Impact of financial leverage on business performance of construction enterprises listed on the vietnam stock market

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

ACKNOWLEDGMENTS

To be honest, being able to do the graduation thesis is an honor as well as an opportunity and challenge for me to express myself by applying the knowledge and study skills cultivated during the past four years of university And in the process of working on my Graduation Thesis, I have received a lot of help and the next words, I would like to thank and appreciate for that valuable support First of all, I would like to thank my instructor Dr Tran Ngoc Mai, who wholeheartedly helped and guided me during the test She directly guided me from how to choose the topic, how to do it as well as edit the content of the complete topic

In addition, I would like to thank the teachers of the Faculty of Finance - Banking Academy for always caring and teaching me the knowledge and experience of the teachers during my time studying at the school The valuable lessons of the teachers are the foundation and luggage for me to have more knowledge about finance which helps me a lot to complete my graduation thesis

Finally, I would like to thank my family and friends who have always been there to encourage and help me in my learning process

Hanoi, April 30, 2024 Student implementation

Vu Ha Phuong

REASSURANCE

I would like to assure that my graduation thesis with the topic "The impact of financial leverage on the performance of construction enterprises listed on the Vietnam stock market" is my own research project and is enthusiastically guided by Dr Tran Ngoc Mai The course uses information, figures, data and references that are presented honestly, citing clear sources Therefore, I take responsibility for this assurance

Hanoi, April 30, 2024 Student implementation

Vu Ha Phuong

TABLE OF CONTENTS

ACKNOWLEDGMENTS i

REASSURANCE ii

TABLE OF CONTENTS iii

LIST OF FIGURES v

LIST OF TABLES v

INTRODUCTION 1

1 The urgency of the topic 1

2 Research objectives 2

3 Subjects and scope of research 3

4 Research methodology 3

5 Thesis Structure 3

CHAPTER I: RESEARCH OVERVIEW 5

1.1 Theoretical basis of the effect of financial leverage on business performance 5

1.1.1 Overview of financial leverage 5

1.1.1.1 The concept of financial leverage 5

1.1.1.2 How to determine financial leverage 6

1.1.1.3 Factors affecting the use of financial leverage by enterprises 7

1.1.2 Business performance of enterprises 9

1.1.2.1 The concept of enterprise performance 9

1.1.2.2 Criteria reflecting the business performance of the enterprise 9

1.1.3 The impact relationship between financial leverage and business performance 11

1.2 Research overview 12

1.2.1 International studies 12

1.2.2 Domestic studies 17

2 Research gaps 20

CHAPTER II: RESEARCH DATA AND RESEARCH METHODOLOGY 22

2.1 RESEARCH DATA 22

2.1.1 Vietnam Construction Industry Overview 22

2.1.2 The current situation of the performance of construction enterprises

recently 25

2.1.3 The current situation of using financial leverage of construction enterprises in recent times 28

2.2 Research methodology 29

2.2.1 Research Process 29

2.2.2 Research Form 30

2.2.3 Building variables in the model 30

2.2.4 Research methodology 36

2.2.5 Research hypotheses 38

CHAPTER III: RESEARCH RESULTS 42

3.1 Data descriptive statistics 42

3.2 Correlation between variables in the model 44

3.3 Quantitative Research Results 45

3.3.1 Model selection verification 45

3.3.2 Model regression results with ROA variable 47

3.3.3 Model regression results with ROE variables 50

3.3.4 Synthesis and discussion of research findings 53

3.3.5 Limitations of the study 59

CHAPTER IV: SOME METHODS AND RECOMMENDATIONS TO ENHANCE THE EFFICIENCY OF USING LEVERAGE IN PROMOTING BUSINESS EFFICIENCY OF CONSTRUCTION ENTERPRISES 61

4.1 Some direct solutions for Vietnamese construction enterprises 61

4.1.1 Solutions to release the negative impact of financial leverage in promoting the efficiency of listed construction enterprises in Vietnam 61

4.1.2 Other solutions to improve the operational efficiency of Vietnamese construction enterprises 62

4.2 Some other recommendations to State government agencies 64

CONCLUDE 67

REFERENCES 68

ADDENDUM 70

LIST OF FIGURES

Figure 2.1: Revenue growth rate of construction enterprises from 2014 -2023 23

Figure 2.2: Average ROA and ROE of 112 construction enterprises in Vietnam in the period 2015-2023 25

Figure 2.3: Average financial leverage of Vietnamese construction enterprises in the period 2015 -2023 28

Figure 3.1 Testing the variance of change of the FEM model with the ROA variable 50 Figure 3.2 Testing the variable variance of the FEM model with the ROE variable 52

LIST OF TABLES Table 2.1: Summary of variables of the research model 31

Table 3.1 Statistics describing variables in the model 42

Table 3.2 Correlation between variables in the model 45

Table 3.3 Pooled OLS model multi-additive test results 49

Table 3.4 ROA regression results 48

Table 3.5 Model selection verification with ROA variable 49

Table 3.6 ROE regression results 50

Table 3.7 Model selection verification with ROE variable 51

Table 3.8 Synthesis of quantitative research results with appropriate models 53

Table 3.9 Synthesis comparing hypothesis results with research results from the model 54

Table 3.10 Financial Leverage & Performance of Enterprises in the Construction Industry 55

INTRODUCTION

1 The urgency of the topic

The construction industry plays a crucial important role in Vietnam's economy Specifically, over the period of 2015-2023 the construction industry has contributed a large part to the comprehensive development of the country, demonstrating its undeniable importance With an impressive growth rate, the construction industry always maintains a strong growth rate, far exceeding the general economic growth rate In the period of 2015-2024, the average growth rate of the construction industry will reach about 8% per year, contributing to the sustainability and development of Vietnam's economy In addition, the construction industry also has a strong spread, closely linked with many other economic fields such as construction materials production, mechanical industry, transportation, tourism and many other fields The development of the construction industry simultaneously promotes the synchronous development of many other economic sectors, contributing to the emergence of many regions and localities

The use of leverage in business plays immensely, especially for businesses in the construction industry Applying the right financial leverage helps to optimize the use of borrowed funds, ensuring investment performance and profitability At the same time, this also helps Construction enterprises enhance their competitiveness and expand business operations, accelerate development and create great opportunities for expansion and development in the competitive period of the market However, the use

of financial leverage also carries many risks Enterprises need to use financial leverage prudently and effectively to minimize risks, ensure sustainability and maximize profits

in the business process The flexibility and ingenuity in applying financial leverage will help Construction businesses overcome challenges and achieve sustainable success in a volatile business environment

In the whole period of 2015-2024, the construction industry and the use of leverage in business have contributed greatly to the sustainable development of Vietnam's economy, from building the necessary infrastructure for economic development to creating job opportunities for millions of workers These efforts have

ensured that the Construction sector is not only an important driver but also a pillar of the country's comprehensive economic development The proper use of leverage in business has also helped Construction businesses make good use of investment opportunities, while minimizing risks and optimizing returns Not only that, the impact

of market fluctuations and the Covid-19 epidemic also created significant challenges

in terms of rising raw material prices and reduced demand for construction projects, which directly affected the performance of businesses in this industry Therefore, making the right business decisions at this time is extremely necessary In particular, the intelligence and strategy in applying financial leverage not only highlights the role and importance of the construction industry but also helps businesses in this industry contribute to promoting the economic development of the country

In the future, maintaining stability and efficiency in the use of financial leverage, coupled with strong investment in the construction industry, will continue to

be an important factor to promote Vietnam's inclusive economic development, creating opportunities for both workers and businesses while ensuring the sustainability and prosperity of the country 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 Exchange" as his thesis topic Thereby, it is possible to analyze the current situation, clarify the impact of financial leverage on the operational efficiency of construction enterprises And provide recommended solutions to help construction companies improve and enhance operational efficiency as well as optimize benefits from financial leverage

2 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

Next, the study outlined the situation of financial leverage and performance of construction enterprises, and empirical analysis of the effects of financial leverage on the performance of construction enterprises listed on the Vietnam stock market

Finally, the study makes recommendations to managers for construction companies and for the State

3 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

The study uses data analysis which is a ratio calculation method to measure dependent variables (ROA, ROE), independent variables such as debt to equity ratio (FL), current ratio (CR), and control variables such as total asset turnover (TURN), 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

Chapter II: Research Data and Research Methodology

Chapter III: Research Results

Chapter IV: Some solutions and recommendations to enhance the efficiency of using leverage in promoting the efficiency of listed construction enterprises in Vietnam

CHAPTER I: RESEARCH OVERVIEW 1.1 Theoretical basis of the effect of financial leverage on business performance

1.1.1 Overview of financial leverage

1.1.1.1 The concept of financial leverage

Financial leverage is a financial term that refers to how much debt a company uses

to finance its assets, either due to lack of cash flow for short-term liabilities or the need for additional capital to finance investments (Myers, 1984)

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

In other words, enterprises use financial leverage by mobilizing additional sources of borrowed capital in addition to equity to take advantage of that borrowed capital to increase the profitability of equity However, it also carries a higher risk for the business itself

One of the biggest advantages of using debt instead of equity is the interest rate

a company pays on debt that is exempt from corporate income tax Meanwhile, dividends or other forms of rewards to owners are still subject to this tax If we replace equity with debt, it will reduce the taxes the company pays and thus increase the value

of the company Accordingly, interest payables are considered reasonable expenses and are deducted from the taxable income of the enterprise, creating a tax shield, helping the amount of corporate income tax payable less and increasing profits Therefore, when debt is increased, it reduces the cost generated per cash and increases profits, as well as the value of the company

On the negative side, the more debt a company owes, the greater the risk of losing its ability to fulfill its debt repayment obligations In other words, too much debt leads to a high probability of bankruptcy and financial distress On the other hand, when a company takes out a loan, its creditors and shareholders may encounter conflicts of interest Creditors may want the company to make less risky investments than those who invest in the company's stock

In short, the use of high leverage helps businesses achieve more opportunities

to increase profit margins, but if overutilized, it will bring many potential risks to the business itself If the ratio of equity to liabilities is low, the degree of leverage will be high In many cases, due to the abuse of financial leverage, the ability to repay debts leads to accumulated debts, illiquidity and then bankruptcy

1.1.1.2 How to determine financial leverage

The determination of financial leverage is always interested by investors and spend time researching through the balance sheets of enterprises with the goal of determining what is the main source of capital mobilized by the enterprise between borrowed capital and equity Here are some common financial leverage indicators (based on research by Kenn – Ndubuisi et al., 2019)

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

Formula: D/A = Total Liabilities

Total Assets

If this coefficient is high, accompanied by efficient business, this will be very beneficial for the business owner Prove that the business is using financial leverage effectively However, if this indicator is low, it shows that the enterprise has not fully exploited the benefits from capital mobilization, the use of financial leverage has not been effective

There are many factors affecting the D/A coefficient value such as: business size, type of organization, field of operation, etc Therefore, to assess whether this indicator is high or low, it is necessary to combine it with the general index of the whole industry

D/E ratio (Debt/Equity Ratio)

The D/E ratio is the ratio of debt to equity This can be considered the most commonly used leverage ratio today This ratio will indicate what the ratio between the debt and equity of the business is

Formula: D/E = Total Debt

Equity

If this coefficient is more than 1, it indicates the borrowing ratio of the large enterprise Therefore, there may be many risks in repaying debts when there are fluctuations in bank interest rates If this coefficient is too small, it shows that the enterprise does not know how to take advantage of financial leverage effectively

Interest payment ratio

The interest payment ratio shows the level of profit before tax and interest when ensuring the ability of an enterprise to pay interest, in addition to showing the financial ability that the enterprise creates to pay borrowing costs

1.1.1.3 Factors affecting the use of financial leverage by enterprises

Scale of operation

According to asymmetric information theory (Myer &; Majluf, 1984), the size

of a company has a proportional relationship with debt, because large companies usually have a low risk of bankruptcy and a low cost of bankruptcy In addition, large companies will get low control costs, less arbitrage than smaller companies, less volatile cash flow, easier access to credit markets, and more borrowed debt to benefit more from tax shields

Asset structure

Research by Tran Hung Son et al (2008) shows that the ratio of tangible fixed assets is inversely proportional to short-term liabilities to total assets and directly proportional to the ratio of long-term liabilities to total assets This means that companies with a high ratio of tangible fixed assets to total assets will use less short-term liabilities due to the suitability of the loan term and the nature of the assets If an enterprise has a high ratio of tangible fixed assets, it will use more debt than an enterprise with a high ratio of intangible fixed assets, because the enterprise with a high ratio of tangible fixed assets will have a lower bankruptcy cost in the event of bankruptcy

Business risk

According to research by Dinh Van Duc (2009), business risk is the level of activity of an entity or competitive circumstances that will cause it to produce worse financial results than expected Enterprises operating in a competitive environment, it is difficult to predict fluctuations in the business environment that adversely affect business operations, the possibility of bankruptcy of enterprises will be higher, the lower the confidence of investors in enterprises, it is more difficult to raise capital from outside and make the debt utilization ratio decrease

Profitability

According to hierarchical order theory, corporate finance managers prefer to finance projects with endogenous capital, then exogenous capital Because highly profitable businesses do not like to raise more equity to avoid diluting ownership This also means that businesses with high profitability will have low debt ratios However, according to the trade-off theory approach, when businesses are highly profitable, they prefer to use borrowed debt because other factors remain constant and they will take advantage of the tax shield more

Solvency

Low solvency of the business often leads to signs of financial risk for the business Businesses with higher solvency can secure higher debt ratios because they will be better able to meet their debt obligations due This indicates a reciprocal

relationship between solvency and capital structure Besides, businesses with more liquid assets can use these assets for investment projects

1.1.2 Business performance of enterprises

1.1.2.1 The concept of enterprise performance

From the perspective of an economic point of view, the business performance of

an enterprise is an economic category reflecting the level of use of resources to achieve the set goals Demonstrates the correlation between the result obtained and the costs spent to get that result The greater the difference between these two quantities, the higher the efficiency

While from a purpose-driven perspective, operational efficiency is the difference between the results obtained and the cost of resources Operational efficiency is enhanced in the event of increased results, reduced costs and also in cases where costs increase but the rate of increase in results is faster than the rate of increase

in costs spent to achieve that result

Thereby, it can be understood that operational efficiency is also the ability of an enterprise to minimize the waste of time, effort, money and materials to produce quality goods and services It can be defined as the ratio between the company's investment in, such as costs, employees, materials, and outputs, such as quality goods, revenue, customer attraction, to determine the overall performance of that company In essence Operational efficiency is all the techniques and strategies used to deliver quality goods at a lower cost

Therefore, the main goal of a business is to produce goods and services and profit from it If the business is inefficient with the methods and strategies it uses, it will end up wasting a lot of resources in terms of capital, time and effort That is why the business must be operationally efficient It ensures that the business creates high-quality products and services in a cost-effective way while minimizing any waste of resources and time

1.1.2.2 Criteria reflecting the business performance of the enterprise

Operational efficiency is reflected in the ability to manage costs incurred during the operation of the business An enterprise cannot have high business performance if its

profitability is low and vice versa Therefore, the operational efficiency and profitability of the enterprise are closely related In addition, there are many indicators to evaluate the business performance of enterprises, including indicators reflecting profitability that are used by interested businesses with the goal of maximizing profits Therefore, this thesis will focus on analyzing the performance of the business evaluated through the profitability

of the business Accordingly, the study will select indicators such as return on equity (ROE) and return on total assets (ROA) to measure performance indicators

Return on Asset (ROA)

ROA is a ratio of return on total assets This is an index that measures the profitability of a company relative to its own assets Total asset profitability reflects the relationship between profits and total existing assets of the enterprise ROA is an important rate of return that indicates the ability of the enterprise to make a profit and

is determined by the formula:

Return on Equity (ROE)

ROE (Return On Equity) is the return on equity, also known as the return on capital ROE shows the ability to use capital to generate profits This indicator speaks

to how much profit an investment brings in an investment

Formula: ROE = 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥

𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

The higher the ROE and always maintained at a stable level, we can know that the use of capital of the business is extremely effective Each field and industry has a different high and low ROE

Like ROA, when assessing the effective use of capital of enterprises, we should not evaluate a separate year but at least 3 years Enterprises that can maintain an ROE of > 20% for a period of 3 years are fully competitive in the market and are assessed as financially competent

Investors can evaluate the business from ROE from 3 factors including marginal profit, asset turnover, fixed asset turnover From analyzing the 3 factors that make up ROE, investors will have the most general view When ROE increases, the capital efficiency of the business also increases, investors predict ROE in the following years and evaluate the stock better Conversely, if ROE decreases, investors will value the stock lower

1.1.3 The impact relationship between financial leverage and business performance

Enterprise value is inversely proportional to the cost of financial distress Accordingly, the use of financial leverage increases enterprise value, ie increases profitability, increases value for businesses Financial leverage will appear when the business has high capital needs while equity is insufficient to fund; is when a business wants to finance the majority of its operations with borrowed capital from outside, in order to consolidate and enhance the profitability of the business Enterprises can use different sources of capital derived from borrowing credit from commercial organizations, banks or issuing bonds to generate the highest profit

Although financial leverage as a support tool amplifies the financial viability of a business, it is a double-edged sword If you do not know how to use it properly, at the right time, it will cause businesses to face many financial risks This will directly affect

the profitability and operational efficiency of the business when the pressure of loan payment, principal interest due and liquidity decreases

Previously, there have been many studies that have proven the relationship of the impact of financial leverage on the efficiency of enterprises through profitability or financial performance of enterprises but the results are not uniform According to research by DeAngelo and Masulis (1980) and the trade-off theory, the more debt a business uses, the more it benefits from the tax shield, increasing the profitability of the business Meanwhile, on some other research samples, such as the study by Dwi Kartikasari et al (2016), financial leverage has an inverse effect on the profitability of businesses Research by

Thereby, it can be seen that the direction of the impact of financial leverage on the performance of enterprises is not the same, possibly due to the inefficient use of leverage and the effect of the trade-off between the interest tax shield and financial cost pressure In addition, the results of research on this relationship also depend on the research sample, including time, space, type of business, other external factors

Wiwiek Mardawiyah Daryanto et al (2018) studied the impact of liquidity and financial leverage on the financial performance of real estate enterprises in Indonesia

By using regression analysis; statistics and significant ANOVA F perform hypothesis testing The results of the analysis show that current debt ratios (CR) and debt-to-asset ratios (DAR) have a negative relationship with return on assets (ROA) while return on interest (TIE) has a positive relationship with ROA Thereby showing that financial leverage has an inverse relationship to the financial performance of real estate enterprises in Indonesia

Research by Alfredo Grau and Araceli Reig (2019) on the effect of the use of financial leverage on the profitability of agricultural companies in Europe The study used data from 9652 small and medium-sized agricultural enterprises, from 2009-

2016 The study uses income to assets (ROA) as the dependent variable, business leverage (OLM), financial leverage (LEV), logarithm of total assets (LTOTASS), intangible assets (INTANG) as independent variables, logarithms of revenue flow (LSALES), liquidity (LIQUID), cash flow from operating activities (CASH) as control variables The results confirm that financial leverage from business activities is a fundamental determinant of the profitability of SMEs, but it also affects the relationship between profitability and other risks depending on individual country factors Specifically, high outstanding debt, business size, innovation characteristics, reputation all affect profitability to some extent, greater or lower depending on the level of leverage from the company's business activities

Md Musfiqur RAHMAN, Farjana Nur SAIMA, Kansar JAHAN (2020) carried

on research on the impact of financial leverage on corporate profitability: Empirical evidence from Bangladesh-listed textile companies The study used a company's profitability as demonstrated by the ratio of return on equity (ROE), both current and long-term debt used as a proxy for financial leverage Pooled OLS, fixed impact (FEM) and generalized moment estimation (GMM) models were used to examine the relationship between financial leverage and profitability of companies The results show a significant inverse relationship between leverage and company profitability using the Pooled OLS methodology, which is similar to the results with the FM and

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 titled "Financial leverage and financial performance of construction/listed real estate and natural resources companies in NIGERIA" The sample is data compiled from the annual report of six construction/real estate and natural resources companies listed in Nigeria for the period 2005-2019 The fixed-impact model with consistent standard variance and strong self-correlation has been applied in the analysis of the effect of financial leverage on financial performance The results show that the ratio of short-term debt has a significant negative impact on long-term financial performance The findings related to variable controls showed that age had a negative and significant impact on financial performance, while size was significantly and positively associated with financial performance as shown by return on assets (ROA) Finally, we conclude that debt financing will hinder improvements in the financial performance of companies represented by ROA It recommends that companies in Nigeria's construction/real estate and natural resources sectors take a closer look at the utility and maximised value of debt for internal equity (retained returns) in the capital structure

Alim, Wajid et al (2022) studied the impact of financial leverage on performance, specifically looking at the impact of leverage on performance in the case

of fertilizer sector companies in which operating levers, financial levers and combinations of levers are included The study included 25 observations of several listed companies in the Pakistani fertilizer industry, collected between 2016 and 2020 Through description as well as regression analysis examined the impact of financial leverage on profitability A company's leverage results have significant returns on assets because companies should follow returns on assets to measure financial performance While companies do not show a significant relationship with the rate of return on equity That suggests that the debt ratio is rising and that it will generate the lowest profits for companies The results assessed a negative relationship with operating leverage as well as a positive relationship with financial leverage and combined leverage of Pakistani fertilizer industry listed companies

Richard Arhinful and Mehrshad Radmehr (2023) studied the impact of financial leverage on the financial performance of companies listed on the Tokyo Stock Exchange The study selected 257 automotive, construction, electronics, metals and telecommunications companies between 2000 and 2021 To find out the effect of financial leverage on financial performance, the study used the stochastic effect and GMM to estimate the effect of companies' leverage on financial performance Research shows that interest rate insurance has a positive and statistically significant effect on Tobin's ROA, ROE, and Q Besides, the study found that cash insurance had

a positive and statistically significant effect on ROE However, research shows that debt repayment obligations have a negative and statistically significant effect on 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:

Research by Ilhan Dalci (2018) on the effect of financial leverage on the profits

of manufacturing companies in China The study used data from 2008 to 2016 of 1503 manufacturing companies listed on the Chinese stock exchange The study uses two variables ROA and ROE which are 2 dependent variables, the commercial cycle (NTC), the logarithm of total assets (LTA), growth capacity (GROWTH), GDP growth (GDP), the annual inflation rate (INF) is the control variable, current liabilities to total assets (STDR), total debt to total assets (TDR) are independent variables The resulting variables controlling NTC, GDP, LTA negatively affect profitability, while INF positively affects profitability, and GROWTH is not statistically significant In addition, asserting that in the relationship between TDR and STDR) financial leverage and two measures of profitability (ROA and ROE), the positive impact of financial leverage on the profitability of China-listed manufacturing companies is due to the tax shield, which causes the debt to increase from different levels that the business incurs

Umer Iqbal and Muhammad Usman (2018) conducted a study to determine the relationship between financial leverage and the performance of Pakistani synthetic textile companies 5-year data was collected from 2011-2015 and 16 top companies were selected as samples Use descriptive statistics, correlation analysis, and

regression models to determine outcomes The results show that financial leverage has

a negative and significant impact on a company's ROE, and financial leverage has a positive and significant impact on a company's ROA Further research indicates that high interest rates and more debt reduce the value of equity and have a negative impact

on a company's performance On the other hand, the amount of debt has a positive impact on a company's ROA The results show that financial leverage has a positive impact on the operating efficiency of the enterprise if the amount of debt does not exceed equity

Research by Abdul Rahman Shaika & Raj Bahadur Sharma (2021) has clarified the impact of leverage and exchanged capital on profitability, experimentally with Saudi Banks from 2014 to 2019 The Earnings per Share (EPS), Return on Assets (ROA), and Return on Equity (ROE) indicators are dependent variables; independent variables including Total Debt Ratio (TDR), Tier 1 Capital Ratio (Tier 1 CAP) and Debt to Capital Ratio (DE) and company size are the controlling variables The study estimated a pooled regression analysis to analyze the effects between variables The results revealed a positive relationship between different profitability margins and Debt to Equity Ratio The Total Debt Ratio has a positive relationship with ROA and ROE, and has a negligible negative relationship with EPS, and the Tier 1 Capital Ratio has a positive relationship with ROA and ROE, and has 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):

Vladyslav Deboi et al (2021) have a study on the impact of financial leverage

on the profitability of 18 largest real estate companies listed on the Swedish Stock Exchange from 2016-2020 This study applies a quantitative research methodology, combining theories tested by multiple regression analysis in accordance with the positivist model and deductive measurement Financial leverage includes short-term liabilities to assets and long-term liabilities to assets Profitability is assessed by return

on assets (ROA) Control variables include company size, liquidity, and solvency The

results show that financial leverage is not related to determining ROA in the real estate industry in Sweden

1.2.2 Domestic studies

There have been many previous studies in the country that have conducted studies related to factors affecting financial leverage, notably the following studies:

Research by Assoc Dr Le Thi Tuan Nghia and MSc Pham Manh Hung (2013)

on factors affecting financial leverage of Vietnamese commercial banks The authors studied the factors affecting the financial leverage of 22 selected commercial banks between 2009 and 2014 The study uses a regression model with the variables PROFIT, enterprise size (SIZE), collateral value (COLL), growth (GROW) as independent variables and financial leverage (LEVERAGE) as dependent variables The result is a variable scale effect on a bank's financial leverage of a significant 1%, which means that the more the size of the bank increases, the more financial leverage increases The collateral variable is related in the same direction as the financial leverage variable Variables of growth and profitability have the opposite effect of financial leverage, in other words, the higher the growth and profitability of commercial banks, the lower the debt ratio or the higher the equity ratio

"The impact of factors on corporate financial leverage: Empirical evidence from Vietnamese real estate and building materials enterprises" (Le Thi Nhung, 2020) The research paper uses financial leverage as a dependent variable combined with 9 independent variables including: asset structure, enterprise size, solvency, profitability, growth ability, unique characteristics of enterprise assets, taxes, tax benefits from depreciation, business uptime By applying tabular data estimation methods, combined with the construction, selection, inspection and remediation of model defects, the study selected 3 optimal application models with three data groups: real estate enterprise data, building materials enterprises and data combining both industries in Vietnam based on small squared estimation method most generalized (GLS) The results in all three models showed that the direction of the impact of factors on financial leverage was consistent with the impact of ROA on financial leverage being the strongest The impact of ROA, LIQUID, GROWTH on financial leverage is consistent with

hierarchical order theory and related empirical studies The theory of static capital structure trade-offs governs the impact of TAX, NDTS, SIZE, AGE on the choice of loans of Vietnamese real estate and construction materials enterprises UNIQUE's tendency to financial leverage obtained in this study runs counter to previous empirical studies

However, there are a number of studies showing that leverage has a negative impact on important financial factors and business performance of enterprises

Tran, T T A & Dang, T T T (2017) "The impact of financial leverage on the performance of Vietnamese enterprises: approach by percentile regression." The study highlights the impact of financial leverage on the performance of Vietnamese enterprises with data collected from 100 listed companies on the Vietnamese stock market between 2012 and 2016 As a result, financial leverage has a negative impact

on the performance of the business and the degree of impact varies in different percentiles Given that other factors are the same, financial leverage will have a less negative impact on businesses with low percentile ROE The increase in financial leverage will cause more ROE decline in businesses with high percentile ROE In addition, factors reflecting the size of the business, net profit ratio, and performance using total assets are statistically significant and bear positive marks across all percentiles in relation to ROE

Research by Tran Thi Tam Nguyen and Truong Dong Loc (2018) aims to determine the impact of financial leverage on companies' investment activities in the Vietnamese stock market The study gathered data of 248 listed companies in Vietnam from 2014-2017 The model uses independent variables such as financial leverage margin (LEV), cash flow (CF), fixed asset utilization efficiency (SALE), growth opportunities of the company (Q), and dependent variables that are the company's net investment (I) The results of estimates using the FEM model show that financial leverage is negatively correlated with the investment activities of companies In addition, this study also shows that the effect of financial leverage on investment varies between companies with high growth opportunities and companies with low growth potential Specifically, financial leverage has a smaller impact than investing in companies with high growth opportunities In addition, the study also shows the

impact of cash flow, asset efficiency and growth opportunities on investment activities

of non-financial companies

Lai, C M P & Nguyen, T L (2022) "Factors affecting the business performance of food enterprises" Using quantitative research methods, the study uses regression table data with 55 listed enterprises in the food industry in Vietnam in the period 2015 - 2020 The results show that variables in the size of the business, the age

of the business, the leverage ratio and liquidity are important factors affecting the business performance of these enterprises The factors that have a negative impact on the business performance of food enterprises are enterprise age, leverage ratio, liquidity, while the size factor of the enterprise has a similar impact on the performance of the enterprise In addition, variable fixed asset structure and revenue growth were not statistically significant in showing the relationship with the business performance of the Food enterprise On that basis, propose some necessary solutions to improve the efficiency of business activities of food enterprises

Research by Ho Thi Thu Huong, Le Thu Hoai and Bui Mai Phuong (2022) also shows results on the inverse correlation of financial leverage to business performance The study measured the impact of financial leverage on the profitability of 34 listed garment companies in Vietnam The data was collected from the annual financial statements of 34 companies listed on HOSE, HNX, UPCOM and OTC for the period 2014-2020 The results show that financial leverage negatively impacts the profitability of Vietnamese garment enterprises From there, the study makes recommendations for businesses to increase profits and production capacity

In addition, a study also showed different results on the correlation between financial leverage and indicators measuring business performance such as ROA and ROE:

Nguyen, V C., et al (2019) "The impact of financial leverage on the profitability of real estate trading companies: A study from the Vietnam stock exchange." This study aims to determine the impact of financial leverage (FL) on return on assets (ROA), Return on equity (ROE), return on revenue (ROS) and return

on capital used (ROCE) with data collected from 58 real estate companies listed on the

Vietnam Stock Exchange (464 observations) Through the use of quantitative methods combined with multimerize regression models to test the hypotheses of the survey with the support of EVIEW 11.0 software The results of the study show that FL has no impact on ROS and ROCE while it has a negative impact on ROA and a positive impact on ROE Based on research results, propose specific recommendations and solutions to improve profitability at real estate companies listed on the Vietnamese stock market

Research by Tran Thi Hong Diem (2021) on the impact of leverage on the profit management of companies in the manufacturing industry listed on the Vietnamese stock market in the period 2017-2019 Leverage is measured by the ratio of long-term debt to the book value of equity Profit management is measured based on accrual (AEM) and real profit management (REM) The research data was collected from published information of 45 companies in the manufacturing industry listed on the Vietnam stock market (HOSE and HNX) with increased or high leverage in the period 2017-2019, forming 135 observations Multivariate regression analysis with tabular data is applied to measure the impact of leverage on profit management The study results show that leverage works in the same direction as accrual-based measured profit management (AEM) and inversely with real return management (REM), but the impact of leverage with REM is not statistically significant In addition, the study found a synergistic relationship between ROA and profit management, and the company size factor (SIZE) had an inverse relationship with profit management

2 Research gaps

The above studies have been conducted with many different sample sizes of observations in terms of quantity, time, field and country combined using different quantitative and marginal research methods The above studies have been conducted with many different sample sizes of observations in terms of quantity, time, field and country combined using different quantitative and marginal research methods The results show a two-way impact from financial leverage on business performance However, thanks to studying and reanalyzing some previous studies, the author found that some gaps still exist and need to be addressed Although topics related to research

problems have been carried out by many scholars and researchers, due to the limitation

of the scope of space, time, number of objects, fields of research which draw conclusions about the impact of financial leverage on corporate performance are different

Research results may be limited in meaning, timing, and in accordance with the research period due to the constantly changing and changing economy Differences in the business environment, legal, banking structure and capital markets, or the influence

of macro factors can all be responsible for the different results in the study If in some foreign countries, the capital market has developed along with a diversified banking structure to help businesses use leverage flexibly, in Vietnam this factor is limited Especially when Vietnam's construction industry often requires large capital and long capital turnover cycles due to the nature of complex construction projects and takes a long time to complete, the mobilization of capital and the use of leverage of these enterprises is limited Moreover, macro factors such as inflation rates, the Covid-19 epidemic and government financial policies can affect the necessity and efficiency of using financial leverage of enterprises in economic sectors with many characteristics such as the construction industry

Therefore, the thesis will analyze and clarify the impact of financial leverage on the performance of enterprises in the construction industry From there, contributing to supplementing results, enriching the topic and making appropriate solution recommendations in a timely and practical manner

CONCLUSION OF CHAPTER I

The content of chapter 1 provides the theoretical basis of financial leverage of enterprises, operating efficiency of enterprises, effects of financial leverage on operating efficiency of enterprises In addition, Chapter 1 also synthesizes a number of domestic and foreign studies on the studied issues such as financial leverage, operational efficiency, and the effects of financial leverage on the performance of enterprises Chapter 1 provides an accurate basis, laying the foundation for the next steps of the essay

CHAPTER II: RESEARCH DATA AND RESEARCH METHODOLOGY 2.1 RESEARCH DATA

2.1.1 Vietnam Construction Industry Overview

2.1.1.1 Characteristics of Vietnam's construction industry

Currently, Vietnam is still in the stage of economic structural transformation towards industrialization - modernization, which promotes the group of industries - construction to develop stronger The construction market in Vietnam tends to grow steadily over the years with an increasing number of construction projects in many fields such as residential construction, commercial construction, transport infrastructure, industrial park construction and utility energy construction It can be seen that a strong economy is the basis for many industries to grow, including construction

The construction industry is a capital-intensive economic sector with large input costs One of the important factors in the construction industry is that the price of input materials greatly affects the revenue and profit of enterprises The price of raw materials such as steel is fluctuating quite high, increasing cost costs and reducing the profit margin of enterprises Output products are single-unit products such as houses, construction infrastructure, buildings not mass-produced and regular Besides, construction projects vary in terms of scale, complexity, location, and materials used, leading to different production costs for each project Due to the variability in production costs, each construction project may require a different amount of capital investment to cover expenses such as labor, materials, equipment, and overhead costs Therefore, the construction industry often adjusts the proportion of components in the capital source to meet the changing financial needs of different projects This flexibility allows companies to adapt to project-specific requirements and optimize their financing structure

The business cycle of this industry is quite long, as construction projects are usually completed within a few years In addition, the construction or delay, the disbursement

of funds, handover or acceptance must also be carried out in stages This affects the financial health of enterprises, namely in terms of payable, receivable and business

cash flow Therefore, it can be seen that the liabilities of construction enterprises are often large and the inventory ratio also accounts for a lot of total assets

In particular, the construction industry is sensitive to the business cycle of the macroeconomic environment As the economy grows, the industry's revenue and profits will increase as demand for infrastructure construction or housing expands When the economy is in recession, at this time people no longer have much demand for housing, the Government does not expand public investment, all focus on basic needs first, so sales, profits of the industry may decline

2.1.1.2 Overview of Vietnam's construction industry from 2015-2023

Vietnam's construction market includes increasing construction projects in various sectors, such as commercial construction, residential construction, industrial construction, infrastructure (transport construction), and utility energy construction The construction market is more segmented with additional types of construction projects, demolition, and new constructions Accordingly, the construction sector plays

an important role in the economic growth rate in Vietnam Vietnam's construction industry (VCI) has grown at an average of more than 8.5% annually over the past 10 years And it is forecast to continue the same growth rate due to the government's efforts to improve the overall quality of the country's infrastructure with investments in infrastructure construction, tourism infrastructure and housing projects across the country In addition, government investment in public infrastructure and healthcare and education buildings has also been heavily concentrated so far

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

According to the General Statistics Office on the revenue growth rate of Vietnam's construction industry, it can be seen that after peaking in 2015 with 10.82% since 2014, the growth rate showed signs of decreasing slightly and steadily in the following years and increased again from 2018 with 9.2% and maintained at 9% in

2019 This can be explained by the fact that in 2015, the government announced the Master Plan for the development of Vietnam's new seaport system until 2020, in order

to develop the country's port infrastructure In 2020, construction industry growth in Vietnam decelerated to 6.8%, a relatively strong rate when compared to similar markets in Southeast Asia (according to a report by GlobalData)

The reason for this situation can be mentioned that in 2015, the Government implemented a plan to 2020 to plan the seaport system to develop the country's seaport infrastructure In addition, the strong outbreak of the COVID-19 epidemic has caused many adverse effects on the sector, including the construction industry Prolonged and continuous social distancing, the slowdown of global trade and tourism, and consumer fear, all impacted the human resources and materials of the construction industry, dragging down the pace of development by the end of 2022 Although the revenue growth rate of Vietnam's construction industry decreased, according to the report of Global Data (2023), when compared to other countries in Southeast Asia, we are still slightly better

Thanks to vaccination deployment plans, the construction industry has shown signs of prosperity as it enters 2021 and lasts until 2022 According to a report of the Ministry of Construction (2022), in 2021, the revenue of the construction industry is estimated at about 2.2 billion USD, up 3.8% compared to 2020 Despite the positive signs, the profit margins of contractors dropped significantly, mainly due to the increase in raw material costs and labor costs Many important building materials such

as steel, sand, cement, diesel , has increased rapidly in 2021, construction contractors did not adjust the contract unit price in time with the movement of input material prices In addition, labor costs have risen especially in big cities because a large number of workers have returned to their hometowns during social distancing and have not yet returned to work In 2022, some indicators of the construction industry achieved better results than the previous year

Vietnam's economy has gone all the way to a difficult 2023 for the world economy, global growth decelerating due to tightening monetary policies in major economies, the Russia-Ukraine war and several conflicts around the world continue to weigh on economic activities In that context, the current state of Vietnam's economic development has shown its resilience, stability, willingness to overcome waves to become one of the economies with positive growth rates of the world

Thanks to positive signals from the macroeconomy, the revenue growth rate of construction enterprises reached 8.5% thanks to the decrease in raw material costs (especially steel) and labor costs And by the end of 2023, the revenue of the whole construction industry in 2023 is estimated at VND 1,250,000 billion, up 8.67% compared to 2022 (according to statistics of the Ministry of Construction in 2023)

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

Source: Self-synthesized author

It can be seen that the similarity between both ROA and ROE indicators has decreased slightly from 2015 to 2016 with 2.08% and 4.27% respectively Then, declines steadily increase in the following years through 2019 with 4.77% of ROE and 2.28% of ROA By 2023, both ROA and ROE of the industry climed steadily to 2.48% and and 5.1% in turn

In the period 2016-2018, the revenue growth rate of the construction industry was recorded at a high level This is explained by the strong development of the real estate market, besides the improvement in the profit growth rate of the building materials industry Until 2019, the growth rate of the construction industry reached the highest value in the study years with the total production value at VND 358684 billion, accounting for 5.94% of the country's GDP The explanation for this growth comes from the high urbanization rate across the country, leading to the demand for infrastructure construction, in addition to attracting foreign investment capital in the industrial construction segment with the shift of factories out of 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 outbreak has slowed revenue growth, but another obstacle is that at the present time, construction businesses are facing many difficulties including fierce competition in the industry, slowing real estate market growth, imbalance between total debt and capital due to increasing accounts receivable to total assets In addition, the sharp increase in borrowed capital has eroded profits, leading to a decrease in the business efficiency of these enterprises Factors that significantly affect the financial position of construction companies include low disbursement rates, postponed public investment projects

Therefore, in order to maintain operational efficiency at a stable level, the group

of construction enterprises also implemented mandatory measures that many other industry groups have also used, such as reducing labor costs such as salary reduction, indefinite leave, According to the General Statistics Office (2020), up to 71.1% of enterprises in this group applied labor-related solutions, of which 32.8% cut labor, 44.2% gave employees rotating leave, 22% gave employees unpaid leave, and 18.4% directly cut workers' wages Some businesses in this industry choose more innovative solutions such as changing the mainstream product According to the General Statistics Office, in the group of enterprises in the construction industry, in order to cope with the epidemic problem and improve operational efficiency, up to 4.3% of enterprises have focused on developing into e-commerce; 6.2% of enterprises have transformed their company's key products, accepting new competitions; 11% of enterprises are looking for new input materials, and 18.7% of enterprises find new output markets

In general, the performance of the construction industry tends to grow in the past 10 years, but is still low compared to other industries such as banking and securities The reason for this is that the high demand for limited infrastructure, housing and real estate promotes growth, the government promotes investment in key projects and the construction industry has many large and reputable enterprises participating However, the construction industry still faces high prices of construction materials affecting profits, rising interest rates, reducing investment demand, along with a shortage of skilled labor

2.1.3 The current situation of using financial leverage of construction

enterprises in recent times

Characteristics of the construction industry always require a large scale of capital to facilitate operation and ensure efficiency in production of enterprises The production process in the construction industry will be greatly influenced by the time factor, including project completion time, project handover time, acceptance, From there, it will directly affect the leverage factor, especially in terms of interest rates In fact, in Vietnam, the process of disbursement and construction of projects is slow, directly reflecting the capital operating costs of enterprises in this industry group In addition, input costs in the construction and production of works are also highly volatile such as iron, steel, cement, as well as costs of labor, construction design, machinery and equipment costs, All of this will often create major obstacles for the business financially every time it makes a decision about a bidding project

The output of the construction industry is also divided into 3 main groups including: residential real estate construction group, infrastructure construction group, industrial group All groups will be subject to their own factors such as residential real estate construction groups will be affected by tastes, cash flows, or GDP growth, Meanwhile, the infrastructure construction group will be influenced by public funding, the support policies of the state and the industrial construction group will depend on environmental and natural factors and multinational factory shifting trends

Figure 2.3: Average financial leverage of Vietnamese construction enterprises in the

period 2015 -2023

Source: Self-synthesized author

Thus, the debt-to-equity ratio (D/E) of construction enterprises will increase in the period 2015-2023 In addition, combined with the data of ROA and ROE of construction enterprises increasing in the period 2015-2023 (collected from the previous section), it shows that the leverage efficiency of construction enterprises is relatively good

In general, the construction industry group is supported by a variety of cash flows from foreign investment and public investment, But the demand for the use of debt capital still exists, especially when the impact of interest expense in leveraged use of this industry group is negative due to the production time factor

Step 2: Research on the current situation of using leverage and operational efficiency of real estate enterprises

Brief analysis of the characteristics of the construction industry to understand and better understand the operation process of enterprises Find out the trend of using financial leverage of construction companies and assess the performance of construction enterprises Thereby, it is possible to evaluate the efficiency of using financial leverage of enterprises in the construction industry

Step 3: Determine the criteria to use

In this topic, to clarify the impact of financial leverage on the performance of construction enterprises, the thesis selects relevant indicators including: Total assets, Current assets, Inventory, Equity, Liabilities, Current liabilities, Net revenue, Profit after tax Thereby calculating necessary financial ratios, ratios and indicators such as Debt to equity ratio (financial leverage), Total asset turnover, Payment ratio, Enterprise size, Total asset growth rate, Return on equity (ROE), Return on total assets (ROA)

Step 4: Collect and process data and calculate necessary indicators

Data is collected from construction enterprises listed on the Vietnam stock exchange (HOSE, HNX and UPCOM) from 2015-2023 through audited financial statements and annual reports For unavailable figures and indicators, the author performs the elimination and calculation of the necessary norms for use in the study

Step 5: Select the appropriate model and conclude the results after the study

After obtaining the necessary data as the basis for conducting analysis and research, it is necessary to experimentally apply the models with appropriate research methods The author will use methods to find relationships between variables, thereby looking at the degree of interaction between the variables The results of the study were used for comparison with the initial hypotheses From there, draw appropriate conclusions

2.2.2 Research Form

The study was conducted on the basis of analysis and evaluation of aggregated and calculated data from 112 construction enterprises listed on the Vietnam stock exchange from 2015-2023 Therefore, the research data used in the project is tabular data, collected from statistical websites such as Vietstock.vn, Cafef.vn and from audited financial statements for 112 Vietnamese companies listed on HOSE, HNX and UPCOM in the period of 2015-2023 provided that all necessary indicators are collected

The study sample includes 1008 observations of 112 construction enterprises for the period 2015-2023

2.2.3 Building variables in the model

The model is studied through 2 dependent variables: ROA, ROE is the rate of return

on total assets, the rate of return on equity represents the business performance of the construction industry Besides, the model also uses an independent variable that is financial leverage (LEV) Also control variables include enterprise size (SIZE), current ratio (CR), gross profit margin (GM), asset turnover (TURN), revenue growth rate (GROWTH) The table below summarizes how all variables are calculated and referenced

Table 2.1: Summary of variables of the research model

al (2021) Return on

L (2022) Independent variables

C, M, P &

Nguyen, T,

L (2022) Control variables

al (2018), Gross

al (2021) Total

(2017), Revenue

worth 1; The remaining years are worth

0 Inflation

rate

Ilhan Dalci (2018)

Dependent variables

With the premise of referencing and inheriting the idea of research on business performance of previous scholars and researchers such as Tran Thi Tuan Anh & Dang Thi Thu Thuy (2017) combined with the analyses presented in the two chapters above, the thesis chose to use the following variables to analyze the impact of financial leverage on efficiency: performance of Vietnamese construction enterprises

Return on total assets ROA (%): is the rate of return on assets reflecting the

profitability of total assets ROA shows the effectiveness of the business in the process of organizing, managing and executing business activities to evaluate the efficiency of asset use

The meaning shows how much profit a capital invested in assets will bring to the business When the ROA is higher, businesses are now using assets quite efficiently and vice versa

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

Independent variables

Financial leverage (LEV) - is the ratio of debt to equity (D/E), showing the

percentage between corporate capital raised from lending activities and the cost of ownership This is the ratio used as a measure of how well the company is financing its business with debt instead of its own resources, reflects the degree of dependence

on the debt of the business Thereby assessing the company's financial leverage clearly This ratio may reflect financial difficulties or dependence on debt of the business is quite large This can pose many potential risks to the business

Control variables

Current ratio (CR) is a financial indicator used to measure a business's ability

to repay short-term debts (usually due within one year) The meaning helps assess the ability of enterprises to use short-term assets such as cash and cash equivalents, inventory, accounts receivable to pay off short-term debts If the index has a value greater than 1 and the greater it is, the safer the solvency of the business will be, but the business will not use assets effectively If the value factor is less than 1, it shows that the enterprise is unable to pay the debts due within one year Accordingly, this coefficient can help evaluate the performance of the enterprise depending on the magnitude of the coefficient

Gross profit margin (GM) or gross profit margin is an indicator that analysts

use to reflect the financial health of a company by calculating the amount of money left over from product sales after subtracting the cost of goods sold This ratio will indicate how much profit the business will receive back per unit of capital after deducting the cost of goods sold If a company's gross profit margin fluctuates wildly, this can signal poor management practices and/or shoddy products Accordingly, this