity capital, which can lead to diminished autonomy for the business Additionally, the debt ratio is influenced by the specific industry and business lines in which the company operates.
General debt ratio (D/A ratio) = (Total liabilities)/(Total assets)
Short-term debt ratio (SD/A ratio)=(Short-term debt)/(Total assets)
Long-term debt ratio (LD/A ratio)= (Long-term debt )/(Total assets)
A company's financing structure is influenced by its overall debt ratio; when this ratio exceeds 50%, assets are primarily funded through debt, whereas a ratio below 50% indicates a reliance on equity Furthermore, elevated debt ratios can strain a company's solvency, as increased reliance on creditors diminishes financial autonomy.
As a company's debt decreases, its capital structure becomes riskier, increasing the likelihood of bankruptcy A lower debt multiple often indicates a reduced risk of financial issues, such as insolvency Additionally, companies with lower debt ratios typically enjoy lower loan interest rates compared to those with higher debt levels The industry in which a business operates also influences its debt ratio; for instance, manufacturing companies usually require significant capital, resulting in a higher risk ratio, whereas service-oriented organizations tend to have lower risk ratios.
The debt-to-equity (D/E) ratio, as defined by Hasan et al (2014), measures the extent to which a company uses debt to finance its operations relative to equity This ratio reflects the financial owner's interest, capacity, initiative, and capital A D/E ratio greater than 1 indicates that a company relies more on borrowed capital than equity, while a ratio below 1 suggests a greater reliance on equity over debt.
Debt to equity ratio (D/E ratio)= (Total debt)/(Total equity)
Financial autonomy ratio (SFR ratio)= (Total equity)/(Total capital)
Fozia Memon (2012) highlights that the financial autonomy coefficient reflects the equity in a business's total capital, indicating that as this coefficient increases, the risk associated with the business decreases A financial autonomy ratio greater than 0.5 signifies a higher level of financial independence, allowing the business to better absorb losses with its equity, primarily derived from shareholder contributions Conversely, a coefficient below 0.5 suggests that the business relies more on loans for funding, resulting in increased risk.
Business is an activity carried out for profit, that is, for the purpose of finding profit Based on their available physical and technical conditions, businesses always find
To maximize profits, businesses must focus on profitability, which reflects their strength in generating income and improving operational efficiency According to Siminica & Stefan (2011), profit serves as the ultimate outcome of production, business, and financial activities, acting as a key indicator of an enterprise's economic efficiency Enterprise profit is calculated by summing operating profits from core business activities and profits from ancillary activities, with the formula: Profits = Revenue - Costs - Tax This approach emphasizes the importance of managing costs effectively to enhance overall profitability.
The group of indicators for measuring the profitability of an enterprise includes the specific indicators below
Return on Sales (ROS) is a key financial metric defined as the ratio of profit after tax to net revenue, expressed as a percentage According to Eugene F Brigham and Joel F Houston (2003) in their book Financial Management, the formula for ROS is calculated as follows: ROS = (Profit after tax / Net revenue) × 100% This coefficient illustrates the relationship between after-tax profit and revenue generated during a specific business period, indicating how much profit is earned for each unit of revenue A higher ROS signifies greater business efficiency, suggesting that improved profitability correlates with enhanced operational performance.
While Return on Assets (ROA) may not be flawless, it remains the most accessible and effective financial metric for evaluating a company's performance ROA serves as a valuable baseline for assessing business performance, reflecting both the income statement results and the assets required for operations As noted by David Lindo in the work of Siminica & Stefan (2011), this metric is crucial for understanding overall financial health.
Return on Assets (ROA) is a key financial metric that evaluates the relationship between profits generated and the investment in assets required to achieve those profits This percentage serves as a benchmark for assessing the necessary profit contribution from new investments Research by Tailab (2014) supports the view that ROA effectively represents a company's profitability in relation to its underlying assets Additionally, Phan Thanh Hiep (2016) emphasizes that ROA is a crucial measure of a business's profit margin.
Return on Assets (ROA) is a key financial metric that measures a company's profitability relative to its total assets It is calculated by dividing the profit after tax by the average total assets during a specific period, and then multiplying the result by 100 to express it as a percentage The formula for ROA is: ROA = (Profit after tax / Average total assets) × 100% This ratio helps investors and analysts assess how efficiently a company is utilizing its assets to generate earnings.
Return on Equity (ROE) is a key financial metric that measures the efficiency of a company's use of equity to generate profit, calculated as the ratio of after-tax profit to average equity during a specific period The formula for ROE is: ROE = (Profit after tax / Average equity) × 100% Average equity is determined by averaging the equity at the beginning and end of the period; if data is insufficient, the equity at a specific point, such as the end of the period, can be used instead A higher ROE indicates greater profitability and business efficiency, while a lower ROE suggests the opposite This indicator is crucial for investors, as it reflects the relative profit level shareholders can expect from their investment, making it a vital tool for assessing a company's profitability and guiding investment decisions.
Research has highlighted the connection between capital structure and profitability, with several studies utilizing return on equity (ROE) as a key indicator of profits Notably, Tailab (2014) and Phan Thanh Hiep (2016) employed ROE to assess this relationship, while Gill et al (2011) and Addae et al (2013) similarly selected ROE as a proxy for business profitability in their analyses of how capital structure influences profitability.
1.1.3 Impact of capital structure on firm’s profitability
Empirical research
A study by Saeed & Badar (2013) examined the influence of leverage in capital structure on the performance of food sector companies listed on the Karachi Stock Exchange The findings indicate that long-term debt positively and significantly affects company operations, whereas short-term debt has a significant negative impact on business performance.
El-Maude et al (2016) examined how capital structure affects the operating efficiency of Nigeria's cement industry, revealing a positive and significant relationship between debt utilization and business performance The study indicates that cement companies are not fully optimizing their performance due to inadequate use of debt within their capital structures.
17 study provides encouragement for companies in the Cement industry to use long-term debt in their capital structure because it has a positive impact on financial performance
Zeb and Rashid (2016) discovered that a favorable capital structure positively influences corporate value, indicating that a higher debt-to-equity ratio leads to increased corporate value It is advisable for businesses to utilize more debt than equity, as the cost of equity is generally higher than that of debt This increase in debt can also impact the average cost of capital (WACC) for the company Additionally, research by Chisti et al (2013) reveals that capital structure significantly affects enterprise profitability, with a positive correlation between the debt-to-total-assets ratio and the profit margin of the business.
Sudiyatno et al (2012) demonstrate that financial leverage positively influences corporate value, as indicated by Tobin's Q In contrast to Zeb and Rashid (2016), this research supports the notion that debt can enhance shareholder value, provided it is maintained within a reasonable ratio Excessive debt, however, can yield negative outcomes for owners and limit managerial opportunities Additionally, the study reveals that increased debt usage negatively impacts business performance, as measured by Return on Assets (ROA) This decline in ROA is attributed to the fact that the returns generated from debt are insufficient to cover its associated costs, leading to a situation where profits do not offset capital expenses.
A study by Amarjit Gill et al (2011) found that capital structure positively influences profit margins in both the service and manufacturing sectors in the US The research highlights that short-term, long-term, and total debt relative to total assets enhance company profits, primarily due to the tax shield effect of debt However, businesses must carefully manage their debt levels to mitigate risks, including bankruptcy, advocating for an optimal capital structure rather than relying on debt entirely Maintaining a reasonable debt ratio can help minimize capital costs, reduce financial burdens, and lower bankruptcy risks Additionally, Chowdhury (2010) examined the relationship between capital structure and corporate value, specifically using stock price as a measure, and concluded that capital structure positively affects corporate value, although his study focused solely on long-term debt as a proxy variable.
The use of long-term debt significantly enhances corporate value, more so than equity, as evidenced by research from Maxwell and Kehinde (2012) involving 124 Nigerian businesses Their findings indicate that equity does not positively influence corporate value, while long-term debt has a substantial positive effect on corporate revenue This aligns with established theories such as pecking order, trade-off, and classical theories, highlighting long-term debt as a crucial factor in determining corporate value amid market imperfections like bankruptcy costs and asymmetric information Consequently, companies are advised to weigh the marginal benefits of long-term debt against its costs to maximize corporate value effectively.
Numerous studies in Vietnam have explored the relationship between capital structure and corporate value, notably the work of Nguyen Thanh Cuong and Nguyen Thi Canh (2012), which examined the influence of capital structure on the value of seafood production enterprises using ROE as a key variable Their findings indicate that a debt ratio below 59.27% positively affects corporate value, whereas exceeding this threshold results in negative consequences, with risks escalating significantly if debt surpasses 94.60% Additionally, control variables such as enterprise size and growth showed insufficient evidence of impacting enterprise turnover In a subsequent study, Nguyen Thanh Cuong (2014) identified multiple thresholds for capital structure's effect on corporate value, suggesting a parabolic nonlinear relationship He recommends that businesses maintain a debt ratio below 57.39% to enhance their value.
A study conducted in 2017 on non-financial companies listed on the Ho Chi Minh City stock exchange, utilizing public data from 2008 to 2015, analyzed corporate value through the Tobin's Q index The findings indicate that while businesses benefit from tax shields when utilizing debt, they also face risks associated with financial distress, which can lead to bankruptcy However, the research concludes that both Short-term Debt Assets (SDA) and Long-term Debt Assets (LDA) enhance corporate value, with the advantages of leveraging debt for tax benefits outweighing the potential costs of financial distress.
Research by Pouraghajan and Malekian (2012) indicates that capital structure negatively affects business performance, as measured by ROA and ROE, at a 1% significance level, suggesting that higher debt ratios diminish operating efficiency and revenue The study advocates for reducing debt to enhance profits and improve ROA and ROE Additionally, it assesses the impact of asset turnover, enterprise size, tangible asset ratio, and growth on performance, finding all variables significant except for enterprise age Chechet and Olayiwola (2014) challenged agency theory by revealing a statistically significant negative effect of debt ratio on profit margins in Nigerian businesses, indicating that debt usage does not benefit these companies Similarly, Movalia (2015) discovered a significant relationship between capital structure and profit margins in India's tire industry, highlighting that an optimal debt-to-equity ratio can enhance profitability Furthermore, research by Ukhriyawati et al (2017) on Indonesian banks demonstrated a negative and significant impact of capital structure on income and free cash flow, while showing a positive but insignificant effect on corporate income, emphasizing the differing influences of capital structure across financial and non-financial industries.
Research by Kausar et al (2014) in Pakistan highlights the significant negative impact of total debt and long-term debt on corporate performance, as measured by Tobin's Q and the P/E index, while short-term debt's effect is not statistically significant Additionally, factors like asset size and business age influence performance The study reveals that most companies listed on the Karachi Stock Exchange primarily utilize equity financing or a mix of equity and short-term debt Complementarily, Zeitun and Tian (2014) found a statistically significant negative relationship between capital structure and corporate performance, with total debt ratios adversely affecting ROA Interestingly, while other capital structure indicators yield mixed results, a higher ratio of short-term debt to total assets positively correlates with Tobin's Q, suggesting that increased short-term debt reflects business growth potential.
In contrast to previous research, Tifow and Sayilir (2015) identified a negative impact of short-term debt on business performance, revealing that it adversely affects ROA, EPS, and Tobin's Q, thereby diminishing operational efficiency They also noted that while long-term debt negatively influences ROE, EPS, and Tobin's Q, it positively affects ROA Similarly, Ahmad et al (2012) found that both short-term and total debt negatively impact operating efficiency at a 5% significance level, while long-term debt shows a positive and statistically significant effect on ROE This perspective is echoed by Addae and colleagues, reinforcing the complex relationship between debt types and business performance metrics.
Research indicates that short-term debt and total debt negatively affect profit margins, while long-term debt positively influences them Additionally, the impact of capital structure on profitability varies by industry Conversely, some studies suggest that short-term debt can positively affect profit margins, particularly return on equity (ROE).
A study of 21 businesses reveals that total debt has a significant negative impact on both Return on Assets (ROA) and Return on Equity (ROE) Additionally, business size negatively affects ROE, while long-term debt also adversely influences profit margins, though this effect is not statistically significant Xu's research (2012) challenges the trade-off theory, asserting that capital structure can enhance expected profits, thereby increasing both the book and market value of a business The findings indicate a negative relationship between profits and financial leverage, suggesting that companies may need to increase equity or liquidate assets to manage debt and reduce their leverage ratio.
Le Thi Kim Thu (2012) examined the factors influencing the capital structure of real estate joint stock companies listed on the Ho Chi Minh City Stock Exchange, analyzing data from 13 companies between 2007 and 2011 Utilizing SPSS16.0 software, the study identified four key factors affecting the exchange rate: debt ratio, equity size, asset growth rate, and asset profitability ratio In a separate study, Thi Trinh and Le Phuong Dung (2014) found a negative correlation between financial structure and return on equity (ROE) in Vietnamese businesses, noting that when the liabilities-to-assets ratio exceeds 30.37%, it adversely affects ROE With an average debt-to-total asset ratio of 47.94% in food manufacturing and processing firms listed on HOSE, a negative correlation with ROE was observed Le Thi My Phuong (2017) investigated the impact of capital structure on financial performance during the integration period, using audited financial statements from 207 listed manufacturing enterprises from 2010 to 2015 The findings revealed a positive correlation between capital structure and ROE, indicating that a reasonable capital structure enhances financial performance, while enterprise size and solvency negatively impact performance; conversely, fixed asset ratio and growth rate positively influence it.
Research conducted by Tran Thi Tuan Anh and Dang Thi Thu Thuy (2017) reveals that financial leverage negatively affects the operating efficiency of Vietnamese enterprises, with varying impacts across different quantiles of return on equity (ROE) Specifically, businesses with low ROE experience a lesser decline in performance due to increased financial leverage, while those with high ROE face a more significant downturn Additionally, factors such as business size, net profit margin, and total asset utilization positively correlate with ROE Pham Thi Hong Van's (2018) study on 236 industrial joint stock companies from 2010 to 2016 confirms that financial leverage and asset size adversely influence profitability, whereas revenue scale positively affects it The findings indicate that financial leverage has a stronger impact on profitability than company scale, suggesting that investors should prioritize optimizing capital structure over merely expanding investment size Nguyen Van Cong and colleagues (2019) further analyze the effects of financial leverage on various performance metrics within 58 real estate firms, finding that while leverage does not affect return on sales (ROS) or return on capital employed (ROCE), it negatively impacts return on assets (ROA) and positively influences ROE The authors offer recommendations to enhance the profitability of real estate companies based on these insights.
DATA AND METHODOLOGY
Research data
This research model examines the profitability of real estate enterprises, focusing on two dependent variables: return on total assets (ROA) and return on equity (ROE) The independent variables include the debt to total assets ratio (TDTA) and the debt to equity ratio (TDTE), along with four control variables: current ratio (CR), enterprise scale (SIZE), tangible fixed asset ratio (TANG), gross margin (GM), and total asset turnover (TURN), as well as the growth rate of gross domestic product (GDP) Data collection involves profit after tax, total assets, equity, debt-to-equity ratio, debt-to-total asset ratio, tangible fixed assets, and net revenue, sourced from audited balance sheets and consolidated income statements of selected real estate companies on economic and financial data websites like VIETSTOCK The collected data is processed using Excel to create a comprehensive spreadsheet summarizing the variables, facilitating the completion of the thesis.
This research analyzes the impact of capital structure on the profitability of real estate corporations listed on Vietnam's stock exchanges, specifically UpCom, HNX, and HOSE, from 2014 to 2023 The sample comprises 30 real estate firms, and to ensure data accuracy and completeness, secondary data was sourced from the firms' audited annual financial statements and VIETSTOCK, a financial data aggregation website The study utilizes a two-dimensional array data structure that includes year numbers and the number of businesses analyzed.
This study analyzes 300 samples from 30 real estate companies listed on HNX, HOSE, and UpCom over a decade from 2014 to 2023 This period marks significant investment and development in the power grid, coinciding with the expansion of real estate companies and the ongoing digital transformation across various sectors, including real estate Additionally, the industry encounters numerous challenges and opportunities during this time, making it a critical period for analysis.
26 to collect and research data
This research model investigates the impact of profitability, measured through return on total assets (ROA) and return on equity (ROE), as the dependent variable Key independent variables include the debt to total assets ratio (TDTA) and the debt to equity ratio (TDTE), alongside four control variables: current ratio (CR), enterprise scale (SIZE), tangible fixed asset ratio (TANG), gross margin (GM), and total asset turnover (TURN), as well as the growth rate of gross domestic product (GDP) Data collection will focus on profit after tax, total assets, equity, debt ratios, tangible fixed assets, and net revenue from audited balance sheets and consolidated income statements of selected real estate industry enterprises, sourced from economic and financial databases like VIETSTOCK The gathered data will be organized in a comprehensive spreadsheet using Excel to facilitate the completion of the thesis.
Research method
This essay utilizes secondary data sources from internal documents of Vietnamese real estate enterprises listed on the stock market, including consolidated financial statements and external data from the World Bank, the General Statistics Office of Vietnam, and economic websites like VIETSTOCK and CafeF The research employs standard techniques such as descriptive statistics and quantitative methodologies, with data processed in Excel and analyzed using STATA 17 for regression modeling To enhance the analysis, qualitative techniques like data synthesis and comparison are applied to explore the relationship between corporate profitability and capital structure The primary research methodology is quantitative, utilizing regression models like Pooled OLS, FEM, and REM to assess the association between variables, although the Pooled OLS model treats all businesses as homogeneous, disregarding their unique characteristics.
Regression models such as Fixed Effects Model (FEM) and Random Effects Model (REM), while derived from the Ordinary Least Squares (OLS) framework, can distinguish between different business characteristics FEM indicates that the independent variable and the model's residuals are similar, a feature that REM lacks To evaluate the effectiveness of these models, I employed the F-test, Hausman test, and Lagrange test The F-test helps in selecting between OLS and FEM, while the Lagrange test differentiates between OLS and REM The Hausman test is utilized to determine the most suitable model Additionally, I conducted tests for autocorrelation and heteroskedasticity, addressing these issues through the Feasible Generalized Least Squares (FGLS) estimation method.
In conclusion, this article analyzes the impact of capital structure on the profitability of publicly listed real estate companies in Vietnam, comparing quantitative findings with previous studies and integrating them with the current market conditions.
Research process
The research process, as defined by Kumar (2005), is a systematic sequence of actions grounded in a knowledge base and logical reasoning, encompassing scientific research methods and specialized knowledge This process involves formulating research questions and addressing practical problems until satisfactory solutions are identified Following a specific order is crucial in the research process (Nguyen Huy Hoang et al., 2020) While various researchers advocate for either a 6-step (Cooper et al., 2006) or an 8-step process (Kumar, 2005), the 7-step research process proposed by Le Duc Tam (2014) is the most widely utilized among scholars to achieve optimal research outcomes.
Choose a topic and set research goals
Identify the factors that need to be analyzed and evaluated
Build models and set research hypotheses
Analyze and discuss research results
Make recommend ations and conclusions
Step 1: Choose a topic and set research goals
Choose a topic and establish research objectives in accordance with appropriate standards to ensure that the issue has scientific significance and gains practical as well as theoretical worth
Learn and research previous theoretical and experimental research works related to measuring profit performance or the influence of some factors on the enterprise’s profit efficiency
Step 3: Identify the factors that need to be analyzed and evaluated
Analyzing the relationship between capital structure and profitability involves identifying key factors that influence profitability, which should be common among most real estate firms listed on Vietnam's stock exchanges.
Step 4: Collect and process data
To effectively gather information, first establish clear objectives and identify relevant data sources based on available platforms and your own expertise Once the data is collected, thoroughly analyze, filter, and standardize it to ensure accuracy and coherence.
Step 5: Build models and set research hypotheses
To enhance profitability, it is essential to identify the key factors influencing it and establish their interrelationships Subsequently, a quantitative analytical model can be developed to quantify these relationships Utilizing STATA software, the model is analyzed to derive insightful research findings.
Step 6: Analyze and discuss research results
The capital structure and profitability of real estate firms listed on the stock market in Vietnam should be examined and discussed in light of theory, reality, and research findings
Step 7: Make recommendations and conclusions
After summarizing the findings and taking into account the demands of the current society, offer suggestions for creating the best possible capital structures in order to increase profitability
Research model
Dependent variables are determined by the values of other variables, with independent variables influencing changes in the dependent variable In assessing a company's profitability, metrics such as Return on Assets (ROA) and Return on Equity (ROE) are essential This study focuses on these two dependent variables to evaluate the impact of capital structure on profitability, measured through an accounting approach ROA and ROE serve as indicators linking profits to production costs, showcasing the effectiveness of industry leaders in utilizing these metrics They facilitate the assessment of a company's post-tax profit potential and overall asset utilization efficiency In contrast, Earnings Per Share (EPS) was excluded from this analysis due to its limitations in reflecting profit efficiency and capital utilization, as noted in previous research by Siminica & Stefan (2011) and Hamid et al (2015).
This research study aims to evaluate the relationship between capital structure and profitability in businesses within the Vietnamese real estate industry listed on the stock exchange To do this, the author identifies two key variables that represent capital structure: the debt to total assets ratio (TDTA) and the debt to equity ratio (TDTE).
The debt-to-total assets ratio (TDTA), also known as the debt-to-assets ratio, is calculated by dividing a company's total debt by its total assets This leverage ratio measures how much debt a company utilizes in relation to its asset value, indicating the extent to which debt finances a firm's assets and how those assets can service that debt Business professionals frequently use this ratio to evaluate a company's risk, as a higher debt ratio can lead to increased risk of bankruptcy and potential losses for other businesses Research by both domestic scholars, such as Doan (2014) and Nguyen Thi Quynh Nga (2020), and international experts like Abor (2005) and Ahmed et al (2012), has shown that this ratio significantly impacts the profitability of companies, particularly in the real estate sector listed on the Vietnam stock exchange.
30 exchange in particular, is negatively correlated with the ratio of debt to total assets In light of the foregoing result, I suggest the following study hypothesis:
Hypothesis ( 𝑯 𝟏 ): Impact of the debt-to-total assets (TDTA) ratio to the profitability of real estate firms listed on Vietnam stock market are negative
The debt-to-equity ratio (TDTE) indicates a business's financial autonomy, with a lower coefficient signifying that liabilities constitute a smaller portion of total equity A decreasing TDTE also correlates with reduced financial risk for the business Research by Mahfuzah et al (2012) and Pouraghajan et al (2012) has shown that a higher TDTE negatively affects business profitability.
Hypothesis ( 𝑯 𝟐 ): Impact of the debt-to-equity (TDTE) ratio to the profitability of real estate firms listed on Vietnam stock market are negative
Control variables are essential elements in research, as they remain constant throughout a study to minimize the impact of external factors on the dependent variable In this context, six key control variables are identified: the current ratio (CR), enterprise scale (SIZE), gross margin (GM), asset turnover (TURN), tangible fixed asset ratio (TANG), and the growth rate of GDP (GDP) These variables help ensure the reliability and validity of the experimental outcomes.
The current ratio (CR) is a key financial metric that assesses a company's short-term solvency by measuring its ability to fulfill short-term financial obligations using short-term assets Highlighted in the research conducted by Duong Thi Hong Van and Tran Phuong Nga (2018), the current ratio serves as a control variable in examining the impact of working capital management on business profitability.
Hypothesis ( 𝑯 𝟑 ) : Impact of the current ratio (CR) to the profitability of real estate firms listed on Vietnam stock market are positive
Gross margin (GM) is a key metric used by researchers to assess a company's growth rate, often calculated through the rate of gross asset or gross revenue growth Growth measurement can vary, as it is typically based on the percentage change in revenue (Fosu, 2013; Soumadi & Hayajneh, 2012) Studies conducted by Salim and Yadav (2012) and Sheikh and Wang further explore these growth calculations.
(2013) supports a positive correlation between growth and profitability Valentin's (2013) study used GM as a control variable to analyze the efficiency of corporate activities and
31 showed a positive Therefore, I propose the following hypothesis based on the experimental research above:
Hypothesis ( 𝑯 𝟒 ) : Impact of enterprises’ gross margin (GM) to the profitability of real estate firms listed on Vietnam stock market are positive
Asset turnover (TURN) is a key financial metric that assesses how efficiently a business utilizes its assets to generate revenue or profit Research by Tran Thi Tuan Anh and Dang Thi Thu Thuy (2017) demonstrates that total asset turnover positively influences a company's profitability This hypothesis is further supported by studies conducted by Onaolapo & Kajola (2010) and Muritala, highlighting the significance of asset efficiency in enhancing enterprise performance.
Research by Hoque et al (2014) and earlier studies from 2012 highlight a significant positive correlation between asset turnover and a firm's profitability, emphasizing the importance of this ratio in evaluating the efficiency of total asset utilization.
Hypothesis ( 𝑯 𝟓 ) : Impact of enterprises’ asset turnover (TURN) to the profitability of real estate firms listed on Vietnam stock market are positive
The scale of an enterprise, measured by the logarithm of total assets at the end of each fiscal year, significantly influences the financial capacity of real estate businesses Larger firms typically possess greater financial resources, enabling them to invest in and develop substantial real estate projects This increased capacity allows for operational expansion, better market opportunity capture, and enhanced competitiveness in the industry, as noted by Brown and Reilly.
In 2009, the size of a business, whether large or small, is often measured by its market value, which can be assessed through total assets, revenue, or market capitalization In capital-intensive industries like real estate, business scale significantly influences competitive advantage Large businesses benefit from greater capital, extensive warehouses, factories, and established reputations, enabling them to operate more efficiently than smaller counterparts Conversely, small businesses enjoy advantages in human resource management and streamlined administrative processes, which can be a limitation for larger companies if their administrative systems are overly complex Inefficient administration can negatively impact performance, making it a critical control variable in business analysis.
Alarussi and Alhaderi (2018) examined the factors influencing business profitability, building on prior research by Zeitun and Tian (2007) and Agiomirgianakis et al (2006) Additionally, Tran Thi Kim Anh (2017) and Phan Thu Hien & Nguyen Nhat Ha (2020) found that a company's scale positively correlates with its profitability Therefore, I propose the hypothesis that larger companies tend to achieve higher profitability.
Hypothesis ( 𝑯 𝟔 ) : Impact of the enterprise’s scale (SIZE) to the profitability of real estate firms listed on Vietnam stock market are positive
The Tangible Fixed Asset Ratio (TANG) highlights the importance of physical fixed assets in enhancing the competitiveness and corporate value of non-financial businesses, particularly in sectors like real estate This ratio reflects the reliance on long-term assets within a company's operations, indicating significant investment in these assets when it is high Industries such as construction heavily depend on long-term assets like machinery and infrastructure to execute projects and generate profits However, an elevated ratio may signal an overreliance on these assets, necessitating diversification and financial risk management to maintain business stability and sustainability Previous studies by Phan Thanh Hiep (2016), Zeitun, and Tian (2007) suggest a negative correlation between this ratio and profitability, leading to the formulation of the following hypothesis.
Hypothesis ( 𝑯 𝟕 ) : Impact of tangible fixed asset ratio (TANG) to the profitability of real estate firms listed on Vietnam stock market are negative
The GDP growth rate, expressed as a percentage of the previous year, reflects the accelerated economic production of a nation over a specific period This research article evaluates the impact of GDP growth on business performance, highlighting its role as a macroeconomic indicator that measures the total output generated by economic activities A rising GDP growth rate signifies a robust economy and is frequently utilized globally to compare the economic strength of countries with similar conditions Furthermore, there is a positive correlation between GDP growth and company profitability, underscoring the importance of GDP as a key metric for assessing business success.
33 numerous prior research (Antonina, 2010; Sehrish et al., 2011) Therefore, I suggest the theory for this thesis:
Hypothesis ( 𝑯 𝟖 ) : Impact of growth rate of GDP (GDP) to the profitability of real estate firms listed on Vietnam stock market are positive
This study examines the factors affecting the profitability of real estate businesses in Vietnam by integrating economic theories and existing research The author proposes a model that includes two dependent variables, Return on Assets (ROA) and Return on Equity (ROE), alongside two independent variables.
TDTE and TDTA, and 6 control variables comprising of CR, TANG, GM, SIZE, TURN, and GDP
Table 2.1 Description and expected sign of variables of regression model
Debt-to- total assets ratio
Duong Thi Hong Van and Tran Phuong Nga
Note: (+): positive impact; (-): negative impact Source: Student research
EMPIRICAL RESULTS
Overview of real estate industry and real estate companies listed on the
3.1.1 Overview of real estate industry in Vietnam
Vietnam's real estate market has gained significant attention from both domestic and foreign investors, particularly in major cities like Hanoi and Ho Chi Minh City, from 2014 to 2023 This period has seen remarkable growth in the apartment and housing sectors, driven by economic development, population growth, and increasing housing demand Land prices in central urban areas have surged due to scarcity and economic expansion, prompting widespread real estate projects, including large-scale apartments, new urban areas, and industrial parks The market began its recovery in 2013-2014, aided by government resolutions aimed at resolving business difficulties and bad debts Although the market showed promise in 2014, it faced external challenges that slowed its momentum From 2015 to 2018, the market thrived, peaking with the rise of condotel and officetel developments in popular tourist destinations However, from late 2018 to early 2022, the condotel market experienced a slowdown, compounded by the emergence of real estate bonds and a focus on high-end properties The lack of legal support for condotel-officetel projects has contributed to ongoing challenges in this segment.
The real estate market has faced significant challenges due to various regulatory issues and market dynamics Local initiatives, such as issuing red books for residential land, have been restricted, while some businesses violate construction standards and regulations, leading to unrecognized products Additionally, financial constraints have resulted in unfinished projects The COVID-19 pandemic in 2019 exacerbated these issues, causing many projects to stall, yet demand from potential investors for high-end real estate products remained strong, driving unexpected price increases Consequently, development investors ramped up the commencement of large-scale projects and utilized corporate bonds for financing However, from April 2022, the market experienced a decline attributed to several factors: reduced credit cash flow, difficulties in bond capital, challenges in public investment disbursement, a downturn in stock market cash flow, and decreased demand for rental housing due to falling import and export orders.
From 2014 to 2023, the Vietnamese real estate market faced numerous challenges but also showed positive development signs The government has introduced various policies aimed at attracting both domestic and foreign investors By consistently monitoring market trends and making necessary policy adjustments, the Vietnamese real estate sector can sustain its growth and play a significant role in the country's economic advancement.
3.1.2 Current status of capital structure use of real estate enterprises
The real estate market represents approximately 33% of the capital structure in the stock market, highlighting its significant role in the overall economy.
The financial health of real estate businesses has not improved over the past six months, with 2,622 new registrations representing a 56.2% decline compared to 2022 Additionally, 756 real estate companies dissolved during this period, marking a 17% increase from the previous year The industry is characterized by high capital requirements, significant debt ratios, and fluctuating material costs, which amplify risks, especially during economic downturns Experts indicate that this data highlights the current challenges facing the real estate market, as the peak period for new businesses has passed, leading to a sharp decrease in new establishments and an anticipated rise in bankruptcies if the difficult conditions persist.
Graph 3.1 Ratio of total debt to total assets of enterprises in the research sample for the period 2014 – 2023
From 2014 to 2023, businesses in the industry have consistently maintained debt levels exceeding 60% of total assets due to the significant need for investment capital This reliance on high debt is typical for the sector; however, it also heightens financial pressure on these companies.
Rising interest rates have led to significant challenges for businesses, particularly in the real estate sector, where debt repayments often exceed liquidity, increasing the risk of default Companies facing debt obligations two to three times higher than their equity are particularly vulnerable, especially as banks tighten lending Despite a decrease in the overall debt-to-equity ratio, many real estate firms still carry unsafe levels of debt, with PDR at 1.5 and DPG at 2.5, posing a cash flow risk Market fluctuations can exacerbate these issues, as high loan rates severely impact business operations Additionally, substantial unsold real estate inventories hinder liquidity and strain bank credit, leading to insufficient interest earnings to cover loan repayments, ultimately increasing the risk of bad debt and potential bankruptcy.
Graph 3.2: Average ROA and ROE of 30 real estate businesses in the period 2014-2023
Between 2014 and 2016, both Return on Equity (ROE) and Return on Assets (ROA) saw significant increases, indicating improved profitability from equity and assets However, from 2017 to 2018, both metrics declined, suggesting the business faced challenges in sustaining its financial performance The downward trend continued into 2019 and 2020, with ROE turning negative, highlighting severe difficulties in profit generation A modest recovery occurred in 2021 and 2022, as both ROE and ROA increased, yet remained below previous levels By 2023, both indexes continued to rise, but still lagged behind historical performance.
Despite a favorable market, competitive pricing is squeezing profit margins for businesses, with loan capital costs significantly impacting investor returns Recent reports indicate that financial revenues are insufficient to offset core business operations Among publicly listed real estate firms, only Vinhomes and Nam Long Group are displaying positive cash flow from key projects Vinhomes reported a remarkable 62.1 trillion VND in net revenue for the first half of the year, a 364% increase year-on-year, driven by the handover of 5,400 low-rise units in Hanoi, resulting in a profit after tax of 21.6 trillion VND, up 295% Nam Long Group achieved 231 billion VND, a 20% increase, but their accumulated net revenue fell by 35% In contrast, major companies like Novaland, Phat Dat, and others have disclosed deteriorating financial conditions, with minimal cash flow from home sales Phat Dat's recent financial report highlighted a stark decline in revenue, with only 5 billion VND from services compared to over 850 billion VND from land transfers in the previous year.
In 2021, real estate businesses emerged as the leading issuers of corporate bonds, accounting for 44% of the total issuance with VND 318,200 billion, reflecting a 66.2% increase from 2020, as reported by SSI Research Among the 33 real estate companies listed on the HOSE, Dat Xanh Group (DXG), VIC, and Phat Dat Real Estate Development (PDR) each reported total debts exceeding VND 10 trillion Specifically, Dat Xanh's debt reached VND 14,873 billion, representing 52.64% of its total assets and 1.11 times its equity, a significant rise from its 2013 liabilities of VND 605 billion Meanwhile, VIC's total debt stood at VND 24,056 billion, highlighting the increasing financial leverage within the sector.
As of the end of 2021, equity accounted for 71.23% of total assets, while liabilities for VIC increased significantly over the years, reaching 24,412 billion VND in 2020, up from 16,871 billion VND in 2018 and 20,368 billion VND in 2019 Similarly, Phat Dat Real Estate Joint Stock Company (PDR) faced substantial debt, with liabilities totaling 12,407 billion VND, which is 1.5 times higher than its equity and represents 60.37% of its total assets.
Research Results
The author conducted descriptive statistics on 30 real estate companies listed on the Vietnam stock market from 2014 to 2023, analyzing a total of 300 observation samples The findings include the mean values, standard deviations, and individual variable values, which are detailed in the accompanying table.
Table 3.1: Statistical results describe the variables
The dataset encompasses a range of financial and economic indicators from 2014 to 2023, highlighting the performance and characteristics of selected entities It prominently features key profitability metrics such as Return on Equity (ROE) and Return on Assets (ROA).
ROE: Entities exhibit an average ROE of 11.17%, with a notable spread indicated by a standard deviation of 13.30% The range spans from -35.69% to 156.09%
ROA: The average ROA is 4.54%, slightly lower than ROE, with a standard deviation of 5.61% This reflects variability in asset utilization efficiency across the sample
TDTE (Total Debt to Equity): The average TDTE ratio is 167.02, with a considerable standard deviation of 126.54, indicating diverse capital structures ranging from conservative to highly leveraged
The Gross Margin (GM) averages 44.65%, reflecting significant variability in profitability with a standard deviation of 166.73% Meanwhile, the Current Ratio (CR) averages 56.63, suggesting strong short-term liquidity, although there is considerable dispersion among different entities.
SIZE: Measured by the log of total assets, the average SIZE is 8.82, suggesting moderate variability in entity size within the sample
TANG (Tangible fixed asset ratio): The average TANG is 14.37, with a standard deviation of 17.23, underscoring diversity in asset compositions among entities
TURN (Asset Turnover): Reflecting asset utilization efficiency, TURN averages at 0.41, with a standard deviation of 0.41, indicating varying levels of efficiency across entities
TDTA (Total Debt to Total Assets): TDTA ratio averages at 56.37, with a standard deviation of 15.63, highlighting variability in leverage levels across the sample
Growth rate GDP: GDP data provides context regarding the economic environment, with an average of 6.04 and a standard deviation of 1.81, recorded observations over the years
Table 3.2: Pearson correlation test results between variables
The matrix reveals significant correlations among various financial and economic indicators Return on Equity (ROE) shows a moderately strong positive correlation with Return on Assets (ROA) at 0.6903, suggesting a direct relationship between these profitability measures Total Debt to Equity (TDTE) has a moderate positive correlation with ROE (0.3476) but a weaker negative correlation with ROA (-0.2129), indicating that higher debt levels may enhance ROE while potentially diminishing ROA Gross Margin (GM) operates independently of other metrics, displaying very weak correlations The Current Ratio (CR) has a weak negative correlation with TDTE (-0.3081), suggesting that higher debt levels are linked to lower short-term liquidity Additionally, size, measured by the log of total assets, correlates weakly negatively with both ROE (-0.1485) and ROA (-0.1372), indicating that larger firms might exhibit slightly lower profitability Tangibility shows a weak positive correlation with TDTE (0.2147), hinting that firms with more tangible assets may have higher leverage Turnover (TURN) correlates moderately positively with ROA (0.2461) and weakly positively with ROE (0.2097), indicating that better asset turnover is linked to increased profitability Lastly, Total Debt to Total Assets (TDTA) has a strong positive correlation with TDTE (0.8072), underscoring the close relationship between these leverage metrics.
The correlation matrix reveals a mild association between economic gross and return on assets (ROA) with a correlation of 0.0913, as well as with the current ratio (CR) at 0.0557 These insights into the interrelationships among various financial and economic indicators can significantly enhance decision-making in financial management, risk assessment, and strategic planning.
To determine whether regression analysis based on the fixed effects model (FEM) or random effects model (REM) is more appropriate, we will use the Hausman test Hypotheses include:
H0: there is no correlation between ei and the independent variables in the model H1: There is a correlation between ei and the independent variables in the model
The analysis of Return on Equity (ROE) shows a significant result with a p-value of 0.0000, leading to the rejection of the null hypothesis (H0) and acceptance of the alternative hypothesis (H1), indicating a correlation among the independent variables in the model Additionally, the Hausman test confirms that the Fixed Effects Model (FEM) is the most suitable model for analyzing ROE.
The analysis of ROA reveals that the Prob > chi2 value is 0.0787, which is greater than the 0.05 significance level Consequently, we reject the alternative hypothesis (H1) and accept the null hypothesis (H0), indicating that the independent variables in the model are not correlated Additionally, the Hausman test confirms that the Random Effects Model (REM) is the most suitable model for ROA analysis.
3.2.4 Checking defects in the FEM model
Multicollinearity occurs in a linear regression model when independent variables are highly correlated, meaning one variable can be predicted by another This correlation can skew the analysis of how independent variables affect the dependent variable To identify multicollinearity, researchers utilize the variance inflation factor (VIF), with the findings detailed below.
Table 3.3: The variance inflation factor (VIF)
While most variables demonstrate low levels of multicollinearity, TDTA and TDTE exhibit moderate levels, indicating that they can generally be included in regression models However, caution is advised when interpreting results that involve TDTA and TDTE, as their multicollinearity may compromise the stability and reliability of regression coefficients.
In regression models utilizing secondary data such as financial statements and annual reports, multicollinearity is indicated by a Variance Inflation Factor (VIF) greater than 10 and a Tolerance value below 0.1 However, the analysis reveals that all variables exhibit a VIF of less than 10 and a Tolerance coefficient exceeding 0.1, confirming the absence of multicollinearity in the regression model.
B) The phenomenon of variable error variance
To detect whether heteroskedasticity occurs in the model or not The model's hypothesis is as follows:
H0: There is no heteroscedasticity phenomenon
H1: There is a phenomenon of variable error variance occurring
The Wald test results indicate statistical significance with Prob > chi2 values of 0.000 and 0.001, both less than the 0.05 threshold Consequently, we reject the null hypothesis (H0) in favor of the alternative hypothesis (H1), confirming the presence of heteroskedasticity in the model.
The author uses the Wooldridge test to detect autocorrelation with panel data for the FEM model The pair of hypotheses is determined as follows:
H0: The model does not have autocorrelation phenomenon
H1: The model has autocorrelation phenomenon
At the end of the Wooldridge test, the results were Prob > F = 0.002 for ROA (< 0.05) and Prob > F = 0.008 for ROE (< 0.05), rejecting the hypothesis H0, meaning the model has a similar phenomenon mandarin.
Assess the impact of factors on business performance of real estate businesses
After overcoming autocorrelation defects and heteroskedasticity by estimating GLS with the FGLS method, we obtain the regression models FEM with ROA and REM with ROE with the following results:
Table 3.4: Correcting REM model defects of the representative variable ROE using GLS estimation
Table 3.5: Correcting FEM model defects of the representative variable ROA using GLS estimation
After performing error correction and adjusting the FEM and REM models, the statistical value of Prob > F = 0.0000 < 0.05 is obtained, showing that at the 5% significance level, the model is statistically significant
Based on the above results table, we have the following specific analysis:
Hypothesis ( 𝑯 𝟏 ): Impact of the debt-to-total assets (TDTA) ratio to the profitability of real estate firms listed on Vietnam stock market are negative
The study indicates that Total Debt to Total Assets (TDTA) significantly influences Return on Assets (ROA) and Return on Equity (ROE), with a P-value of less than 0.05, confirming its impact at a 5% significance level Additionally, the negative coefficient (β|t|=0.1, it indicates that CR is not significant in influencing profitability Additionally, the negative coefficient (β < 0) suggests that CR adversely affects profitability, contradicting initial hypotheses This finding implies that solvency is not a priority for real estate businesses concerning profitability, challenging the conclusions of previous studies by Salim and Yadav (2012) and Sheikh and Wang (2013).
The current ratio (CR) is a crucial metric for investors to assess a company's ability to repay its debts, particularly when it struggles to quickly convert inventory and receivables into cash This capability varies significantly across industries; for instance, real estate firms typically maintain lower cash reserves due to their ongoing investments in housing projects and industrial parks, which leads to a higher proportion of inventory within their short-term assets For example, Nam Long Investment Joint Stock Company (NLG) reports that inventory constitutes 68.12% of its short-term assets, while cash and cash equivalents make up only 4.34% Similarly, Vingroup (VIC) shows that inventory and cash represent 30% and 12% of its short-term assets, respectively, in 2023 Consequently, evaluating the influence of immediate liquidity on profitability may not yield meaningful insights in this context.
Hypothesis ( 𝑯 𝟒 ) : Impact of enterprises’ gross margin (GM) to the profitability of real estate firms listed on Vietnam stock market are positive
The analysis reveals that while the estimated coefficient for Return on Equity (ROE) is positive, it lacks statistical significance (P-value > 0.05), indicating insufficient evidence to determine the impact of Gross Margin (GM) on ROE In contrast, the estimated coefficient for Return on Assets (ROA) is both positive and statistically significant (P-value < 0.05), suggesting that a higher GM positively influences ROA This finding aligns with the observations made by Salim and Yadav (2012) as well as Sheikh and Wang.
Table 3.7 Ratio of GM of DTA for the period 2014-2023
The data indicates a strong correlation between gross profit and DTA's net profit over the years Notably, from 2014 to 2019, gross profit rose from 0.6 to 3.4, leading to an increase in net profit from 5.2 to 7.4 This trend highlights the positive impact of gross profit growth on overall profitability.
In 2021, the gross profit surged to 5.28, while net profit saw a slight decline to 2.6, still maintaining a high level compared to previous years Notably, 2020 presented an anomaly with a sharp decrease in gross profit, yet net profit only fell significantly, indicating the influence of factors like operating costs, taxes, and other expenses A high net growth rate suggests that the business is successfully attracting more customers and boosting revenue, leading to increased profitability However, the gross margin (GM) index in the real estate sector often exhibits a large standard deviation, reflecting significant fluctuations in revenue growth, which may undermine its statistical significance in relation to return on equity (ROE).
Hypothesis ( 𝑯 𝟓 ) : Impact of enterprises’ asset turnover (TURN) to the profitability of real estate firms listed on Vietnam stock market are positive
Research indicates that asset turnover positively influences both Return on Assets (ROA) and Return on Equity (ROE), supporting the initial hypothesis with a statistically significant value (P>|t|=0.000 0.05), they do for Return on Assets (ROA), with a P-value of 0.02, indicating significance Consequently, the evidence regarding the impact of SIZE on ROE and ROA remains inconclusive Additionally, the negative coefficient (β < 0) contradicts the findings of Tran Thi Kim Anh (2017) and Phan Thu Hien & Nguyen Nhat Ha (2020), highlighting differing perspectives on this relationship.
CONCLUSION AND RECOMMENDATION
Conclusion drawn from the research article
Profitability remains a critical concern in Vietnam for companies, regulators, and investors alike, influenced by a myriad of complex factors These include quantitative and non-quantitative elements, as well as micro and macro factors, each affecting short-term and long-term profitability in distinct ways Research from both domestic and international authors highlights this diversity and complexity in understanding profitability dynamics.
This study aims to evaluate the impact of financial leverage on the profitability of real estate companies listed on the Vietnamese stock exchange A research model was developed, incorporating 10 factors, including 2 dependent variables, 2 independent variables, and 6 control variables, building on previous research findings The analysis utilized a sample of 30 out of 110 real estate companies from 2014 to 2023, employing both the Fixed Effects Model (FEM) and Random Effects Model (REM) while addressing potential issues like multicollinearity, autocorrelation, and heteroskedasticity The Hausman test indicated that the FEM results were appropriate for Return on Assets (ROA), while the REM was suitable for Return on Equity (ROE) The FEM identified three significant factors—Total Debt to Total Assets (TDTA), Total Debt to Total Equity (TDTE), and Turnover (TURN)—that influence profitability, whereas the REM highlighted four factors, including Size (SIZE) alongside the previous three Overall, the study measured the effects of TDTA, TDTE, SIZE, and TURN on the profitability of the real estate sector.
High debt-to-asset (TDTA) and debt-to-equity (TDTE) ratios negatively affect the profitability of real estate businesses by increasing financial risk As borrowing raises total assets, it fails to generate sufficient profits to cover the associated financial costs, leading to a decline in return on assets (ROA) and return on equity (ROE) This phenomenon explains why businesses with low profitability often resort to significant borrowing; when internal capital is insufficient, they follow the pecking order theory and seek external financing.
Businesses should prioritize issuing debt only after exhausting internal capital, especially those with high profits, as a low debt ratio indicates sufficient funding for operations However, the real estate sector is facing increasing risks, with the risk coefficient for real estate loans rising between 150% and 200% The State Bank of Vietnam has limited short-term loans for medium and long-term purposes due to rising bad debts and outstanding loans in commercial banks As of August 2023, real estate credit had increased by 14.58%, representing 19.14% of the economy's total outstanding debt, highlighting the ineffective use of debt by many real estate firms, which negatively impacts profitability To enhance profits, it is crucial to limit debt usage, and businesses must engage in debt restructuring to mitigate risks, especially in a capital-intensive industry like real estate For sustainable development and success in a competitive market, real estate companies in Vietnam must establish a stable capital structure and utilize financial leverage effectively.
To enhance profitability, real estate companies must focus on improving asset turnover efficiency This involves optimizing asset management through personnel training, liquidating unused fixed assets, and making informed purchasing decisions By implementing effective strategies to maximize asset utilization, businesses can create sustainable value Key to this process is effective asset management, which ensures that assets are fully utilized rather than left abandoned or underused.
In recent years, foreign direct investment (FDI) inflows into the real estate sector have surged, highlighting its appeal to both domestic and international investors This trend underscores the real estate industry as a promising field, prompting businesses to continuously adapt and innovate to attract further investment.
58 advantage of opportunities to expand their business activities, diversify their industries, have many real estate products in all industry segments from housing, offices, industrial parks for rent
Larger businesses often experience diminishing profits, as evidenced by fluctuations in the real estate market from 2014 to 2023 These larger enterprises face more challenges compared to smaller ones, leading to increased costs and reduced efficiency Consequently, it is crucial for businesses to carefully assess their scale; if expanding leads to lower profits, they should consider downsizing.
In addition, the essay also notes a number of new points compared to past studies such as:
(1) Updated data, clearly reflecting the business situation and fluctuations of real estate businesses in Vietnam in the current period
The study expanded its analysis by incorporating additional internal factors like current ratio (CR), turnover (TURN), and gross margin (GM), while also controlling for variables such as size and GDP, thereby providing a more comprehensive understanding of their impact on profitability compared to previous research that focused on a limited set of factors.
This essay conducts a thorough analysis of the factors influencing profitability specifically within the real estate sector of the Vietnam stock market, rather than across all industries By examining the impact of various financial statement variables on real estate profitability, this research equips businesses with valuable insights to optimize their capital structure for enhanced profitability.
Recommendations
High debt to asset (TDTA) and debt to equity (TDTE) ratios negatively affect business profitability, indicating that as these ratios increase, profitability declines To enhance profitability, companies should prioritize reducing their debt ratios through strategic capital restructuring However, many real estate firms currently operate with limited capital, constraining their financial capabilities To address this issue, these companies need to focus on increasing their capital base effectively.
Endogenous capital enhances the financial autonomy of businesses, enabling them to navigate challenging times, especially when banks tighten credit, reduce loan limits, or raise interest rates To mitigate these issues, companies in the real estate sector can focus on increasing their equity capital.
To achieve sustainable profit growth, businesses must focus on cost control, particularly regarding interest and financial expenses associated with capital It's essential to monitor additional costs like management and sales expenses A comprehensive understanding of a company's capital structure and the costs associated with various funding sources enables better cost management, enhancing cash flow and ultimately increasing operating profits Companies should evaluate the implications of debt usage and develop a cost-effective debt structure alongside other funding channels to optimize capital contributions Creating an annual operating budget allows businesses to assess their capabilities and market position, guiding future strategies This budgeting process helps clarify existing resources and financial capacity, leading to more effective resource management and improved cost control.
Maximizing retained profits is essential for businesses to leverage their internal capital effectively This financial resource enables companies to proactively fund operations, swiftly capitalize on emerging opportunities, and maintain control over their financial activities By relying on retained earnings, businesses can avoid the burdens of interest payments and timely debt repayments, ensuring sustainable growth and stability in their financial health.
Converting debt into equity capital is a strategic approach for businesses undergoing restructuring, allowing them to negotiate effective solutions for external funding This can include issuing additional shares or forming joint ventures and partnerships Given the current business landscape, the Vietnamese market presents attractive opportunities for foreign investors, enabling companies to leverage foreign direct investment (FDI) and tap into potential capital sources.
60 placement aims to attract foreign investment capital and at the same time access modern technology and management skills from foreign businesses
To effectively mobilize capital, real estate businesses should consider issuing preferred shares with interest rates higher than traditional savings, while also exploring alternative funding sources Utilizing short-term assets for depreciation or selling future assets can be effective strategies Building strong relationships with banks and business partners is essential for accessing diverse capital options Additionally, financial leasing, which does not require prior guarantees, offers a viable credit solution that alleviates financial pressure Companies must also focus on recovering outstanding debts, implementing stringent measures to address lingering and bad debts, with directors and team leaders held accountable for financial responsibilities in contracted projects.
To enhance asset turnover in the real estate sector, businesses should prioritize increasing turnover to quickly recover capital and reinvest Key strategies include optimizing land use by acquiring favorable locations and redistributing existing land, as well as strengthening project management to maximize time and resource efficiency Diversifying cash flows minimizes risks and enhances capital efficiency, while optimizing the cash cycle through efficient payment and collection processes ensures swift project sales and effective use of proceeds Additionally, improving product quality and integrating technology are vital for boosting sales and management Lastly, focusing on sustainable development fosters environmentally friendly real estate projects, creating long-term value for both businesses and communities.
Regarding the SIZE factor, it is proven that scale and profit have opposite effects Therefore, to increase profits, real estate businesses can focus on managing size (SIZE)
To enhance profitability and ensure long-term sustainability, real estate businesses should focus on optimizing the management of existing assets and improving project management processes rather than expanding too rapidly Diversifying real estate portfolios is crucial for minimizing risks and maximizing profit opportunities Additionally, investing in research and development fosters innovation and competitiveness within the industry Strengthening community relationships is vital for protecting projects and creating sustainable value By implementing these strategies, real estate firms can effectively optimize their operations and achieve lasting success.
The analysis of debt utilization by real estate companies highlights its crucial role in enhancing financial performance amid intensifying competition To foster a conducive business environment, the government must implement supportive measures that stimulate enthusiasm and motivation among businesses The interdependence between the real estate market and the broader economy underscores the sector's vulnerability to regulatory changes, with legal obstacles hindering growth Although 2020 saw notable improvements in procedures and policies, further government intervention is essential for the recovery and development of real estate businesses.
Vietnam has made significant strides in infrastructure development, particularly in transportation, with the Ministry of Transport projecting a 44% increase in capital disbursement to 35.6 trillion VND in 2023, followed by a 28% rise to nearly 46 trillion VND in 2024 Despite these advancements, the country's transportation infrastructure still falls short of international standards, posing challenges for economic growth and the real estate sector To address these issues, the Government must prioritize policies that enhance infrastructure, ensuring robust support for businesses in the industry.
To support the real estate market, it is essential to continue lowering credit interest rates and expanding credit limits for real estate loans Low interest rates have significantly aided both investors and construction contractors by alleviating capital costs, while real estate buyers benefit from more favorable borrowing conditions However, these policies must be balanced with inflation control to prevent a potential real estate bubble Additionally, expanding credit limits for real estate loans is crucial, as there is a notable disparity between real estate lending and other sectors Lending should be based on the reputation of real estate businesses, as real estate development is a key driver of construction and related industries.
In 2023, supporting the development of a connected ecosystem encompassing real estate, construction, and building materials is essential for fostering circular economic growth As businesses increasingly focus on value chain management and integration across multiple industries, they can enhance their benefits significantly The potential for even greater advantages lies in the successful establishment of interconnected systems within the real estate and construction sectors.
- building materials ecosystem business according to the circular economy model and multi- industry companies
Fourth is to strengthen market management towards stable and healthy development
To ensure a thriving real estate market, the government must effectively manage each segment of the industry value chain Currently, investors face cumbersome licensing procedures and corruption in real estate project approvals in many localities To address these issues, the government should implement decisive measures while carefully considering the market's stability to avoid a repeat of the 2022 freeze, especially after corporate hardships As 2023 unfolds, it is crucial to continue refining the legal framework, which still has significant gaps, such as the absence of official regulations for emerging real estate products like condotels and shoptels Additionally, legal matters surrounding project approval, planning, land policies, and investment attraction need urgent attention to foster a healthier market environment.
63 disbursement of public investment, reclaiming infrastructure corridors based on construction auctions according to planning, promoting low-cost housing projects
To enhance the legal framework for real estate, it is essential to address existing shortcomings despite recent updates to the land law Currently, there is a lack of official documentation for emerging real estate products like condotels and shoptels Additionally, key legal aspects require improvement, including project approval processes, land use policies, investment attraction, public investment disbursement, infrastructure corridor reclamation through planned construction auctions, and the promotion of low-cost housing initiatives.
Limitations of the research article
This thesis focuses exclusively on enterprises within the construction and real estate sector listed on HNX from 2014 to 2023, which may not accurately reflect the broader economy or other industries The short research period limits the ability to capture all economic changes While the study utilizes ROA and ROE as indices for profit margins, it acknowledges that profitability can also be assessed through various other indicators such as capital, assets, and net profit These limitations arise from both objective and subjective factors, leading to recommendations for future research directions.
Based on the limitations identified in this study, students recommend several research directions: extending the research sample's time period, incorporating additional variables to better analyze industry fluctuations, and enhancing the overall accuracy of results They also suggest broadening the research scope to encompass the entire stock market for improved representation Furthermore, future studies should explore other aspects of capital structure beyond SDA and LDA, while utilizing alternative indicators to assess profitability.
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1 Vietnam Real Estate Association, Vietnam Real Estate Brokers Association
(2018), Vietnam Real Estate Market Report 2018, Hanoi
2 Vietnam Real Estate Association, Vietnam Real Estate Brokers Association
(2019), Vietnam Real Estate Market Report 2019, Hanoi
3 Vietnam Real Estate Association, Vietnam Real Estate Brokers Association
(2020), Vietnam Real Estate Market Report 2020, Hanoi
4 Vietnam Real Estate Association, Vietnam Real Estate Brokers Association
(2021), Vietnam Real Estate Market Report 2021, Hanoi
5 Vietnam Real Estate Association, Vietnam Real Estate Brokers Association
(2022), Vietnam Real Estate Market Report 2022, Hanoi
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(2019), The impact of financial leverage on the profitability of real estate
Appendix 1: List of real estate enterprises listed on the Vietnam stock market used for research analysis
1 CTI IDICO Cuong Thuan Development Investment
2 DPG Dat Phuong Group Joint Stock Company HOSE
3 DIG Construction Development Investment Joint Stock
4 EVG EverLand Group Joint Stock Company HOSE
5 SJS SJ Group Joint Stock Company HOSE
6 HQC Hoang Quan Real Estate Services and Commercial
7 LDG LDG Investment Joint Stock Company HOSE
8 TDC Construction Technical Development Joint Stock
9 REE Refrigeration Electrical Engineering Joint Stock
10 NTL Tu Liem Urban Development Joint Stock Company HOSE
11 IJC Technical Infrastructure Development Joint Stock
12 CEO C.E.O Group Joint Stock Company HNX
13 DXG Dat Xanh Group Joint Stock Company HOSE
14 VCG Vietnam Construction and Import-Export Joint
15 KBC Kinh Bac Urban Development Corporation - JSC HOSE
16 HHV Deo Ca Transport Infrastructure Investment Joint
17 PDR Phat Dat Real Estate Development Joint Stock
18 NLG Nam Long Investment Joint Stock Company HOSE
19 KDC KIDO Group Joint Stock Company HOSE
20 HDC Ba Ria - Vung Tau Housing Development Joint
21 CII Ho Chi Minh City Technical Infrastructure
22 CTD Coteccons Construction Joint Stock Company HOSE
23 LCG Lizen Joint Stock Company HOSE
24 HDG Ha Do Group Joint Stock Company HOSE
25 FCN FECON Joint Stock Company HOSE
26 HUT Tasco Joint Stock Company HNX
27 SZB Sonadezi Long Binh Joint Stock Company HNX
28 DTA De Tam Joint Stock Company HOSE
29 BCG Bamboo Capital Group Joint Stock Company HOSE
30 VIC VINGROUP Group - JSC HOSE
Appendix 2: Results of running data on STATA software
5 FEM Model with ROE variables
6 REM Model with ROE variables
8 FEM model with ROA variable
9 REM model with ROE variable
12 Testing the heteroskedasticity with ROE
13 Testing the heteroskedasticity with ROA
14 Fix REM model defects with ROE
15 Fix FEM model defects with ROA