HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME CASES OF CONSTRUCTION COMPANIES

i HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME CASES OF CONSTRUCTION COMPANIES BY NGUYEN THI KIM THOA E0600117 BARCHELOR OF BUSINESS (ACCOUNTING) HONS HELP UNIVERITY COLLEGE 28 MARCH 2011 1 DECLARATION OF ORIGINALITY AND WORD COUNT I hereby declare that this graduation project is based on my original work except for quotations and citations which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other course/degree at Help University College or other institutions. The word count is 11828 words. NGUYEN THI KIM THOA 28 th March 2011 2 ACKNOWLEDGEMENT This project may not be efficient without the helping, support and encouragement of many people. I wish to send this opportunity to thank all people who have helped me during the time of conducting this project. First of all, I would like to express my deep gratitude to my supervisor Dr. Le Van Lien, International School, Vietnam National University Hanoi who has kindly helped and supported me in doing this research process. I also would like to express my thank to Ms. Sumathi , Help University College, who initiated the project and give so much instruction and support to this thesis. Additionally, I would like to thank all investors of 2 companies are Thanh Cuong Co., Ltd and Construction, Bridges and Roads No 17 JSC who participated in this survey in order to conduct this project. I also would like to extend my special thanks to managers, accountants, my friends, and other people who have help me to carry out the survey. I want to thank them for all their support, interest and valuable hints. Last but not least, I would like to express my deep appreciation to my family who provided and supported me much in commentary which is very important for completing this project, made for me any chances to conduct this subject in any spare time. NGUYEN THI KIM THOA 3 HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME CASES OF CONSTRUCTION COMPANIES By NGUYEN THI KIM THOA March 2011 Supervisor: Dr. Le Van Lien ABSTRACT Accounting ratios are values of the relationships between 2 related accounts that appear in the financial statements such as: income statement, balance sheet, cash flows statement, and changes in equity. They present a company condition in the previous time, and predict by how the company will operate in the future. This research works to evaluate the values of accounting ratios to make investment decisions. By conducting of standard financial statements, calculating of accounting ratios and comparing these ratios in variety of companies are a burning issue and crucial mission to investors. As Vietnam is a developing and urbanizing country, it is a benefit condition for construction industry to grow. This project aims to discover definitions of accounting or financing ratios also the calculations of these accounting, and then it shows how of accounting ratios affect on investor’s decision making. The results of the study provide evidence to measure ratios and lastly it show out some recommendations and suggestions in applying accounting ratios in investment decisions to investors. 4 TABLE OF CONTENTS DECLARATION OF ORGINALITY AND WORD COUNT 1 ACKNOWLEDGEMENT 2 ABSTRACT………………………………………………………………………………3 TABLE OF CONTENTS 4 LIST OF FIGURES 7 LIST OF TABLES 8 LIST OF ABBREVIATIONS 9 CHAPTER 1: INTRODUCTION 11 1.1 Research background 11 1.2 Problem statement 12 1.3 Objective and scope of the research 14 1.3.1 Objective 14 1.3.2 Scope 14 1.4 Research method 14 1.5 Struture of research………………………………………………………… ………15 CHAPTER 2: LITERATURE REVIEW 17 2.1 Financial statements – the important accounting information sources for investors to calculate accounting ratios. 18 2.1.1 Balance sheet 19 2.1.2 Income statement 20 2.1.3 Cash flow statement 20 2.1.4 Statement of changes in equity. 21 2.2. Value-relevance Literature: definitions of accounting ratios……………………….21 2.2.1. Liquidity ratios 22 2.2.1.1 Current ratio 22 2.2.1.2. Quick ratio 23 5 2.2.2.Profitability ratios 23 2.2.2.1 Gross profit magin. 24 2.2.2.2 Net operating profit magin. 24 2.2.2.3 Return on asset ratio. 25 2.2.3 Activity ratio. 25 2.2.3.1 Inventory turnover ratio. 26 2.2.3.2 Account receivable turnover ratio. 26 2.2.3.3 total asset turnover ratio. 26 2.2.4 Debt ratio. 27 2.2.4.1 Debt ratio. 27 2.2.4.2 Debt to equity ratio. 28 2.3 Disclosure of SWOT model analysis in using of accounting ratios. 28 2.4 The importance and impacts of accounting ratios on making investment decision process 30 2.5 Disadvantges of using accounting ratios to mesure efficiency of the company 31 2.5.1. Impact of inflation…………………………………… ………………………….31 2.5.2: Window Dressing………………………… …………………………………31 2.5.3. Product Line diversification… ………………………………………………31 2.5.4. Differences in Accounting Policies…………………………… ……………32 CHAPTER 3: RESEARCH AND METHODLOGY 33 3.1 Aims of project………………………………………………………………… 34 3.2 Research Methodology………………………………………………………… 35 3.3 Data sources, which includes………………………………………………… 36 3.3.1. Primary data……………………………………………………………… 36 3.3.2. Secondary data………………………………………………………………36 3.4 Limitation……………………………………………………………………… 37 CHAPTER 4: CASE STUDY ANALYSIS …39 6 4.1 Introduction of 2 example companies……………………………………………….39 4.1.1 Thanh Cuong Limited Company…………………………………………… ……39 4.1.2 Introduction of Construction, Bridges and Roads No 17 Joint Stock Company……………………………………………………………………………………………40 4.1.3 The management strutures of Thanh Cuong Co.,Ltd and XDCD 17 JSC… … 41 4.2 Presentation and explanation of the 2 companies’ development and financial statements……………………………………………………………………………… 43 4.3. The facilities and developments of these 2 example companies……………………44 4.3.1.: Thanh Cuong Co., Ltd………………………………… ……………………44 4.3.2. Construction, bridges and roads No 17, Joint Stock Company………………44 4.4. The using of accounting method in conducting financial statements of these 2 companies……………………………………………………………………………… 45 4.5 Missions of these 2 companies in the future………………… ……………………45 4.6. Calculations of these 2 companies’ ratios……………………………………… …45 4.7 The attitude of investors to 2 example companies in investment………………….… 56 CHAPTER 5: CONCLUSION AND RECOMMENDATION 58 5.1 Findings……………………………………………………………………………………… 58 5.2 Conclusion……………………………………………………………………… …59 5.3 Recommendation for computing the accounting ratio of Thanh Cuong Co., Ltd , XDCD 17 JSC………………………………………………………………………………….,,,.60 REFERENCES…………………… ………………………………………………,,, 61 APPENDIXES………………………………………………………………………… 64 APPENDIX A: ……………………………………………………………………….66 APPENDIX 1.A Translation of the above data in the picture 1.A into English……… 69 APPENDIX 2.A Translation of the above data in the picture 2.A into English 74 APPENDIX B………………………………………………………………………… 76 7 APPENDIX 1.B Translation of the above data in the picture 1.B into English…77 APPENDIX 2.B Translation of the above data in the picture 2.B into English…81 APPENDIX 3.B Translation of the above data in the picture 3.B into English…85 8 LIST OF FIGURES, DIAGRAM, AND IMAGES Figure 1 Financial statement 19 Figure 2 SWOT analysis model. 29 Figure 3 Structure of management team in both example company. 41 Diagram 1 Investment decisions of 10 investors in these 2 example companies. 57 Image 1 64 Image 2 . 65 Picture 1.A The balance sheet of Thanh Cuong Co., Ltd as at 31 December, 2009 (data in Vietnamese language. 66 Picture 2.A Income statement of Thanh Cuong Co., Ltd for the year ended 31 st Decenber 2009( the data in Vietnamese language ) 72 Picture 1.B The data about fianance of Construction, Bridges and Roads No 17, JSC (in Vietnamese language). 76 Picture 2.B The balance sheet of XDCD 17 as at 31 December, 2009 (data in Vietnamese language). 79 Picture 3.B Income statement of XDCD 17 for the year ended 31 st Decenber 2009( the data in Vietnamese language) 84 9 LIST OF TABLES Table 1 46 Table 2. 47 Table 3. 48 Table 4. 49 Table 5 50 Table 6. 51 Table 7. 52 Table 8 53 Table .9 54 Table 10 55 [...]... Accounting ratios calculations and attitude of investors in investment decisions making are the crucial aims of this project It will show the advantages and disadvantage of using 12 accounting ratios analysis to an organization, as well as their function on the decision of investors, users of financial statements, etc To know how accounting ratios affecting an investor’s decision, let examine the role of accounting... theories as well as definitions of some accounting ratios, after that the thesis will apply these theories and definitions to some real cases of 2 companies: Thanh Cuong co,, Ltd, and Constructions, Bridges and Roads No 17, JSC Hence, value relevance of accounting ratios of financial statements analysis in making decision to investors could be measured clearly In this project, data and accounting information... accounting ratios analysis to make decisions in the construction industry An accounting ratio or financial ratio is a relative magnitude of two mathematical values that are chosen and got from financial statements of an organization Accounting or financial ratios may be used by company’s owners, managers, shareholders, investors, and a business’ creditors In the context of stocks market, financial ratios. .. comparative ratios analysis between 2 companies in supplying construction materials industry that are Thanh Cuong co, Ltd, and XDCD 17 , JSC will help investors figure out quantity of these 2 companies From it, investors can evaluate 13 financial position of these companies Moreover, they can understand the risks they may be facing in the future when investing in business Therefore, accounting ratios are... efficiency and weaknesses among the variety of firms If stocks in an organization are listed and traded in a financial market, the stock’s price in the market will be used in certain financial or accounting ratios In general, many areas of an organization are reflected by accounting ratios, these results of ratios are inherent parts of the financial statement analysis A business’s performance is affected... theories, definitions, and formulas of financial statements, accounting ratios, SWOT analysis model, strong points, and weak points of accounting ratios Chapter 4 will tell about some real and example cases that are played as a role of applying literatures and formulas in calculations of accounting ratios that appear in chapter 2 And the last chapter will consist of the findings, conclusion, and recommendation... competitors in range of the industry, and the previous performance of the business they are taking into Mention to this research; let concern to 4 accounting ratios such as: liquidity ratios, profitability ratios, activity ratios, and debt ratios 2.2.1 Liquidity ratios Liquidity ratios are accounting or financial ratios that reflect condition of a firm's ability to fulfill its short-term loans, financial debts... periods of an entity, and between a significant firms and its industry average in which the firms belongs to Hence, if investors make decisions without accounting ratios analysis, it is very risky to invest in a new project Useful financial ratios can be refer as special and efficient tools to many professional investors, managers, researchers, accountants on many approaches of investment; it can help... significant value to the investors, this part is conducted with the aim that this can support investors evaluate the efficiency and values of using accounting ratios information in investment and in doing business 3.2 Research methodology Coming from the usage and declare the calculation of accounting ratios from financial statements analysis of Vietnam construction companies, the research will show and... researcher wants to compare the accounting ratios analysis to answer some following questions: Whether calculation of some accounting ratios can be one of the elements that play the role in making the decisions to investors? What are the results of these alternatives on the decision making process after comparing of accounting ratios between 2 example companies? Some suitable accounting ratios might . i HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME CASES OF CONSTRUCTION COMPANIES BY NGUYEN THI KIM THOA E0600117 BARCHELOR OF BUSINESS (ACCOUNTING). HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME CASES OF CONSTRUCTION COMPANIES By NGUYEN THI KIM THOA March 2011 Supervisor: Dr. Le Van Lien ABSTRACT Accounting ratios. accounting, and then it shows how of accounting ratios affect on investor’s decision making. The results of the study provide evidence to measure ratios and lastly it show out some recommendations and