Improving corporate financial analysis in lending activities at joint stock commercial bank for foreign trade of vietnam, hanoi branch

BANKING ACADEMY ADVANCED PROGRAM GRADUATION THESIS IMPROVING CORPORATE FINANCIAL ANALYSIS IN LENDING ACTIVITIES AT JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM, HANOI BRAN

BANKING ACADEMY ADVANCED PROGRAM

GRADUATION THESIS IMPROVING CORPORATE FINANCIAL ANALYSIS

IN LENDING ACTIVITIES AT JOINT STOCK

COMMERCIAL BANK FOR FOREIGN TRADE OF

VIETNAM, HANOI BRANCH

Student: Nguyen Hoai Minh Khanh

PROMISE

I hereby declare that this is my own research work, the data and findings in the thesis are honest and completely do not copy or use the consequence of any other similar research The information used in the assignment is based on the actual situation of the enterprise

Hanoi, May 9th 2023

Student

Nguyen Hoai Minh Khanh

ACKNOWLEDGENT

In order to complete this graduation thesis, I would like to express my sincerest gratitude to all the lectures of Banking Academy as well as the Faculty of Finance who had dedicatedly provide me with such valuable knowledge and experiences during my time at university, which can serve me well in my future careers I also want to send my most profound thanks to Ms Nguyen Thi Nga, my instructor, who really helped me a lot, so that I could try my best to complete this thesis

In particular, I would like to thank all my colleagues at Joint Stock Commercial Bank for Foreign Trade of Vietnam, Hanoi Branch who encouraged and instructed

me a lot in collecting information, data analysis and gave me such useful experiences during my time as an intern

Due to the limited practical internship time at the bank and incomplete knowledge, this report may include many shortcomings, so I am looking forward to receiving suggestions from lecturers so that I can change and improve myself, not only in studying but also in the later future

Hanoi, May 9th, 2023

Student

Nguyen Hoai Minh Khanh

CONTENT

PROMISE i

ACKNOWLEDGENT ii

LIST OF ACRONYMS vi

LIST OF TABLES vii

LIST OF CHARTS viii

INTRODUCTION 1

1 The urgency of the subject 1

2 Thesis purposes 2

3 Object and scope of the thesis 2

4 Research methods 2

5 Literature review 3

6 Structure 5

CHAPTER 1: THEORETICAL BASIS OF CORPORATE FINANCIAL ANALYSIS IN LENDING ACTIVITIES AT COMMERCIAL BANKS 6

1.1 Lending activities of commercial banks 6

1.1.1 Commercial banks 6

1.1.2 Lending activities at commercial banks 9

1.2 Overview of corporate financial analysis in lending activities at commercial banks 12

1.2.1 Definition of corporate financial analysis 12

1.2.2 Objectives of corporate financial analysis 12

1.2.3 Information sources for corporate financial analysis 15

1.2.4 Corporate financial analysis techniques 17

1.2.5 Content of corporate financial analysis 21

1.2.6 Roles of corporate financial analysis in lending activities at commercial banks 33

CONCLUSION CHAPTER 1 35

CHAPTER 2: CURRENT STATUS OF CORPORATE FINANCIAL ANALYSIS IN LENDING ACTIVITIES AT JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM, HANOI BRANCH 36

2.1 Brief introduction about Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi branch 36

2.1.1 The history and development 36

2.1.2 Organizational structure 38

2.1.3 Some key performance indicators 40

2.2 Current status of corporate financial analysis in lending activities at Joint Stock Commercial bank for Foreign Trade of Vietnam, Hanoi Branch 44

2.2.1 Information sources used for corporate financial analysis 44

2.2.2 Corporate financial analysis techniques 45

2.2.3 Corporate financial analysis process 46

2.2.4 Illustrating financial analysis of corporate customers in lending activities at Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi branch 48 2.3 Evaluation of corporate financial analysis in lending activities at Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi branch 64

2.3.1 Achievements 64

2.3.2 Limitations 65

2.3.3 Causes of the limitations 66

CONCLUSION CHAPTER 2 68

CHAPTER 3 SOLUTIONS TO IMPROVE CORPORATE FINANCIAL ANALYSIS IN LENDING ACTIVITIES AT JOINT STOCK COMMERCIAL

BANK FOR FOREIGN TRADE OF VIETNAM, HANOI BRANCH 69

3.1 Development orientation of Joint Stock Commercial Bank for Foreign Trade of Vietnam, Hanoi branch 69

3.2 Solutions to improve corporate financial analysis in lending activities at Joint Stock Commercial Bank for Foreign Trade of Vietnam, Hanoi Branch 70

3.2.1 Improving the quality of information collected and processed 70

3.2.2 Improving the content of financial analysis 71

3.2.3 Improving the quality and qualifications of credit officers 74

3.2.4 Applying technology to corporate financial analysis 74

3.3 Recommendations 75

3.3.1 Recommendations to the State Bank 75

3.3.2 Recommendations to Joint Stock Commercial Bank for Foreign Trade of Vietnam 76

3.3.3 Recommendations to the corporate customers 76

CONCLUSION CHAPTER 3 78

GENERAL CONCLUSION 79

REFERENCES 80

APPENDIX 82

LIST OF ACRONYMS

Vietcombank Hanoi Joint Stock commercial bank for Foreign Trade of

Vietnam, Hanoi branch

Table 2.7 Income Statement of ELCOM CORP 2020-2022 51

Table 2.8 Asset structure of ELCOM CORP 2020-2022 53

Table 2.9 Liabilities and Equity structure of ELCOM CORP

Table 2.10 Activity ratios of ELCOM CORP 2020-2022 60

Table 2.11 Liquidity ratios of ELCOM CORP 2020-2022 61

Table 2.12 Solvency ratios of ELCOM CORP 2020-2022 62

Table 2.13 Profitability ratios of ELCOM CORP 2020-2022 62

Table 3.1 Cash Flow Statement of ELCOM CORP 2020-2022 71

Table 3.2 DuPont analysis of ELCOM CORP 73

LIST OF CHARTS

Chart 1.1 Business life cycle 24 Chart 2.1 Organizational structure of Vietcombank Hanoi 40

INTRODUCTION

1 The urgency of the subject

In the last 3 years, the Covid-19 caused the world economy to slow down, the global supply chain was disrupted locally, and many countries fell into a difficult situation, and Vietnam also could not avoid this trend when growth in most industries and fields decreased and unemployment rate became higher All enterprises met a lot

of difficulties to survive and develop, and one of the biggest challenges that enterprises had to face was the financial burden, more specific, lack of capital Even when the pandemic had gone and the world entered a new phase of recovery, this problem still cannot be solved thoroughly As a result, raising capital by borrowing from commercial banks is an effective solution for corporations to deal with their difficulties

Lending activities play an important role in generating the most profit for commercial banks, and the majority is lending to enterprises However, this main activity also has many potential risks such as business can be unable to pay the debt,

or their financial situation is unclear, which can make it uncertain about their ability

to repay the debt for the bank The main reason that leads to this issue is that commercial banks do not properly evaluate the financial situation and debt repayment capacity of the borrowing enterprises Therefore, corporate financial analysis becomes very important to the lending activities of commercial banks Evaluating and making right valuation about the firm can help banks to decide whether to make lending decision or not and come up with solutions on time to control credit risks

As one of the leading banks in Vietnam, Vietcombank has always attached importance to the quality of corporate financial analysis over the recent years Although this process has been improved recently, there are still a lot of drawbacks

and solutions needed As a result, topic: “Improving corporate financial analysis

in lending activities at Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi branch”is chosen

2 Thesis purposes

This thesis aims to solve the following problems:

- Synthesizing the theoretical basis for the analysis of corporate finance in lending activities at commercial banks

- Analyzing and evaluating current financial situation of corporations in lending activities at Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi Branch to give the advantages and limitations still existing

- Proposing some solutions to solve the remaning issues in corporate financial analysis in lending activities at Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi Branch to make it quicker, more qualified and effective

3 Object and scope of the thesis

Object: analyzing corporate financial in making lending decisions at Joint

Stock commercial bank for Foreign Trade of Vietnam, Hanoi Branch

Scope:

Scope of content: quality of analyzing corporate financial at Joint Stock

commercial bank for Foreign Trade of Vietnam, Hanoi Branch

Scope of space: Research at Joint Stock commercial bank for Foreign Trade of

Vietnam, Hanoi Branch

Scope of time: Research data was collected in the period from 2020 to 2022

4 Research methods

To achieve the purpose of the study, this thesis uses these following methods: Collecting and synthesizing information and data from documents and financial reports provided by the Branch In addition, data used in the thesis is also collected from other sources such as previous studies, books and websites

Qualitative analyzing and other methods such as statistical method, comparison method, enumeration method, etc All these methods are used to analyze, consider

and evaluate specifically about the current situation of enterprises, so that banks can propose solutions to improve corporate financial analysis in lending activities at Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi Branch

5 Literature review

Corporate financial analysis is one of the most concerned topics all over the world, and there have been a lot of analysts publishing their scientific research about this field

The topic “Banks Lines of Credit in Corporate Finance: An Empirical Analysis” (2007) by Sufi, A examines the factors that affect whether businesses used bank lines

of credit or cash when managing their corporate liquidity The author discovered that bank lines of credit are only a practical replacement for liquidity for firms that maintain high cash flow On the other hand, businesses with low cash flow have a lower chance of getting a line of credit and rely more on cash to maintain their corporate liquidity

Kumbirai M and Webb R in the research “A financial ratio analysis of commercial bank performance in South Africa” (2010) used ratio analysis technique

to evaluate financial performance of commercial banks, therefore identify their areas

of strengths and shortcomings The author conducted an investigation in three different aspects: profitability, liquidity and credit quality, determined the trend over the period and provided explanation for that change

Not only foreign but also domestic researchers are interested in this subject The fact that numerous previous studies have looked into and published extremely useful scientific research serves as proof

Dao Thu Lien in Master thesis “Application of camels model in financial analysis at An Binh Joint Stock commercial bank - Hai Phong Branch” (2015) used Camels model with 6 components combined with other criteria such as quality assets, management capacity and profitability to assess An Binh bank's financial capacity The thesis also pointed out the limitations in financial analysis at Hai Phong branch

of An Binh bank, thereby came up with solutions to overcome its difficulties

Reseach “ The influence of corporate financial analysis on lending performance

at Vietnam Prosperity Commercial Joint Stock Bank (VPBank)” (2021) by Nguyen Thanh Ha looks into and determines the situation of corporate financial analysis in lending activities through conducting surveys for employees working at VPBank, and therefore provide models of the influence of corporate finance on the effectiveness of lending performance at the bank The author also discovers some causes and problems as a basis in order to come up with solutions for those matters

Another topic, “Financial analysis of business customers in lending activities at Sai Gon Thuong Tin commercial Joint Stock bank, Long Bien Branch – situation and solutions” (2021) has clearly systematized the theoretical basis for the financial analysis at commercial banks The thesis also clearly stated the situation of Sai Gon Thuong Tin commercial Joint Stock bank, Long Bien Branch by analyzing financial statements, thereby clarifying its strengths as well as weaknesses, and proposing solutions and recommendations to improve in the future

Nguyen Hong Quan in “Solutions to complete financial analysis of corporate customers in credit activities at Military Commercial Joint Stock Bank - Dong Da Branch” (2022) has specifically examined the present condition of financial analysis

of enterprises by using a variety of techniques, thereby offering some solutions to the remaining limitations

In general, the majority of these studies provide a theoretical basis associated with the topic, provide models or actual data to analyze the situation, therefore suggesting practical solutions However, these investigations are still quite theoretical, and the solutions given are not highly applicable Particularly, at Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi Branch, no research has been done specifically on corporate financial analysis, despite the fact that it is one

of the key determinants of its profitability As a result, in addition to inherit the findings of earlier studies, I will work to go deeper and develop the most useable and efficient solutions for this matter

Chapter 2: Current status of corporate financial analysis in lending activities at

Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi branch

Chapter 3: Solutions to improve corporate financial analysis in lending

activities at Joint Stock commercial bank for Foreign Trade of Vietnam, Hanoi branch

CHAPTER 1: THEORETICAL BASIS OF CORPORATE FINANCIAL ANALYSIS IN LENDING ACTIVITIES AT

COMMERCIAL BANKS 1.1 Lending activities of commercial banks

1.1.1 Commercial banks

1.1.1.1 Definition

Commercial banks have existed and developed for hundreds of years associated with the development of commodity economy The development of the commercial banking system has had a great and important impact on the development of the commodity economy, on the contrary, the commodity economy developed strongly until the highest stage was the In the market economy, commercial banks are also increasingly improved and become indispensable financial institutions Through credit activities, commercial banks create benefits for depositors, borrowers and for the whole bank through the interest rate differential, which earns profits for the bank

Up to now, there are many definitions of commercial banks:

In the United States: A commercial bank is a currency trading company that specializes in providing financial services and operating in the financial industry The French Banking Act (1941) also defines: "Commercial banks are enterprises or establishments whose regular occupation is to receive money from the public in the form of deposits, or in other forms and use those resources for themselves in their discounting, crediting and financing transactions

In Vietnam, commercial bank is an institution that is allowed to conduct all banking activities and other activities for profit purposes in accordance with the Law

on Credit Institutions and other provisions of law (Decree No 59/2009/ND-CP of the government on organization and operation of commercial banks)

From the above observations, it can be seen that commercial banks are one of the financial institutions that are characterized by providing a variety of financial services with the basic operations of receiving deposits, lending and providing

payment services In addition, commercial banks also provide many other services to satisfy the maximum demand for products and services of the society

1.1.1.2 Activities of commercial banks

a Fund raising activities:

- Commercial banks can accept demand deposits, time deposits, savings deposits and other types of deposits;

- Commercial banks can issue certificates of deposit, promissory notes, bills, and bonds to mobilize domestic and foreign capital

- Commercial banks may borrow capital from the State Bank in the form

of refinancing according to the provisions of the Law on State Bank of Vietnam

b Credit activities:

Commercial banks may grant credit in the following forms: Loans; Discounting and rediscounting negotiable instruments and other valuable papers; Bank guarantee; Issuing credit cards; Domestic factoring; international factoring for banks authorized

to make international payments; Other forms of credit extension after being approved

by the State Bank

c Payment service activities:

- Commercial banks must open a deposit account at the State Bank and maintain on this deposit account the average balance not lower than the required reserve level

- Commercial banks may open payment accounts at other credit institutions and may open deposit accounts and payment accounts abroad

in accordance with the law on foreign exchange

- Commercial banks open payment accounts for customers; Provide means of payment; Providing payment services, including: Providing domestic payment services including checks, orders, payment orders, collection requests, collection orders, letters of credit, bank cards;

Perform international payment services and other payment services after being approved by the State Bank

- Commercial banks are allowed to organize internal payments and participate in the national interbank payment system

d Capital contribution and shares purchasing activities:

- Commercial banks may only use their charter capital and reserve funds

to contribute capital and purchase shares in accordance with the following provisions:

- Commercial banks must establish or acquire subsidiaries and associated companies to carry out business activities: securities underwriting, securities brokerage; management and distribution of securities investment fund certificates; manage securities portfolio and buy and sell stocks; financial leasing; insurance

- Commercial banks are established, acquire subsidiaries, affiliated companies operating in the field of security asset management, overseas remittance, foreign exchange, gold, factoring, and credit card issuance , consumer credit, payment intermediary services, credit information

- Commercial banks may contribute capital, purchase shares of enterprises operating in the following fields: Insurance, securities, remittances, foreign exchange business, gold, factoring, credit card issuance, credit consumption, intermediary payment services and credit information In case a commercial bank contributes capital or buys shares from an enterprise operating in fields other than the above-mentioned fields, it must be approved in writing by the State Bank

e Other activities:

- Trading, providing foreign exchange services and derivative products

- Participating in bidding for Treasury bills, buying and selling negotiable instruments, Government bonds, Treasury bills, State bank bills and other valuable papers on the market

- Performing cash management, banking and financial consulting services; services of management, preservation of assets, rental of cabinets, safes

- Corporate finance consulting, buying, selling, consolidation, merger and investment consulting; Buying and selling Government bonds, corporate bonds and other business activities related to banking activities after obtaining written approval from the State Bank

1.1.2 Lending activities at commercial banks

1.1.2.1 Purposes of lending activities at commercial banks

Law on Credit Institutions No 02/1997/QH10 and Law on Amending and Supplementing a Number of Credit Institutions Article of the Law on Credit Institutions No 20/2004/QH11 stipulates: Lending is a form of credit extension whereby the lender assigns or commits to hand over to a customer a sum of money

to be used for a specified purpose within a certain period of time as agreed with the principle of repayment of both principal and interest

Lending is the main business of commercial banks to generate profit Revenue from lending activities can cover deposit and reserve expenses, operating and administrative expenses, floating capital expenses, taxes of all kinds and investment risk costs A significant portion of the bank's overall revenue and profit comes from interest If the bank does not take significant risks with these loans, revenue and profit will increase when the bank increases lending The quality of loans increases, the ability to recover loans is high, especially for long-term loans, the revenue and profit from these loans will also increase

1.1.2.2 Roles of lending activities at commercial banks

Through lending activities, the bank also realizes the Government's economic development objectives by lending with reserve budget capital The State authorizes banks to issue bonds and promissory notes to mobilize capital for development investment At that time, the bank will be more widely known among

socio-the people not only in lending activities but also in capital mobilization activities will also develop, creating prestige and reputation for the bank

From a solid relationship with customers in lending activities, the bank will establish relationships with customers in other areas such as opening payment deposit accounts, payment services on behalf of customers, guarantee, etc On the customer side, the production and business activities will be more efficient, on the basis of the existing relationship with the bank, the customer will actively create another credit relationship with the bank, creating an increasingly durable relationship Such a stable relationship between the customer and the bank contributes to the expansion

of the credit market

1.1.2.3 Commercial bank lending process

Lending process of commercial banks will follow these steps:

Step 1: Receive loan application

Before receiving the loan application, the credit officer will determine and clarify the loan purpose of the customer, then preliminarily verify the client's financial situation After determining the purpose and verifying the eligibility, the credit officer will guide you to prepare a complete set of loan documents according

to the requirements and loan conditions of each bank Each bank will have different eligibility requirements and profile composition

Step 2: Appraise personal loan conditions

After receiving the documents that the customer has provided in full, the bank

or credit institution will conduct the appraisal of the application This is one of the most important steps in the entire process to verify the accuracy of the loan application provided by the customer, the appraisal will determine whether you are approved for the loan application or not

Step 3: Financial Analysis

This step is to identify risks that may happen in order to minimize these risks

The content of the analysis will normally include:

- The level of honesty and authenticity of the data provided by the customer

- Credit history, repayment history

- The number of credit institutions with which the customer has relations and the customer's ability to pay

From the above information, an analysis and assessment of the customer's reputation, financial ability, and solvency will be made in the past, present and future After that, the approval department will conduct review and approval

Step 4: Approval for lending

After reviewing the source of funds, payment conditions, methods and lending interest rates, the consultant will submit the application and appraisal report to the review officer for inspection and review which can be re-verified then submitted for approval In this step, the credit department based on the analyzed information and the appraised documents to decide whether to approve the loan or not

Step 5: Sign the contract and disburse

Once your loan application is approved, the bank will issue a loan contract for the customer to sign and disburse This is the written agreement between the customer and the bank with commitments requiring the two parties to comply with each other's requirements After being approved by the director, the accounting department is responsible for disbursing consumer loans to customers However, the credit officer will continue to monitor whether your loan is used for the right purpose If there are any signs of fraud or appropriation, the bank will withdraw the loan at any time

Step 6: Collect debt and issue a new credit judgment

When the payment is due, the bank's debt collection department will notify the customer requesting to make the payment on time, this payment will include interest and part of the principal loan This amount has been clearly agreed in the loan contract signed by both parties In case of late payment or insolvency, the bank will consider the solvency to have appropriate new credit judgments

1.2 Overview of corporate financial analysis in lending activities at commercial banks

1.2.1 Definition of corporate financial analysis

Corporate financial analysis can be defined as a process of examining and reviewing the current financial data of an enterprise for the purpose of assessing the financial position, risks and their future potential, in order to help others who are interested in the firm to make financial decisions related to their benefits

Corporate financial analysis usually focuses on the information provided in the financial statements of the enterprise, combined with additional information from different sources to clarify the financial position of the company in the past, indicate major changes in the future, calculate the factors causing those adjustment, and discover the laws of activities All these works will serve to make current decisions and future projections

Corporate financial analysis is the concern of many people, from managers to investors, banks, suppliers, agencies, etc Each party is concerned with different perspectives and different purposes, so it is required to implement financial analysis

by various methods to meet their needs

1.2.2 Objectives of corporate financial analysis

Corporate financial analysis is the concern of many people whose benefits are attached to the firm are interested in its financial activities of the enterprise and they have the demand for using financial information of that enterprise Each party is concerned with different perspectives and different goals Objects interested in the financial situation of the business include:

- Business managers

- Investors (including current and future shareholders)

- Credit providers for businesses such as banks, financial institutions, bond buyers, etc

- Employees working in the business

- State management agencies

- Financial analysts

Different objects using financial information will make decisions with different purposes Therefore, financial analysis for each party will meet different goals that fit most to their benefits Specifically:

1.2.2.1 To the business managers

As the person who directly manages and runs the business, the manager understands financial situation of the firm best, so they have a lot of information serving for analyzing Corporate financial analysis to the manager will meet the following goals:

- Creating regular cycles to evaluate the effectiveness of business management in the past period, the implementation of financial principles, profitability, risks and solvency in the activities of the firms

- Ensuring that the decisions of Board of Directors in investing, sponsoring, profit dítributing, etc are consistent with the actual situation

of the enterprise

- Providing necessary information for financial projections

- Providing bases for inspection, movement and management in the firm Corporate financial analysis clarifies the importance of financial forecasting, which is the foundation of management activities, illuminating not only policy in financing but also the general rules of the enterprise

1.2.2.2 To the investors

Investors are those who assign their capital to a company for management, profit, and risk-taking These include stockholders, people, organizations, and other businesses These objects have a direct stake in predicting the firm's future value Dividends and capital surplus are the sources of revenue for investors The amount

of profit a business makes has a significant impact on these two variables In reality, its rate of return frequently attracts investors' attention What is the typical return on

company capital and return on equity What is the market price of the asset compared

to its par value and book value? What are the long-term investment projects based on? How objective and truthful are the financial statements available to the public? are the crucial questions needed to be answered If they do not have enough specialized knowledge to evaluate the financial performance of an enterprise, investors will have to rely on professional financial analysts who can provide necessary data for their decisions

In conclusion, investors can make the best investment choices when corporate financial analysis evaluates the company, estimates stock value, profitability, risk analysis based on an examination of financial statements, economic news, direct contact with business management, and financial analyst recommendations

1.2.2.3 To the credit suppliers

Credit suppliers are people who give loans to businesses so they can get the cash they need for operations and production They must be confident in their capacity to repay the debt before lending Interest on debts is how they make money Therefore,

a lender's analysis of financial success aims to determine borrower's capacity for loan repayment However, there are differences between the study for long-term loans and short-term loans

For short-term loans, short-term credit providers are especially interested in the business's ability to pay immediately In other words, it is the ability of the business

to cope when the debt is due For long-term loans, long-term credit providers must conduct financial appraisal of investment projects, manage the disbursement process using capital for each investment project to ensure repayment ability through income and profitability of the firm as well as control the cash flow of investment projects of the enterprise

1.2.2.4 To the wage earners

The wage earners in the enterprise are the employees of the enterprise, whose main source of income is from the salary paid Some employees also have a certain capital investment in the company in addition to their salary revenue Therefore, they

have the profit to share in addition to the income from the salary given Both of these incomes are based on the enterprise's production and business operations, as well as its pay structure and opportunities for advancement in the use of labor Financial analysis of enterprises enables them to devote themselves to the output and business operations of the enterprises in accordance with their assigned tasks

1.2.2.5 To the State management agencies

These are agencies representing the power and benefits of the people such as: Ministry of Finance (Corporate Finance Department, Tax authorities, financial agencies at all levels, Customs offices), Market management performing the task

of managing and monitoring the economy The movement of financial resources from outside to enterprises and from enterprises to the market reflects all developments and actions of the business In order to help managers of these agencies carry out the duties assigned to them by the State more successfully, financial analysis should provide information on the management, use, and preservation of state capital in enterprises, oversee the implementation of obligations of enterprises to the State, and inspect the observance of laws by firms

Overall, corporate financial analysis is a helpful tool for determining economic value, evaluating a company's strengths and weaknesses, and identifying both objective and subjective factors These factors give each party the information they need to make decisions that are appropriate for their goals

1.2.3 Information sources for corporate financial analysis

1.2.3.1 Financial statements

Financial statements are written records that convey the business activities and the financial performance of a company Financial statements are often audited by government agencies, accountants, firms, etc to ensure accuracy and for tax, financing, or investing purposes

Financial statements provide key economic and financial information to the people using accounting information in evaluating, analyzing and forecasting financial position of the enterprise Financial statements are used as the main data

source when analyzing corporate finance Financial report not only shows the main load situation of the enterprise at the reporting time, but also presents the performance results achieved by the company at that time By reviewing and analyzing financial statements, users can evaluate accurately the financial strength, profitability and prospects of the business The Three major financial statement reports are the balance sheet, income statement, and cash flow statement

Balance sheet is a consolidated financial statement that provides an overview

of a company's assets, liabilities, and shareholders' equity at a certain point of time.Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure It can be used with other important financial statements to conduct fundamental analysis or calculate financial ratios

Unlike the balance sheet, the income statement covers a range of time, which

is a year for annual financial statements and a quarter for quarterly financial statements The income statement provides an overview of revenues, expenses, net income, and earnings per share Income statement provides valuable insights into a company’s operations, the efficiency of its management, underperforming sectors, and its performance relative to industry peers

The cash flow statement measures how well a company generates cash to pay

its debt obligations, fund its operating expenses, and fund investments The cash flow statement allows investors to understand how a company's operations are running, where its money is coming from, and how money is being spent It also provides insight as to whether a company is on a solid financial footing It contains three sections that report cash flow for the various activities for which a company uses its cash Those three components are: operating activities which include any sources and uses of cash from running the business and selling its products or services; investing activities including all cash sources and expenditures related to a company's long-term assets; and financing activities includes the sources of cash from investors or banks, as well as the uses of cash paid to shareholders

1.2.3.2 Other information sources:

Financial analysis is used to forecast the company's financial performance and potential outcomes so that the right decisions can be made Thus, it is not limited to look up for financial statements but also gather all data related to the financial position of the enterprise, specifically:

General information referred to data about the economy, politics, and laws

related to business potential, investment opportunities, technological opportunities, market research, and growth prospects in production, business, and commercial services Economic expansion or contraction has a strong impact on how well the entities perform

Information by economic sector is the data about how firms act in relation to the

characteristics of an economic sector, such as: Industry economics related to the entity of the product, the technical process to be performed, the basis for production demand, growth rates of economic cycles, market size, and development prospects

Information about the company, including data on its strategies in each period,

its performance, how capital is created, distributed, and used, and also its ability to repay the debt Managers' explanations, financial statements, accounting reports, statistical reports, and expert accounting are all used to demonstrate this information Additional relevant information gathered for financial research is extremely extensive and diverse These are the important data sources to support analysts to evaluate different aspects of financial activities fully and accurately

1.2.4 Corporate financial analysis techniques

- Analyzing the long-term trend, on the basis of comparing the data of the following years with the base year

Subsequently, it is possible to combine the common features and distinguish the unique characteristics of the compared phenomena, on the basis of which the advantages, disadvantages, effectiveness and inefficiency can be assessed to determine the best management strategies for each unique situation The comparative technique has the benefit of being straightforward, user-friendly, and capable of calculating the trend of the indicators However, its drawback is that it is unable to measure the quality of the data that was used for researching Absolute numerical comparison, relative numerical comparison, horizontal analysis and vertical analysis are the comparison categories that are frequently used

Comparing using absolute numbers by deducting the indicator or factor's value

from its corresponding value from the base period The difference, which is the outcome of the comparison, shows the volatility and trend of the indicator

Comparing using relative numbers by assesing the trend of the change while

taking into account the relative and phenomenal relationships of the components

Horizontal method is to identify and evaluate changes in financial statements

over time It can provide not only data for a single year but also the details required

to analyze long-term business and financial patterns for the company

In vertical method, every line item on a financial statement is entered as a

percentage of another item, making it easier for the analyst to recognize changes in the value of ratios in relation to net sales

1.2.4.2 Segmentation method

This method is used to subdivide the process and results into different parts for the purpose of understanding the process and the results under different aspects in accordance with the objectives of each object's interest in each period We describe the production process and the outcomes according to the following standard:

- Details in accordance of the constituent elements of research expenditure: is to break down the study target into various parts of the

indicator Understanding its nature, content, trend, and growth is beneficial

- Details by time of process and economic results: is to organize the actions and outcomes into historical stages of their appearance and growth in order to assess the indicator’s trend, rate of advancement and level of acceptance

- Details based on the phenomenon's arising area: is to separate the process and outcomes in accordance with the origin and growth of the research goal, making it easier to evaluate the position and contribution of each department to the enterprise's development

1.2.4.3 Ratio analysis method

The ratio technique uses a number of ratios in a continuous time series and also

in each period to show the structure and relationship between financial indicators and changes in financial quantity In corporate finance, financial ratios are categorized into different ratio categories that indicate the fundamental components in accordance with the operational goals of the business These are groups of ratios related to solvency, ability to balance capital, operating capacity, and profitability The ratio grouping consists of numerous distinct ratios, and each aspect of financial activity is unique in each situation The analyst selects several ratio groups to meet the needs of clients depending on their analysis viewpoint Choosing the appropriate ratios and analyzing them will certainly help you assess the financial situation

Ratio analysis method can highlight patterns of variation that are frequently hard to find through a separate analysis of the ratio components A single ratio, however, is not very meaningful, so when studying ratios, we need to compare them

to previous ones, existing benchmark ratios, and average ratios of the industry

1.2.4.4 DuPont analysis method

The DuPont Model is frequently used in financial analysis to examine the relationship among financial ratios We can identify factors that have affected analytical criteria in an accurate logical sequence thanks to the study of primers

linking indicators, and the analyst will be able to identify the causes causing both good and bad situations in company activities The key to understanding this phenomenon is to distinguish between various aggregates that represent the profitability of a company to see how these ratios affect the composite ratio

The DuPont Analysis Formula is an alternate way to calculate and deconstruct ROE (Return on Equity) in order to get a better understanding of the underlying factors behind a company's ROE This allows analysts to understand where a company is strong and where it is weak when it comes to generating profitability DuPont formula is shown as following:

ROE = Net Profit Margin x Asset Turnover x Financial Leverage

When broken down into the calculations for the different components, the DuPont method formula will look like this:

ROE = !"# %&'()"*"+"&," x -+"./0" -11"#1*"+"&," x -+"./0" 23,4#5-+"./0" -11"#1

While ROE measures a company's performance by dividing net income by shareholder’s equity, the DuPont method goes deeper and emphasizes three significant ROE categories: Operating efficiency, Asset efficiency and Leverage

Operating efficiency, which is measured by net profit margin This shows how

much money in net sales is generated per every dollar in expenses Net profit margin

is calculated by dividing net profit, also known as net income, by revenue

The second component, Asset efficiency, is measured by total asset turnover

This establishes the amount of total income that a business generates per dollar of assets By dividing a company's revenue by its available assets, total asset turnover will be determined

The last component is Financial leverage, determined by the equity multiplier

Unlike the first two components, which directly evaluate a company's operations, financial leverage assesses how well a company is using debt, a key driver of ROE,

to finance those operations

As can be seen, the DuPont method is just a more complicated way to calculate ROE However, it can be a more effective tool for investors and analysts because it goes into deeper detail of what is driving a company's ROE

For instance, if a company's assets are declining, it might continue to generate

a strong ROE by taking on more debt, which, depending on the amount accumulated, might be a warning sign for investors On the other hand, if a company is relying more on its profit margin to generate its ROE without accumulating much debt, an investor may be more inclined to invest in that company because there is lower risk that the company will take on too much debt

In addition, Basic ROE might be far less misleading when using the DuPont technique, particularly when considering a company's debt

1.2.5 Content of corporate financial analysis

1.2.5.1 Balance Sheet analysis

a Fluctuation and structure of assets analysis:

The main tool used to analyze asset volatility is comparison, using both horizontal and vertical comparison techniques Horizontal analysis is a financial analysis technique used to evaluate a company's performance over time By comparing current financial results with financial results in the base year, a company

is better able to spot the direction of change in account balances and the magnitude

in which that change has occurred Percentage of change can be calculated as:

Percentage of change = !"#$%& (% )#"*+,(-#% /+,0 !"#$%& (% 1+-/ /+,!"#$%& (% 1+-/ /+, x 100

While horizontal analysis uses percentages to represent each line item's percent change over time, vertical analysis focuses on the relationships between the numbers

in a single reporting period, or one moment in time Vertical analysis makes it much easier to compare the financial statements of one company with another, and across industries as one can see the relative proportions of account balances Additionally,

it makes it simpler to compare earlier periods for time series analysis, in which quarterly and annual numbers are compared over several years to get a sense of

whether performance indicators are improving or declining The proportion of each part in total assets for the analysis of the enterprise's asset structure can be calculated

as following:

Percentage of each component in total assets = !"#$% '( %")* )'+,'-%-./'."# 011%.1 x 100

b Fluctuation and structure of capital analysis:

The structure and fluctuation of capital indicate the current condition of an enterprise's capital sources Capital structure is the proportion of each type of capital

in total We may evaluate the firm's financial strategy, the level of financial risk and the degree of financial independence or dependency of the company by looking at the proportion of each source of shareholders’ equity The analytical method is to compare between the beginning and the end of the period and determine the difference in the proportion of each type of capital source The percentage of each type of capital source in total is calculated by:

Percentage of each capital source in total = 2+3$/ #4 /+)5 )#"*#%/%&

6#&+3 -5+,/5#37/,- /8$(&. x 100

c Relationship between assets and capital:

From the perspective of capital financing, each kind of asset needs to be financed with a certain source of funding The use of capital to finance capital needs

in businesses is often considered on the principle of balance, which requires managers

to take into account both safety factors in the capital structure but still ensure the cost

of capital is relatively reasonable to achieve the desired effect of capital use The relationships in the balance sheet are frequently taken into account while analyzing this issue The relationships on the balance sheet are shown through three factors: Net working capital (NWC), Working capital needed and Debt-to-equity Ratio (D/E) NWC is the difference between the current assets and its current liabilities It's

a commonly used measurement to gauge the short-term financial health

NWC = Current assets – Current liabilities

Positive NWC shows that current assets is higher than current liabilities, which means the overall structure is reasonable, the company has the ability to repay the

debt and there is still residual cash if all current assets need to be sold to cover the debt A negative NWC indicates that not all of the company's current liabilities can

be covered by its current assets The company has more short-term debt than it has short-term resources Negative NWC is a sign of insufficient liquidity, poor short-term health, and potential problems meeting debt obligations when they come due

Working capital needed is short-term financial requirement that arises in the

production and business processes but are not yet supported by a third party

Working capital needed = Business assets – Business liabilities

Business assets include short-term receivables, inventory, and other current assets on the balance sheet that are currently used in the production and operation of the company Business debts are obligations to third parties, such as payables to sellers, paybles to employees, and other payables

Positive working capital requirement indicates that a portion of the company's assets have not been financed by a third party, suggesting that the company has a capital need On the other hand, if the need for working capital is smaller than zero, the capital that the company has appropriated from a third party exceeds all of its short-term capital requirements that arise from its operations

The D/E ratio is an important metric in corporate finance since it indicates how much a firm relies on debt to fund its operations rather than its own resources

D/E ratio = !"#$% %'$('%'#')*

!"#$% *+$,)+"%-),* ! )./'#0

A corporation that relies heavily on debt funding will have a high D/E ratio, which is frequently associated with high investment risk On the other hand, low D/E ratio indicates that equity from shareholders is the main source of capital of the company The firm is in a safe situation without worrying about repaying the debt However, debt in business is not always a bad thing as expenses to raise capital by borrowing is much lower than using shareholders’ equity, and the profitability by using debt is also much more higher The decision to raise capital whether by debt or equity significantly depends on the stage the enterprise in in

Chart 1.1 Business life cycle

(Source: google.com)

In the introduction and growth stage, businesses with limited scope, poor revenue, and high costs shouldn't borrow money through debt because they won't be able to repay it Sales and profits are falling in the last stage, making it impossible for them to pay off their loans Only until the business has established a solid reputation

in the industry, a consistent cash flow, and the capacity to cover debt in the maturity stage should they raise capital from loans

1.2.5.2 Income Statement analysis

Through comparing business income statements, analysts can start understanding the position and business results of that company The analyst can use these data to acquire an overall picture of how sales, costs, and profit have changed over time

a Income Statement using horizontal comparison:

The horizontal method of analysis is used to identify and evaluate changes in financial statements over time The horizontal comparative report, which provides findings in both absolute and relative figures, can display changes in the indicators that reflect the company's financial status This report is highly helpful to the analyst since it provides not only data for a single year but also the details required to analyze long-term business and financial patterns for the company This research sheds

further light on the nature and trends of the ongoing developments that have an impact

on firm's financial performance

Table 1.1 Example of income statement using horizontal comparison

(Source: financestrategists.com)

b Income Statements using vertical comparison:

In vertical analysis method, every line item on a financial statement is entered

as a percentage of another item, for example, every line item on an income statement

is expressed as a percentage of sales This approach makes it easier for the analyst to recognize changes in the value of ratios in relation to net sales, especially when the analyst wants to compare one company to another or to the industry average because

he will then have a baseline for broad comparisons for absolute numbers Analysts must perform vertical comparisons of the statements in order to determine whether the ratio of income to expenses has increased or decreased These rates may shift as

a result of changes in pricing, costs, or both

Table 1.2 Example of income statement using vertical comparison

(Source: corporatefinanceinstitue.com)

1.2.5.3 Cash Flow Statement analysis

The Cash Flow Statement provides information about a company’s cash receipts and cash payments during an accounting period The cash-based data provided by the cash flow statement contrasts with the accrual-based information from the income statements Although income is an important measure of the results of a company’s activities, cash flow is also essential As an extreme illustration, a hypothetical company that makes all sales on account, without regard to whether it will ever collect its account receivables, would report healthy sales on its income statement and might well report significant income; however, with zero cash inflow, the company would not survive The cash flow statement also provides a reconciliation of the beginning and ending cash on the balance sheet (CFA Institute, 2022)

In addition to data about cash generated in operating activities, the cash flow statement also provides information about cash provided in a company’s investing and financing activities This data allows the analysts to answer such questions as:

- Does the company generate enough cash from its operations to pay for its new investments, or is the company relying on new debt issuance to finance them?

- Does the company pay its dividend to common stockholders using cash generated from operations, from selling assets, or from issuing debt? Operating activities include the company’s day-to-day activities that create revenues, such as selling inventory and providing services, and other activities not classified as investing or financing Cash inflows result from cash sales and from collection of account receivable Examples include cash receipts from the provision

of services and royalties, commissions, and other revenue Cash outflows result from cash payment for inventory, salaries, taxes and other operating-related expenses and from paying account payable

Investing activities include purchasing and selling long-term assets and other investments These long-term assets and investments include property, plant, intangible assets, and other long-term assets Cash inflows in the investing category include cash receipts from the sale of non-trading securities; property, plant, and equipment; intangibles and other long-term assets Cash outflows include cash payments for the purchase of these assets

Financing activities include obtaining or repaying capital, such as equity and long-term debt The two primary sources of capital are shareholders and creditors Cash inflows in this category include cash receipts from issuing stock or bonds and cash receipts from borrowing Cash outflow include cash payments to repurchase stock and to repay bonds and other borrowings Note that indirect borrowing using account payable is not considered a financing activity- such borrowing is classified

as an operating activity

1.2.5.4 Financial ratio analysis

Financial ratio nalysis is the use of the relationship of the criteria on the financial statements to evaluate the financial performance of an enterprise The financial ratios provide fundamental details about a company’s economic nature, its competitive strategy, and unique characteristics of its financial and investment activities, as well

as its manufacturing and business operations By comparing the risk and return of the company, investors will be better able to make appropriate investing and lending decisions (CFA Institute, 2022) There are 4 main kinds of ratio that are often used:

a Activity ratios:

Activity ratios, also known as asset utilization or operating efficiency ratios, is

assets on its balance sheet, to generate revenues and cash Activity ratios will help analysts to determine how efficiency the firm is using its assets and how many dollars

of sales the firm is able to generate from each dollar of assets Activity ratios can be broken down into the following sub-categories:

Inventory turnover ratio calculates how frequently the balance of inventory

is sold over the course of an accounting period Higher computations imply that a business can transport its inventory rather easily Lower inventory turnover ratio indicates that products are held for longer periods of time, rotated slowly, which leads

to high expense for enterprises This shift could be the result of companies establishing a policy of building reserves to meet their future production and business demands, or it could be the result of good aviation management, where orders were placed too early compared to demand owing to a miscalculation need for usage

Inventory turnover = !"#$ "& #'()#

*+),'-) /+)/$",0

Receivable turnover ratio determines an entity's ability to collect cash from

its customers to whom it offers credit A high receivable turnover ratio indicates high efficient credit and collection, which is a good sign for the firm On the other hand, low ratio shows that its collection procedures may be inefficiency If the receivables are not controlled, they will have an impact on the company's production and commercial operations since they are too huge and the money of the company is heavily utilized

Receivable turnover = 1)+)/2)

*+),'-) ,)3).+'4()#

Payable turnover ratio measures how many times per year the company

theoretically pays off all its creditors A high payable turnover ratio relative to the industry could indicates that the firm is not making full use of available credit facilities or the company is taking advantage of early payment discount An excessive low ratio could mean that it is having trouble in making payments on time or exploitation of lenient supplier terms

Payable turnover = *+),'-) $,'7) 8'0'4()#52,36'#)#

b Liquidity ratios:

Liquidity ratio, which focuses on cash flows, measures a company's ability to meet its short-term obligations How rapidly assets are transformed into cash is measured by liquidity Liquidity management is often accomplished in daily operations through effective asset use By controlling the structure of liabilities, liquidity in the non-financial sector is also addressed in the medium run Depending

on the company, a different amount of liquidity is required The amount of liquidity

a company has may change depending on when it expects to need money Liquidity ratios should be equal or over 1.0 Current ratio, quick ratio and cash ratio are three common liquidity ratios

Current ratio compares current liabilities to current assets A higher ratio

indicates a high level of liquidity If a company's current ratio is 1, it means that the book value of its current liabilities and current assets are exactly equal A lower ratio indicated less liquidity and a larger reliance on operating cash flow and outside funding in order to satisfy short-term obligations The company's ability to take on debt is impacted by liquidity In order to calculate the current ratio, it must be assumed that inventory and accounts receivable are liquid

Current ratio = !2,,)/$ (.'4.(.$.)#!2,,)/$ '##)$#

Quick ratio is more conservative than current ratio as it covers the more liquid

current assets, which are also known as quick assets The quick ratio reflects the reality that some current assets, such prepaid expenses, some taxes, and prepayments related to employees, represent costs of the current period that have been paid in advance and are typically unable to be turned back into cash Like the current ratio, a higher quick ratio indicates greater liquidity

Quick ratio = 1$*+23+",#4#),5 5$,6)#$(%) '78)*#5)7#*29::"/7# ,):)'8$(%)*

1/,,)7# %'$('%'#')*

Cash ratio normally represents a reliable measure of an entity's liquidity in a

crisis situation Cash and only highly liquid short-term assets are included Even in a

broad market crisis where market forces could cause a considerable decrease in the fair value of marketable securities, this ratio would be unreliable

Cash ratio = !'#69:6",$;$),< <',=)$4'() /+)#$<)/$#!2,,)/$ (.'4 $.)#

c Solvency ratios:

Solvency refers to a company’s ability to fulfill its long-term debt obligations Solvency ratios provide information regarding the relative amount of debt in the company’s capital structure and the adequacy of earnings and cash flow to cover interest expenses and other fixed charges such as lease or rental payments when they come due Understanding a company’s use of debt can provide analysts with insight into the company’s future business prospects because management’s decisions about financing may signal their beliefs about a company’s future For example, the issuance of long-term debt to repurchase common shares may indicate that management believes the market is underestimating the company’s prospects and the shares are undervalued Solvency ratios are primarily of two types: debt ratios and coverage ratio

Debt ratios often consist of four main kinds: debt-to-assets ratio, debt-to-capital

ratio, debt-to-equity ratio and financial leverage ratio The three first types measure the percentage of assets, capital and equity respectively with debt Generally, these ratios are higher mean higher financial risk and thus weaker solvency On the other hand, low debt ratio shows that the company is in low risk and safe financial situation Financial leverage is one of the most concerned ratios of analysts It measures the amount of total assets supported for each one money unit of equity The higher the financial leverage ratio, the more leveraged the company is in the sense of using debt and other liabilities to finance assets which leads to higher financial risk This ratio plays an important role in DuPont analysis as mentioned in section 1.1.4.4

Debt-to-assets ratio = >"$'( 7)4$

>"$'( '##)$#

Debt-to-capital ratio = >"$'( 7)4$9>"$'( #6',)6"(7),#>"$'( 7)4$ 2)?2.$0

Debt-to-equity ratio = >"$'( #6',)6"(7),#>"$'( 7)4$ 2)?2.$0Financial leverage ratio = *+),'-) $"$'( )?2.$0*+),'-) $"$'( '##)$#

Interest coverage ratio measures the number of times a company’s EBIT could

cover its interest payment Because of this, it is also known as times interest earned Greater certainty that the company can service its debt, such as bank debt, bonds, and notes from operating earnings is provided by a higher interest coverage ratio, which denotes stronger solvency

Interest coverage ratio = B/$),)#$ 8'0<)/$#@AB>

d Profitability ratios:

The ability to generate profit on capital invested is a key determinant of a company’s overall value and the value of securities it issues Consequently, any equity analysts would consider profitability to be a key focus of their analytical efforts Profitability reflects a company’s competitive position in the market, and by extension, the quality of its management Higher ratios, which show success in turning revenue to profit, are frequently preferable than lower ones Profitability

ratios can be broken down into Return on sales, consisting of Gross profit margin, Operating profit margin, Net profit margin and Return on investment including

Return on assets (ROA), Return on equity (ROE)

Gross profit margin indicates the percentage of revenue available to cover

operating and other expenses of the firm and to generate profit Higher gross profit margin indicates some combination of higher product pricing and lower product costs A business that has a higher gross margin than its competitors probably has the ability to charge more for its goods It can mean the business has a significant competitive edge However, a pattern of decreasing gross margins can indicate greater competition

Gross profit margin = C,"## 8,"&.$1)+)/2)