From the above theses, the author chose the topic "The impact of financial leverage on the business performance of enterprises in the construction industry listed on the Vietnam Stock Ex
The urgency of the topic
The construction industry is vital to Vietnam's economy, significantly contributing to the country's comprehensive development from 2015 to 2023 With an average growth rate of approximately 8% per year, it consistently outpaces overall economic growth, underscoring its importance in promoting sustainability and economic advancement Furthermore, the construction sector is intricately linked to various other industries, including construction materials, mechanical engineering, transportation, and tourism, facilitating the synchronized development of multiple economic fields and fostering regional growth across the nation.
Leveraging financial resources is crucial for construction businesses, as it optimizes borrowed funds to enhance investment performance and profitability By effectively utilizing financial leverage, these enterprises can boost competitiveness, accelerate growth, and seize expansion opportunities in a competitive market However, it is essential to approach financial leverage with caution due to inherent risks To ensure sustainability and maximize profits, construction companies must apply financial leverage wisely and strategically This flexibility and creativity in leveraging finances enable them to navigate challenges and achieve lasting success in a dynamic business landscape.
From 2015 to 2024, Vietnam's construction industry has been pivotal in driving sustainable economic development by building essential infrastructure and generating millions of jobs The strategic use of leverage in business has enabled construction companies to capitalize on investment opportunities while managing risks and maximizing returns However, challenges such as fluctuating raw material prices and decreased demand due to the Covid-19 pandemic have impacted industry performance, making informed business decisions crucial Effective financial leverage not only underscores the construction sector's significance but also enhances its contribution to the nation's economic growth.
In the future, the effective use of financial leverage and robust investment in the construction sector will play a crucial role in fostering Vietnam's inclusive economic development, creating opportunities for workers and businesses while ensuring national sustainability and prosperity This context inspires the thesis topic, "The Impact of Financial Leverage on the Business Performance of Enterprises in the Construction Industry Listed on the Vietnam Stock Exchange." The study aims to analyze the current landscape, elucidate the effects of financial leverage on the operational efficiency of construction firms, and propose actionable solutions to enhance their performance and maximize the benefits derived from financial leverage.
Research objectives
The thesis researches and clarifies the following main points:
First, the study provides theoretical bases on the topic of the impact of financial leverage on the performance of enterprises, thereby building a theoretical foundation from previous studies
The study examined the relationship between financial leverage and the performance of construction enterprises, focusing on those listed on the Vietnam stock market Through empirical analysis, it highlighted how varying levels of financial leverage impact the operational success of these companies.
Finally, the study makes recommendations to managers for construction companies and for the State.
Subjects and scope of research
Object of study: Study on the impact of financial leverage on the performance of construction enterprises listed on the Vietnam Stock Exchange
• In terms of space: 112 construction enterprises are listed on HOSE, HNX, UPCOM in Vietnam
• In terms of time: a 9-year period from 2015 to 2023.
Research methodology
The study gathers data from audited financial statements in 112 construction companies for 9 years from 2015 - 2023 and the data in the industry is compiled and extracted every time used
The study employs data analysis through ratio calculation methods to evaluate dependent variables like Return on Assets (ROA) and Return on Equity (ROE) It also examines independent variables, including the debt to equity ratio (FL) and current ratio (CR), alongside control variables such as total asset turnover (TURN) and company size (SIZE).
Statistical methods are the use of descriptive statistical methods, pooled regression tests OLS, FEM, REM, GLS, linear multi-additive defect tests, variable variance, self-correlation performed on Stata 17 software
In addition, details of the research methods used in the thesis are discussed in chapter II of this thesis.
Thesis Structure
In addition to the introduction, conclusion, the thesis consists of the following chapters:
Chapter II: Research Data and Research Methodology
Chapter IV: Some solutions and recommendations to enhance the efficiency of using leverage in promoting the efficiency of listed construction enterprises in Vietnam.
RESEARCH OVERVIEW
Theoretical basis of the effect of financial leverage on business performance
1.1.1.1 The concept of financial leverage
Financial leverage refers to the extent to which a company utilizes debt to finance its assets, often arising from insufficient cash flow to meet short-term liabilities or the necessity for additional capital to support investments.
It can be seen that financial leverage is an economic concept used to describe the ability that a business or organization has when using debt to strengthen its equity
Enterprises utilize financial leverage by incorporating borrowed capital alongside equity to enhance equity profitability While this strategy can lead to increased returns, it also introduces greater risk for the business.
Using debt instead of equity offers significant tax advantages, as interest payments on debt are exempt from corporate income tax, while dividends to equity holders are taxable By substituting equity with debt, a company can lower its tax liabilities, thereby enhancing its overall value Interest expenses are classified as reasonable deductions from taxable income, creating a tax shield that reduces corporate income tax and boosts profitability Consequently, increasing debt lowers cash costs and elevates profits, ultimately increasing the company's value.
Excessive debt increases a company's risk of bankruptcy and financial distress, as it struggles to meet repayment obligations Additionally, conflicts of interest may arise between creditors and shareholders, with creditors favoring safer investments compared to stock investors who may seek higher returns.
High leverage can provide businesses with increased opportunities to boost profit margins; however, excessive use poses significant risks A low equity-to-liabilities ratio indicates a high degree of leverage, which can lead to financial distress When financial leverage is mismanaged, it may result in mounting debts, reduced liquidity, and ultimately, bankruptcy.
1.1.1.2 How to determine financial leverage
Investors are keenly interested in assessing financial leverage, often analyzing company balance sheets to identify the primary sources of capital—borrowed funds versus equity Key financial leverage indicators, as outlined by Kenn – Ndubuisi et al (2019), provide valuable insights into this aspect of corporate finance.
D/A ratio (Debt/Total Assets Ratio)
The D/A ratio indicates how much of the financing of liabilities to the total assets of the enterprise is, allowing a comparison of the leverage used between different businesses
A high financial leverage coefficient, when paired with efficient business operations, greatly benefits the business owner by demonstrating effective use of financial leverage Conversely, a low coefficient indicates that the enterprise has not fully capitalized on the advantages of capital mobilization, suggesting ineffective use of financial leverage.
The D/A coefficient value is influenced by various factors, including business size, organizational type, and operational field To accurately evaluate whether this indicator is considered high or low, it is essential to compare it with the overall industry benchmarks.
The Debt-to-Equity (D/E) ratio is a key financial metric that measures the proportion of a company's debt relative to its equity, making it one of the most widely utilized leverage ratios in today's financial analysis This ratio provides insight into the balance between debt and equity financing within a business.
A borrowing ratio exceeding 1 suggests that a large enterprise may face significant risks in debt repayment due to fluctuations in bank interest rates Conversely, a borrowing ratio that is too low indicates that the enterprise is not effectively utilizing financial leverage.
The interest payment ratio indicates a company's profitability before tax and interest, reflecting its capacity to meet interest obligations and demonstrating its financial strength in covering borrowing costs.
Formula: Interest payment ratio = EBIT
The coefficient meaning represents how many dollars of interest expense are available to be offset by EBIT
A higher interest coverage ratio indicates an enterprise's strong ability to manage interest payments, showcasing effective use of financial leverage When this ratio exceeds 1, it signifies that the business can comfortably meet its loan interest obligations Conversely, a ratio below 1 suggests that the enterprise either has excessive debt relative to its capacity or is struggling financially, as its earnings before interest and taxes (EBIT) are insufficient to cover interest expenses.
1.1.1.3 Factors affecting the use of financial leverage by enterprises
Asymmetric information theory suggests that a company's size correlates positively with its debt levels, as larger firms typically face lower bankruptcy risks and costs These companies enjoy reduced control costs, less arbitrage, more stable cash flows, easier access to credit markets, and greater opportunities to leverage borrowed funds for tax benefits.
Research by Tran Hung Son et al (2008) indicates that there is an inverse relationship between the ratio of tangible fixed assets and short-term liabilities to total assets, while a direct relationship exists with long-term liabilities Companies with a higher proportion of tangible fixed assets tend to rely less on short-term liabilities, aligning their financing with the nature of their assets Additionally, enterprises with significant tangible fixed assets are more likely to utilize debt compared to those with greater intangible assets, as the former face lower bankruptcy costs in the event of financial distress.
Research by Dinh Van Duc (2009) defines business risk as the likelihood that an entity's performance will fall short of financial expectations due to competitive conditions In a competitive landscape, predicting adverse fluctuations in the business environment becomes challenging, increasing the risk of bankruptcy As investor confidence wanes, it becomes more difficult for enterprises to raise external capital, resulting in a decreased debt utilization ratio.
Research overview
Some typical studies have shown the inverse correlation between financial leverage and important financial factors in the business as well as the performance of the business:
A study conducted by Dr Bambang Setyobudi Irianto and colleagues (2017) examined the effects of profitability, financial leverage, business size, and capital intensity on tax avoidance, utilizing data from 156 Indonesian-listed manufacturing companies between 2013 and 2015 The research employed multiple regression analysis, considering profitability, financial leverage, enterprise size, and capital intensity as independent variables, while tax avoidance served as the dependent variable Findings revealed that profitability, business size, and capital intensity positively influenced tax avoidance, whereas financial leverage had a negative effect.
Wiwiek Mardawiyah Daryanto et al (2018) studied the impact of liquidity and financial leverage on the financial performance of real estate enterprises in Indonesia
Regression analysis and ANOVA F testing reveal that current debt ratios (CR) and debt-to-asset ratios (DAR) negatively impact return on assets (ROA), while return on interest (TIE) positively correlates with ROA This indicates that financial leverage adversely affects the financial performance of real estate enterprises in Indonesia.
A study by Alfredo Grau and Araceli Reig (2019) investigated the impact of financial leverage on the profitability of agricultural companies in Europe, utilizing data from 9,652 small and medium-sized agricultural enterprises spanning from 2009 to 2019 The findings highlight the significant relationship between financial leverage and profitability, emphasizing its implications for the financial strategies of agricultural businesses.
A 2016 study analyzes the impact of various financial factors on the profitability of SMEs, using return on assets (ROA) as the dependent variable Key independent variables include business leverage (OLM), financial leverage (LEV), intangible assets (INTANG), and the logarithm of total assets (LTOTASS) Control variables consist of revenue flow (LSALES), liquidity (LIQUID), and cash flow from operating activities (CASH) The findings indicate that financial leverage from business activities significantly influences SME profitability, with its effects varying based on country-specific factors Additionally, factors such as high outstanding debt, business size, innovation characteristics, and reputation also play a role in determining profitability, with their impact influenced by the level of leverage in the company's operations.
A study conducted by Md Musfiqur RAHMAN, Farjana Nur SAIMA, and Kansar JAHAN (2020) explored the impact of financial leverage on corporate profitability within Bangladesh-listed textile companies The research utilized the return on equity (ROE) ratio to measure profitability and employed both current and long-term debt as proxies for financial leverage Various analytical models, including Pooled OLS, fixed effects model (FEM), and generalized method of moments (GMM), were applied to assess the relationship between financial leverage and profitability The findings revealed a significant inverse relationship between leverage and profitability, particularly evident through the Pooled OLS methodology, aligning with results obtained from the fixed effects model.
GMM methods Thus, it is implied that the profitability of the company is negatively affected by its capital structure (effects from financial leverage)
Ahmadu Abubakar et al (2021) conducted a study examining the impact of financial leverage on the financial performance of construction, real estate, and natural resources companies in Nigeria, using data from six listed firms between 2005 and 2019 Utilizing a fixed-impact model, the analysis revealed that short-term debt negatively affects long-term financial performance Additionally, age was found to have a significant negative impact on financial performance, while company size positively correlated with financial performance, as indicated by return on assets (ROA) The study concludes that debt financing may hinder improvements in financial performance, recommending that companies in Nigeria's construction, real estate, and natural resources sectors evaluate the effective use of debt to enhance internal equity within their capital structure.
A study by Alim, Wajid et al (2022) investigated the effects of financial leverage on the performance of fertilizer sector companies in Pakistan, analyzing data from 25 listed firms between 2016 and 2020 The research utilized descriptive and regression analysis to assess the relationship between financial leverage and profitability, revealing that higher leverage correlates with significant returns on assets, which are crucial for evaluating financial performance However, the study found no significant connection between leverage and the rate of return on equity, indicating that an increasing debt ratio may lead to lower profits Furthermore, the results highlighted a negative relationship with operating leverage, while demonstrating a positive correlation with financial leverage and combined leverage among the companies in the Pakistani fertilizer industry.
A study by Richard Arhinful and Mehrshad Radmehr (2023) examined the influence of financial leverage on the performance of companies listed on the Tokyo Stock Exchange, analyzing 257 firms across sectors such as automotive, construction, electronics, metals, and telecommunications from 2000 to 2021 Utilizing stochastic effects and GMM methods, the research revealed that interest rate insurance positively and significantly impacts Tobin's ROA, ROE, and Q, while cash insurance also shows a positive effect on ROE Conversely, the study indicates that debt repayment obligations negatively and significantly affect financial performance.
However, another school of study results in financial leverage that has a positive impact on financial factors and the performance of the business:
A study by Ilhan Dalci (2018) examined the impact of financial leverage on the profitability of 1,503 manufacturing companies listed on the Chinese stock exchange from 2008 to 2016 The research utilized Return on Assets (ROA) and Return on Equity (ROE) as dependent variables, while independent variables included current liabilities to total assets (STDR) and total debt to total assets (TDR), along with control variables such as the commercial cycle (NTC), logarithm of total assets (LTA), growth capacity (GROWTH), GDP growth (GDP), and annual inflation rate (INF) The findings revealed that NTC, GDP, and LTA negatively influence profitability, whereas INF has a positive effect, and GROWTH is statistically insignificant Furthermore, the study concluded that financial leverage, represented by TDR and STDR, positively impacts the profitability of manufacturing companies in China, primarily due to the tax shield benefits associated with increased debt levels.
In their 2018 study, Umer Iqbal and Muhammad Usman explored the relationship between financial leverage and the performance of synthetic textile companies in Pakistan, using data from 2011 to 2015 from 16 leading firms Their analysis, which employed descriptive statistics, correlation, and regression models, revealed that financial leverage negatively impacts a company's Return on Equity (ROE) while positively influencing Return on Assets (ROA) They found that high interest rates and increased debt diminish equity value, adversely affecting overall performance Conversely, a moderate level of debt can enhance a company's operating efficiency, provided it does not exceed equity levels.
A study by Abdul Rahman Shaika and Raj Bahadur Sharma (2021) examined the effects of leverage and capital exchange on profitability in Saudi banks from 2014 to 2019 Key performance indicators such as Earnings per Share (EPS), Return on Assets (ROA), and Return on Equity (ROE) were analyzed alongside independent variables including Total Debt Ratio (TDR), Tier 1 Capital Ratio (Tier 1 CAP), and Debt to Capital Ratio (DE), with company size as a control variable Utilizing pooled regression analysis, the findings indicated a positive correlation between profitability margins and Debt to Equity Ratio Additionally, TDR showed a positive relationship with ROA and ROE, while having a negligible negative impact on EPS Similarly, the Tier 1 Capital Ratio was positively associated with ROA and ROE but exhibited a negligible relationship with EPS.
In addition, there is a third school of study that points out that financial leverage does not make sense for a measure of performance (ROA):
A study by Vladyslav Deboi et al (2021) examines the influence of financial leverage on the profitability of the 18 largest real estate companies listed on the Swedish Stock Exchange from 2016 to 2020 Utilizing a quantitative research methodology, the study employs multiple regression analysis within a positivist framework and deductive measurement Financial leverage is defined through short-term and long-term liabilities relative to assets, while profitability is measured using return on assets (ROA) Control variables include company size, liquidity, and solvency The findings indicate that financial leverage does not significantly affect ROA in the Swedish real estate sector.
There have been many previous studies in the country that have conducted studies related to factors affecting financial leverage, notably the following studies:
A study conducted by Assoc Dr Le Thi Tuan Nghia and MSc Pham Manh Hung (2013) analyzed the factors influencing financial leverage in 22 Vietnamese commercial banks from 2009 to 2014 Utilizing a regression model, the research identified profit, enterprise size, collateral value, and growth as independent variables, with financial leverage as the dependent variable The findings revealed a significant positive correlation between bank size and financial leverage, indicating that larger banks tend to have higher leverage Additionally, collateral value was positively related to financial leverage, while growth and profitability exhibited an inverse relationship, suggesting that as commercial banks experience higher growth and profitability, their debt ratios decrease, leading to a higher equity ratio.
The research paper by Le Thi Nhung (2020) investigates the factors influencing corporate financial leverage in Vietnamese real estate and building materials enterprises, utilizing financial leverage as the dependent variable alongside nine independent variables: asset structure, enterprise size, solvency, profitability, growth ability, unique characteristics of enterprise assets, taxes, tax benefits from depreciation, and business uptime Employing generalized least squares (GLS) estimation methods, the study identified three optimal models across real estate and building materials data Findings revealed that return on assets (ROA) has the strongest impact on financial leverage, with liquidity and growth following in hierarchical order, aligning with established theories and empirical evidence Additionally, the static capital structure trade-off theory explains the influence of taxes, non-debt tax shields, size, and age on loan choices for these enterprises, while the study's unique findings on financial leverage diverge from previous research.
However, there are a number of studies showing that leverage has a negative impact on important financial factors and business performance of enterprises
A study by Tran and Dang (2017) investigates the effects of financial leverage on the performance of Vietnamese enterprises, utilizing data from 100 listed companies on the Vietnamese stock market from 2012 to 2016 The findings reveal that financial leverage negatively impacts business performance, with varying degrees of effect across different percentiles Specifically, businesses with lower return on equity (ROE) experience a less pronounced negative impact from increased financial leverage, whereas those with higher ROE face a more significant decline Additionally, factors such as business size, net profit ratio, and total asset utilization are statistically significant and positively correlated with ROE across all percentiles.
Research gaps
Recent studies utilizing various sample sizes and research methods have revealed a bidirectional relationship between financial leverage and business performance However, upon reanalyzing previous research, the author identified existing gaps that warrant further investigation Despite extensive exploration of the topic by numerous scholars, discrepancies in conclusions regarding the impact of financial leverage on corporate performance persist, largely due to limitations in scope, time, sample size, and research fields.
Research findings can be constrained by the evolving economy, varying business environments, and macroeconomic factors In countries with advanced capital markets and diverse banking structures, businesses can leverage resources more effectively However, in Vietnam, the construction industry faces challenges due to limited access to capital and long turnover cycles associated with complex projects Additionally, macro factors such as inflation, the Covid-19 pandemic, and government financial policies significantly impact the necessity and efficiency of financial leverage in sectors like construction.
This thesis will examine the influence of financial leverage on the performance of companies in the construction sector, aiming to enhance existing research, enrich the topic, and provide timely and practical solution recommendations.
Chapter 1 establishes the theoretical framework for understanding financial leverage and its impact on the operational efficiency of enterprises It reviews various domestic and international studies related to financial leverage, operational efficiency, and their interrelationship This foundational analysis serves as a critical basis for the subsequent sections of the essay, ensuring a comprehensive exploration of the topic.
RESEARCH DATA AND RESEARCH METHODOLOGY
RESEARCH DATA
2.1.1.1 Characteristics of Vietnam's construction industry
Vietnam is undergoing an economic structural transformation aimed at industrialization and modernization, leading to significant growth in the construction sector The construction market has shown steady growth over the years, with a rising number of projects across various fields, including residential, commercial, transport infrastructure, industrial parks, and utility energy construction A robust economy serves as the foundation for the expansion of multiple industries, particularly construction.
The construction industry is characterized by high capital intensity and significant input costs, where the fluctuating prices of raw materials like steel directly impact enterprise revenue and profit margins Each construction project is unique, varying in scale, complexity, and materials, which results in differing production costs and required capital investments for labor, materials, equipment, and overhead To address these variations, construction companies often adjust the proportion of their capital sources, enabling them to meet the specific financial needs of each project and optimize their financing structure.
The construction industry experiences a lengthy business cycle, with projects typically taking several years to complete This extended timeline, along with the phased processes of construction, fund disbursement, and project handover, significantly impacts the financial health of construction companies As a result, these enterprises often face substantial liabilities, and their inventory ratio constitutes a significant portion of total assets, influencing their payable, receivable, and cash flow dynamics.
The construction industry is highly influenced by the macroeconomic business cycle During periods of economic growth, the demand for infrastructure and housing rises, leading to increased revenue and profits for the industry Conversely, in a recession, demand for housing diminishes as consumers prioritize basic needs, and government investment in public projects decreases, resulting in declining sales and profits for the construction sector.
2.1.1.2 Overview of Vietnam's construction industry from 2015-2023
Vietnam's construction market is experiencing significant growth across various sectors, including commercial, residential, industrial, and infrastructure construction This market has become increasingly segmented, encompassing diverse projects such as demolition and new constructions, which are vital for the country's economic growth Over the past decade, Vietnam's construction industry (VCI) has averaged an impressive growth rate of over 8.5% annually, a trend expected to continue due to government initiatives aimed at enhancing infrastructure quality Key investments are being directed towards infrastructure, tourism, and housing projects, along with a strong focus on public infrastructure, healthcare, and educational facilities.
In Vietnam, construction is one of the country's major and important economic sectors
It contributes a significant part to the GDP of the national economy and is one of the fast-growing sectors in recent years
Figure 2.1: Revenue growth rate of construction enterprises from 2014 -2023
Source: Self-compiled author from General Statistics Office
The General Statistics Office reports that Vietnam's construction industry experienced its highest revenue growth rate of 10.82% in 2015, following a peak in 2014 Since then, the growth rate has shown a gradual decline but began to rise again in 2018, reaching 9.2% and stabilizing at 9% in subsequent years.
In 2015, the Vietnamese government unveiled the Master Plan for the development of the country's new seaport system, aimed at enhancing port infrastructure by 2020 Despite a slowdown in construction industry growth to 6.8% in 2020, Vietnam's performance remains robust compared to other Southeast Asian markets, as reported by GlobalData.
In 2015, the Government initiated a plan to enhance the seaport infrastructure by 2020, aiming to improve the country's seaport system However, the COVID-19 pandemic significantly disrupted the construction sector, leading to prolonged social distancing, a slowdown in global trade and tourism, and increased consumer apprehension These factors adversely affected both human resources and materials in the construction industry, hindering development by the end of 2022 Despite a decline in revenue growth for Vietnam's construction industry, a report by Global Data (2023) indicates that Vietnam still performed slightly better than other Southeast Asian countries.
The construction industry has experienced growth entering 2021 and continuing into 2022, largely due to vaccination deployment plans A report from the Ministry of Construction (2022) indicates that the industry’s revenue reached approximately 2.2 billion USD in 2021, reflecting a 3.8% increase from 2020 However, profit margins for contractors have significantly declined, primarily due to rising costs of raw materials and labor Key building materials, including steel, sand, cement, and diesel, saw rapid price increases in 2021, while contractors struggled to adjust contract prices accordingly Additionally, labor costs surged in major cities as many workers returned to their hometowns during social distancing measures and have yet to return Despite these challenges, some construction industry indicators showed improved results in 2022 compared to the previous year.
In 2023, Vietnam's economy has demonstrated remarkable resilience amid global challenges, including slowing growth due to tightening monetary policies in major economies and ongoing conflicts such as the Russia-Ukraine war Despite these difficulties, Vietnam has maintained stability and a positive growth trajectory, positioning itself as one of the few economies experiencing growth in a turbulent global landscape.
In 2023, construction enterprises experienced an 8.5% revenue growth, driven by favorable macroeconomic conditions and reduced costs for raw materials, particularly steel, and labor The total revenue for the construction industry is projected to reach VND 1,250,000 billion, reflecting an increase of 8.67% compared to 2022, according to the Ministry of Construction.
2.1.2 The current situation of the performance of construction enterprises recently
Figure 2.2: Average ROA and ROE of 112 construction enterprises in Vietnam in the period 2015-2023
From 2015 to 2016, the similarity between the Return on Assets (ROA) and Return on Equity (ROE) indicators decreased slightly, with ROA dropping by 2.08% and ROE by 4.27% This declining trend continued until 2019, where ROE fell by 4.77% and ROA by 2.28% However, by 2023, both ROA and ROE in the industry showed a steady increase, reaching 2.48% and 5.1%, respectively.
From 2016 to 2018, the construction industry experienced significant revenue growth, driven by a booming real estate market and increased profitability in the building materials sector In 2019, the industry reached its peak growth rate, with a total production value of VND 358,684 billion, representing 5.94% of the nation's GDP This surge can be attributed to a high urbanization rate, which heightened the demand for infrastructure development, alongside the influx of foreign investment in industrial construction as factories relocated from China.
Besides, the Covid-19 pandemic was the reason why ROA decreased to 1.92% and ROE decreased to 4.03% in 2020 In 2021-2023, ROA and ROE recovered strongly, recording figures of 2.04% - 2.48% and 4.33% - 5.10%, respectively
The COVID-19 pandemic has hindered revenue growth for construction businesses, which are currently grappling with intense industry competition and a sluggish real estate market Additionally, there is a concerning imbalance between total debt and capital, largely due to rising accounts receivable relative to total assets The significant rise in borrowed capital has further diminished profits, negatively impacting overall business efficiency Key factors influencing the financial health of construction companies include low disbursement rates and delays in public investment projects.
To maintain operational efficiency, construction enterprises have adopted various mandatory measures, similar to other industries, including reducing labor costs through salary cuts and indefinite leave According to the General Statistics Office (2020), 71.1% of these enterprises implemented labor-related solutions: 32.8% reduced their workforce, 44.2% offered rotating leave, 22% provided unpaid leave, and 18.4% directly cut wages Additionally, some companies pursued innovative strategies, with 4.3% focusing on e-commerce development, 6.2% transforming key products to embrace new competition, 11% seeking new input materials, and 18.7% exploring new output markets to enhance operational efficiency amid the challenges posed by the epidemic.
Research methodology
Step 1: Study the literature and determine the research method and model orientation:
Conducting thorough research and analyzing relevant theories and viewpoints from both domestic and international studies is essential This process allows for the extraction of valuable insights and lessons, which can guide the selection of appropriate models for future research endeavors.
Step 2: Research on the current situation of using leverage and operational efficiency of real estate enterprises
This article provides a concise analysis of the construction industry's characteristics to enhance understanding of enterprise operations It explores the trend of financial leverage utilization among construction companies and assesses their performance Ultimately, the study evaluates the efficiency of financial leverage in the construction sector, offering insights into the industry's operational dynamics.
Step 3: Determine the criteria to use
This article examines the influence of financial leverage on the performance of construction enterprises by analyzing key financial indicators, including total assets, current assets, inventory, equity, liabilities, current liabilities, net revenue, and profit after tax It calculates essential financial ratios such as the debt-to-equity ratio, total asset turnover, payment ratio, enterprise size, total asset growth rate, return on equity (ROE), and return on total assets (ROA) to assess the impact of these factors on overall performance.
Step 4: Collect and process data and calculate necessary indicators
Data for this study was gathered from construction companies listed on the Vietnam stock exchange (HOSE, HNX, and UPCOM) covering the period from 2015 to 2023, utilizing audited financial statements and annual reports In cases where specific figures and indicators were not available, the author conducted eliminations and calculations to derive the necessary metrics for analysis.
Step 5: Select the appropriate model and conclude the results after the study
Once the essential data for analysis and research is gathered, it is crucial to apply suitable research methods to experimentally test the models The author will utilize techniques to identify relationships between variables and assess their interactions The study's findings will be compared against the initial hypotheses, leading to informed conclusions.
The study analyzed aggregated data from 112 construction enterprises listed on the Vietnam Stock Exchange between 2015 and 2023 This research utilized tabular data sourced from statistical websites like Vietstock.vn and Cafef.vn, along with audited financial statements from companies listed on HOSE, HNX, and UPCOM during the specified period, ensuring the collection of all necessary indicators.
The study sample includes 1008 observations of 112 construction enterprises for the period 2015-2023
2.2.3 Building variables in the model
The study examines the model using two dependent variables: Return on Assets (ROA) and Return on Equity (ROE), which reflect the performance of the construction industry Additionally, financial leverage (LEV) serves as the independent variable, while control variables include enterprise size (SIZE), current ratio (CR), gross profit margin (GM), asset turnover (TURN), and revenue growth rate (GROWTH) A summary table details the calculation and reference methods for all variables involved.
Table 2.1: Summary of variables of the research model
Ampersand How to measure it Empirical sources
Tran Thi Tuan Anh & Dang Thi Thu Thuy
(2017), Vladyslav Deboi Alim, Wajid et al (2022); Lai,
Wiwiek Mardawiyah Daryanto et al (2018),
SIZE Log(total assets) ASS Dr Le
Thi Tuan Nghia and Pham Manh Hung
(2013), Tran Thi Tuan Anh & Dang
(2017), Le Thi Nhung (2020); Ahmadu Abubakar et al (2021)
Tran Thi Tuan Anh & Dang Thi Thu Thuy
The ratio of current assets to total assets
Alfredo Grau and Araceli Reig
Covid-19 COVID The years 2020, 2021 and 2022 are worth 1; The remaining years are worth
Building on the foundational research of scholars like Tran Thi Tuan Anh and Dang Thi Thu Thuy (2017), this thesis examines the relationship between financial leverage and the performance efficiency of Vietnamese construction enterprises, utilizing specific variables identified in prior analyses.
Return on Total Assets (ROA) is a key financial metric that indicates the profitability of a company's total assets It measures how effectively a business utilizes its assets in the organization, management, and execution of its operations, providing insights into the efficiency of asset usage.
Return on Assets (ROA) indicates the profitability generated from capital invested in assets, reflecting how effectively a business utilizes its resources A higher ROA signifies efficient asset management, while a lower ROA suggests potential inefficiencies in asset usage.
Return on equity ROE (%): is the rate of return on equity to evaluate the efficiency in using capital ROE is a measure of the capital efficiency of an enterprise
The meaning shows that a capital that an enterprise spends on production and business activities will bring a few dollars of profit
Financial leverage (LEV), defined as the debt-to-equity (D/E) ratio, indicates the proportion of corporate capital sourced from debt compared to ownership costs This ratio serves as a key measure of a company's reliance on debt for financing its operations, highlighting its degree of dependence on borrowed funds A high financial leverage ratio may signal significant financial challenges and an increased risk profile for the business, as it suggests a substantial reliance on debt, which can expose the company to potential financial instability.
The current ratio (CR) is a key financial metric that evaluates a company's ability to meet its short-term liabilities, typically due within a year It assesses how effectively a business can utilize short-term assets like cash, inventory, and accounts receivable to settle these debts A CR greater than 1 indicates a stronger solvency position, suggesting the company is more capable of covering its obligations, although excessively high values may signal inefficient asset use Conversely, a CR below 1 reveals potential liquidity issues, indicating the enterprise may struggle to pay its short-term debts Thus, the current ratio serves as a crucial indicator of a company's financial health and operational performance.
Gross profit margin (GM) is a key financial metric that assesses a company's financial health by measuring the profit remaining from product sales after deducting the cost of goods sold This ratio reveals the profit generated per unit of capital, highlighting the business's efficiency Significant fluctuations in gross profit margin may indicate issues such as poor management or subpar products, directly reflecting the company's operational effectiveness in generating profit for each dollar invested.
Enterprise size (SIZE) refers to the scale of a business, assessed through indicators like revenue, employee count, assets, capital sources, market activities, production scale, and distribution scope Businesses are typically classified into small, medium, and large categories based on various factors, primarily focusing on revenue and employee numbers.
This thesis incorporates the concept of enterprise size (SIZE), defined as the total assets held by a business, as a control variable in the research model This inclusion is essential for evaluating both the profitability and operational efficiency of the enterprise.
RESEARCH RESULTS
Data descriptive statistics
Figure 5.1 presents statistics on standard deviation, mean, maximum, and minimum values of various factors used to assess the performance of Vietnamese construction enterprises from 2015 to 2023 The analysis includes two key dependent variables for measuring performance: ROE (Return on Equity after tax) and ROA (Return on Total Assets after tax) Additionally, nine other variables, such as LEV (financial leverage) and TURN (total asset turnover), influence the performance of these construction businesses.
CR (current ratio ratio), GM (gross profit margin), GROWTH (revenue growth rate), SIZE (enterprise size), LIQ (ratio of current assets to total assets), COVID (Covid-19), INLAT (inflation rate)
Table 3.1 Statistics describing variables in the model
Source: Compiled author from STATA
For 2015-2023, ROA and ROE have an average value of 2.168% and 4.355%, respectively, with standard deviations of 5.75532% and 45.38958%, respectively With
ROE having the largest value of 356.51%, the lowest value is -1090.77% While ROA has the largest value of 37.58% and the smallest value is -57.67%
The average Return on Equity (ROE) and Return on Assets (ROA) for 112 construction enterprises is notably low, with figures falling below 10% This disparity highlights significant fluctuations between the highest and lowest performance indicators The challenges faced by the construction industry, characterized by volatility and influenced by economic conditions, contribute to these results Notably, only a select few companies, such as Hoa Binh Construction Group (HBC) and Vinaconex Construction Joint Stock Company (VCG), have managed to achieve consistent and high profitability during these turbulent market periods This situation underscores the pronounced divergence in operational performance among construction firms, driven by factors such as company size, competitive dynamics, and varying operational strategies.
The average debt-to-equity ratio (LEV) for construction enterprises stands at 3.173211, with a significant standard deviation of 6.844549, indicating a heavy reliance on debt financing and low financial autonomy This suggests that many construction companies depend considerably on external capital Furthermore, there is a notable disparity in loan utilization among these firms, influenced by factors such as company size, risk tolerance, and capital structure policies The highest recorded ratio is 123.1748, while the lowest is -12.63369.
The current ratio (CR) in the construction industry is favorable, averaging 1.95, with a standard deviation of 3.69 The CR ranges from a minimum of 0.20 to a maximum of 62.70 While a high CR may seem positive, it can indicate an excess of idle capital, suggesting that the efficiency of capital utilization is low.
The gross profit margin (GM) ranges from a low of -3.084804 to a high of 9.384849, signaling potential shifts in company growth rates Despite this variability, the average gross profit margin stands at a positive 0.1539847, indicating overall profitability.
The study analyzed enterprise size, measured as the logarithm of total assets, revealing a range from 23.36811 to 31.41112, with a mean of 27.46718 and a standard deviation of 1.52845 The sample included a diverse array of construction companies, spanning from small and medium enterprises to large corporations.
Total asset turnover (TURN) averages 0.6635, with a standard deviation of 0.4579 The turnover values range from -0.0464 to 3.4875, suggesting that the asset management business is performing well, despite the relatively short turnover period.
The average growth rate of total revenue (GROWTH) for enterprises is 0.265, with a significant standard deviation of 5.195, indicating substantial variability Revenue growth rates among businesses in the sample vary widely, ranging from -116.44 to 72.62, reflecting the uneven nature of business growth.
The LIQ variable shows that the average ratio of current assets to total assets in construction enterprises is 0.6755, highlighting that current assets represent a significant portion of the total assets.
With two macro control variables, COVID and INLAT (inflation rate), the variables repeat year-on-year and have mean values of 0.33333333 and 0.0273556, respectively.
Correlation between variables in the model
To check the correlation between variables, the author performs a self- correlation test
Table 3.2 Correlation between variables in the model
ROA ROE LEV CR GM SIZE TURN GROWTH LIQ COVID INFLAT
Source: Compiled author from STATA
Using Stata17, the analysis presented in Table 3.2 reveals that all variables in the model exhibit low correlation, with none exceeding 80% This indicates that the variables do not significantly impact the study's implementation The findings confirm that most variables are uncorrelated, validating the research model as meaningful and appropriate for observation and implementation.
The correlation coefficient indicates the direction of the relationship between variables, with a positive sign reflecting a direct relationship and a negative sign indicating an inverse relationship In this study, financial leverage (LEV), the ratio of current assets to total assets (LIQ), and the inflation rate (INFLAT) demonstrate a negative correlation with both return on assets (ROA) and return on equity (ROE) Conversely, variables such as current ratio (CR), gross margin (GM), company size (SIZE), turnover (TURN), and growth (GROWTH) show a positive correlation with ROA and ROE Interestingly, the COVID variable exhibits a negative correlation with ROA while positively correlating with ROE.
Quantitative Research Results
The order of execution of regression models and tests required for dependent variables:
Some of the inspections performed:
Multicollinearity refers to the high correlation among independent variables in a regression model, which can distort various indicators and render quantitative analysis results meaningless To assess the presence of multicollinearity, the Variance Inflation Factor (VIF) is commonly utilized; a VIF greater than 10 typically indicates significant multicollinearity issues, as noted by researchers David G Kleinbaum, Lawrence L Kupper, and Keith E Muller.
1988) In contrast, if < 10, there will be no linear Multicollinearity
Ftest to select the right model between Pooled OLS and FEM
H0: The Pooled OLS model is suitable
H1: The FEM model is suitable
If the Prob coefficient > F = a >5%, then accept H0
If the Prob coefficient > F = a chibar2= a >5%, then accept H0
If the Prob coefficient > chibar2= a chi2 = a >5%, then accept H0
If Prob > chi2 = a 5% accepts H0
If the coefficient Sig chibar2 value of 0.0000.
Figure 3.2 Testing the variable variance of the FEM model with the ROE variable
Therefore, it is necessary to overcome the model defect through the implementation of regression using the feasible generalized minimum squares (GLS) method provided that the model has variable variance
The analysis of table 3.6 reveals that the ROE-dependent marine regression results from the GLS model indicate that various factors, including LEV, CR, GM, SIZE, TURN, GROWTH, LIQ, COVID, and INFLAT, influence the performance of construction enterprises listed on the Vietnam stock market However, it is important to note that the variables CR, GROWTH, LIQ, and COVID were found to be statistically insignificant.
The variables influencing Return on Assets (ROA) are ranked in descending order as follows: inflation rate (INFLAT), gross profit margin (GM), total asset turnover (TURN), enterprise size (SIZE), and financial leverage (LEV) Notably, GM, TURN, and SIZE positively correlate with ROA, whereas LEV and INFLAT exhibit an inverse relationship Consequently, the hypotheses H1 are accepted.
3.3.4 Synthesis and discussion of research findings
Table 3.8 Synthesis of quantitative research results with appropriate models
Table 3.9: Synthesis comparing hypothesis results with research results from the model
Variable Hypothesis ROA ROE Conclude
Source: Self-synthesized author Note: (+) co-directional action, (-) opposite effect, x no impact
This thesis examines the impact of financial leverage on the financial performance of 112 construction companies listed on the Vietnamese stock market from 2015 to 2023 The research model incorporates independent variables such as financial leverage (LEV), current ratio (CR), gross profit margin (GM), enterprise size (SIZE), total asset turnover (TURN), revenue growth rate (GROWTH), current assets to total assets ratio (LIQ), and external factors like COVID-19 and inflation (INFLAT) The dependent variables, return on equity (ROE) and return on assets (ROA), serve as indicators of business performance The study employs various regression models, including Pooled OLS, FEM, REM, and GLS, to validate the formulated variables and achieve its research objectives The analysis reveals that ROA and ROE effectively illustrate the significant influence of financial leverage on the performance of construction enterprises, leading to conclusions regarding this relationship based on the regression results.
Table 3.10 Financial Leverage & Performance of Enterprises in the Construction
The STATA model results indicate that the independent variable LEV significantly affects both ROA and ROE Specifically, the negative coefficient of -0.0010339 for ROA suggests that increased financial leverage leads to a decrease in return on assets, with each unit change in leverage resulting in an average change of -0.0010339 units in ROA Similarly, the negative coefficient of -0.0159099 for ROE indicates that higher financial leverage correlates with a decline in return on equity, with each unit change in leverage causing an average change of -0.0159099 units in ROE Notably, the impact of financial leverage on ROE is more pronounced than its effect on ROA, as evidenced by the higher coefficient for ROE.
Financial leverage has a more substantial impact on Return on Equity (ROE) compared to Return on Assets (ROA) The regression analysis highlights this difference, showcasing how financial leverage specifically affects a company's financial performance in relation to its equity.
Financial leverage (LEV) inversely affects the construction industry, as indicated by a 99% reliability in its correlation with ROA and ROE Regression model findings suggest that high financial leverage ratios may diminish the competitive edge of construction firms This contrasts with findings from Abdul Rahman Shaika & Raj Bahadur Sharma (2021) but aligns with domestic studies by Nguyen, V C., et al (2019) and Lai, C M P & Nguyen, T L (2022) Conversely, research by Vladyslav Deboi et al (2021) on Swedish real estate companies presents a different perspective Thus, financial leverage acts as a "double-edged sword," potentially enhancing profits through debt but risking adverse outcomes if not managed effectively.
Recent findings indicate that construction enterprises have not efficiently utilized loan sources Descriptive statistics reveal that from 2015 to 2023, construction companies in Vietnam have maintained a high leverage ratio, averaging 3.173211 These regression results align with the current realities of the Vietnamese construction industry.
In addition to financial leverage, the thesis also examines the impact of important control variables on the performance of construction enterprises
The current ratio (CR) demonstrates a significant correlation with return on assets (ROA), showcasing a high reliability of 95%, indicating that the current ratio influences business performance This finding contrasts with the research conducted by Wiwiek Mardawiyah Daryanto et al.
The positive influence of the current ratio on the business performance of construction enterprises stems from their strong capability to manage short-term debts effectively This not only enhances their credibility with suppliers and customers but also allows construction companies to utilize working capital efficiently, leading to higher profits Additionally, this financial health enables enterprises to invest in new business ventures and expand their market reach.
SOME METHODS AND RECOMMENDATIONS TO
Some direct solutions for Vietnamese construction enterprises
4.1.1 Solutions to release the negative impact of financial leverage in promoting the efficiency of listed construction enterprises in Vietnam
Research indicates that financial leverage negatively affects the performance of construction enterprises, as evidenced by profitability metrics like ROE and ROA To mitigate this impact, companies can either reduce debt or increase equity, tailored to their specific business characteristics and economic conditions However, management must carefully weigh these options, as reducing debt may forfeit tax advantages from interest deductions, while increasing equity through retained earnings or issuing shares requires consideration of capital costs and dividend pressures When utilized appropriately, financial leverage can enhance profits and operational efficiency, but excessive reliance can lead to burdensome debt costs, interest obligations, and diminished solvency, ultimately harming business operations and efficiency.
Construction companies must explore various input sources and optimal loan mobilization channels to maximize financial leverage Additionally, it is essential to implement accurate policies and strategies for utilizing financial leverage effectively to enhance operational efficiency To address these needs, the author proposes several solutions.
Construction enterprises should leverage low loan costs available through preferential bank packages under supportive economic policies Given the construction industry's significance and the long-term nature of its projects, companies can benefit from state-supported loan policies with favorable interest rates By proactively establishing a sound capital structure, businesses can secure low-interest loans for their investment projects, ultimately reducing capital costs and enhancing profitability.
To minimize costs and manage risks effectively, enterprises should explore diverse funding sources, including retained profits, additional share issuance, and corporate bonds It is essential to maintain transparency and tailor capital mobilization strategies to the specific characteristics of each construction enterprise within varying economic contexts This approach enables a balanced combination of debt and equity, ensuring financial safety while enhancing overall business value.
To effectively manage loans, businesses must adopt a flexible approach, ensuring that funds are utilized for appropriate purposes to avoid capital wastage Utilizing loans for investment activities and scaling operations is crucial, alongside developing a well-structured investment and spending plan Clear investment policies that anticipate revenues and costs will enable businesses to meet their loan obligations, ensuring the ability to pay both interest and principal Furthermore, having a strategic plan for managing and repaying due principal and interest is essential to alleviate debt repayment pressure.
4.1.2 Other solutions to improve the operational efficiency of Vietnamese construction enterprises
Construction enterprises must enhance their current solvency by conducting thorough assessments of customer creditworthiness prior to contract signing and verifying customer information through reliable sources Additionally, they should negotiate flexible payment terms that accommodate customers' financial situations and provide various payment options for convenience Effective capital management and stringent debt recovery policies are crucial for maintaining solvency Furthermore, increasing employee training in financial and risk management will optimize solvency management and boost the overall efficiency of the construction business.
To enhance their financial health, businesses must prioritize increasing their gross profit margin, as higher profits reflect effective capital utilization and strong leadership throughout production and operational phases Additionally, increased profitability offers significant financial advantages, including improved debt repayment capabilities and opportunities for reinvestment Therefore, the study recommends strategies aimed at boosting enterprise profitability.
To enhance the quality of construction and installation services, construction companies must prioritize the quality of input materials and consistently evaluate the ongoing projects Regular assessments and progress tracking are essential for ensuring high standards Additionally, assembling a skilled team of engineers, designers, and workers is crucial for boosting project efficiency and delivering superior results to customers.
To remain competitive in the market, enterprises must create distinctive highlights that attract customers Key factors influencing business competitiveness include distribution range, product pricing, advertising strategies, and product quality The study recommends that businesses prioritize expanding their consumption markets and diversifying their product offerings to better meet customer needs.
To increase the efficiency of a construction business in Vietnam based on the size factor of the business, there are a number of solutions that can be implemented
To enhance labor productivity, businesses should leverage technology and automation to streamline workflows Effective resource management and allocation are crucial for efficiently meeting project demands and optimizing operations Additionally, fostering a positive work environment, attracting top talent, and implementing comprehensive training and development policies are essential for building the necessary resources to scale operations By adopting these strategies, businesses can optimize performance according to their scale, ultimately boosting competitiveness and promoting sustainable market development.
To enhance asset turnover, enterprises should focus on optimizing the management and utilization of existing assets through recycling and reusing, which reduces costs and improves personnel management for efficient resource use Additionally, refining production processes and inventory management can decrease cargo turnover time, leading to better cash flow and profitability Furthermore, implementing strict contract and payment management practices can reduce payment wait times and optimize asset turnover Collectively, these strategies aim to improve the business efficiency of construction enterprises in Vietnam.
To enhance the operational efficiency and revenue growth of Vietnamese construction enterprises, several strategic measures can be implemented Diversifying products and services effectively expands market reach and meets varied customer needs Investing in research and development (R&D) fosters innovation, leading to new technologies and offerings that drive revenue Scaling operations by engaging in new projects or expanding existing ones optimizes output and profitability Additionally, improving product and service quality attracts customers and fosters loyalty, further boosting revenue Lastly, modernizing production processes and technology not only reduces costs but also enhances efficiency, positively impacting the overall revenue growth of construction businesses.
In addition, businesses should also focus on strengthening short-term asset ratio management by optimizing the currency cycle and managing inventory
Establishing a well-structured payment and collection policy is crucial for mitigating the adverse effects of short-term asset ratios, ultimately enhancing cash flow and boosting the operational efficiency of construction enterprises in Vietnam By adopting these strategies, businesses can improve their financial management, minimize risks associated with short-term asset ratios, and foster sustainable development opportunities in the market.
Some other recommendations to State government agencies
The State is crucial in formulating policies and legal regulations that foster a sustainable and conducive business environment for the growth of construction enterprises To enhance development opportunities for these companies, the author proposes several policy orientations aimed at supporting the construction sector.
Regarding credit capital: developing the capital market, diversifying mobilization channels for construction enterprises in a transparent way Most construction companies are now heavily dependent on loans from commercial banks
Despite the growth of Foreign Direct Investment (FDI) in the construction sector, other capital channels such as corporate bonds and stock market mobilization remain underdeveloped The Government's increasing focus on preferential policies for attracting foreign capital has yielded positive outcomes, yet construction enterprises still face challenges in accessing these funds To enhance capital mobilization through securities and bonds, the Government should consider amending legal regulations to facilitate easier access for businesses Additionally, it is crucial to regulate capital mobilization activities in the stock market to prevent speculation and manipulation, while ensuring compliance with laws governing corporate bond issuance and investment services.
Effective economic policies, including the administration of monetary policies and the implementation of flexible fiscal strategies, play a crucial role in shaping the operational environment for construction enterprises Key issues such as inflation control and interest rate adjustments significantly impact these businesses By understanding and adapting to these economic factors, construction companies can develop and implement operational policies that enhance their efficiency and sustainability.
To ensure the effective implementation of legal policies, the State must establish robust management practices and closely monitor compliance among enterprises This includes enforcing strict measures against businesses that fail to adhere to regulations Such actions will contribute to the development of a healthy, stable, and sustainable real estate market.
Based on the findings presented in Chapter III, this study offers synthesized recommendations tailored for businesses and guidance for executives to establish effective future strategies These insights aim to enhance leverage utilization and improve overall operational efficiency within enterprises.
The research on the "Impact of Financial Leverage on the Performance of Real Estate Enterprises Listed on the Vietnamese Stock Market" analyzed a sample of 112 construction companies Utilizing various models such as Pooled OLS, FEM, REM, and GLS, the study revealed a negative correlation between financial leverage and the performance of construction businesses Additionally, it identified several positive factors influencing performance, including enterprise size, growth rate, total asset turnover, and inflation rate.
From 2015 to 2023, the use of financial leverage in the construction industry has proven ineffective, as evidenced by the inverse correlation between financial leverage and profitability indicators While financial leverage theoretically serves as a tool for businesses to enhance profits through increased capital, its misuse or poor management can lead to detrimental effects Regression analysis indicates that Vietnamese construction companies have not effectively utilized leverage to their advantage.
This thesis offers timely and effective solutions for construction enterprises based on theoretical analysis and qualitative research in the construction market It also provides recommendations for state agencies, enabling business managers to leverage financial strategies to enhance operational efficiency Ultimately, these efforts aim to establish a stable and sustainable construction market for the future.
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