Ineffective capital structure of ninh van bay joint stock company

MBA Final Thesis: Ineffective capital structure of Ninh Van Bay Joint Stock Company Instructor: Dr Pham Phu Quoc Student: Le Anh Mai Chi MBA Class 5.2 TABLE OF CONTENTS Executive summary CHAPTER 1: THE PROBLEM CONTEXT CHAPTER 2: SITUATION ANALYSIS 2.1 Problems finding process 2.2 Problem symptoms 2.2.1 Significant profit decrease 2.2.2 Profitability decrease 10 2.2.3 Basic Earning Power ratio decrease 13 2.3 Possible problems 13 2.4 Main problems 17 2.4.1 Interest expense increase 17 2.4.2 Ineffective utilization of leverage factor 18 2.5 Possible causes of the problem 23 2.6 Main causes of the problem 24 2.7 Cause – effect tree of problem 26 CHAPTER 3: SOLUTION DESIGN 27 3.1 Possible solutions for inefficient capital structure 27 3.2 Implementation of suitable plans 28 3.3 Actions Plan 30 References 34 Appendix 38 LIST OF FIGURES Figure Revenue and Net profit of NVT from 2013 - 2015 Figure Revenues of companies in the same industry with NVT 2013 - 2015 Figure Profit margins of companies in the same industry with NVT 2013 - 2015 Figure Cause – Effect tree Figure Actions plan LIST OF TABLES Table Revenue and profit of NVT from 2013 – 2015 Table Revenue and profit margin of companies in the same industry from 2013 – 2015 Table NVT’s Profitability Ratios 2013 – 2015 Table ROE, ROA and EPS of companies in same industry with NVT from 2013 - 2015 Table The BEP ratios of NVT 2013 – 2015 Table The possible problems and supportive theories Table NVT DuPont Analysis 2013 – 2015 Table Interest Expense of NVT from 2013 to 2015 Table Capital structure ratios of NVT and other companies from 2013 to 2015 Table 10 Income Statement of NVT from 2013 to 2015 Table 11 NVT’s net sales and total asset Table 12 Possible causes and supportive theories Table 13 Possible solutions Table 14 Implementation of suitable plans Executive summary The main problem is inefficient capital structure by increasing debts over the period 2013 to 2015 In which, total debt to total equity increased from 46.60% to 52.68% that leads to profitability decrease from 4.83% to -14.71% of ROE Financial ratios are calculated from company’s financial and accounting reliable sources as NVT had listed in the Ho Chi Minh Stock Exchange over the period 2013 to 2015 The ratios are also in comparison with other corporates in the industry associated with deep interviews of company’s leaders in order for trustable findings The main causes of the problem are high debts on total projects and financing interest cost of debts NVT has to borrow different resources of debts to finance the projects and operation, especially the contract of issuing 230 billion VND of bonds Using financial leverage sometimes is good However, using that method in a wrong time when the difficulties of the economy plus the difficulties of the corporation in implementing projects may led to exhaustion of funds Continuing to borrow to maintain operating can be a temporary solution, but if it lasts, causing serious consequences There are two solutions for company’s activities Firstly, NVT should reduce overinvestment and increase cash by reselling the project Six Senses Saigon River and transferring and withdrawing the investment in Tan Phu JSC Secondly, the company should increase sales in the control of expenses to get profits for financing current debts CHAPTER 1: THE PROBLEM CONTEXT NVT is a tourism real estate, specializing in investment, construction and luxury eco resorts business in Vietnam NVT is creating five star quality and superior products in Vietnamese style, through inheriting and promoting deeply culture in Vietnam’s regions The company was founded in 2006 with the charter capital of billion Vietnam dong In 2009, the company raised the charter capital up to 505 billion Vietnam dong In 2016, the charter capital of the company is 905 billion Vietnam dong Six Senses Ninh Van Bay Resort of the Company has become the destination of more than 150,000 inbound and outbound tourists Especially, the resort has received 14 awards voted by many travel agencies and organizations, well-known travel magazines such as Tatler world, World Travel Awards, the Guide Magazine, Conde ‘Nast Traveller A new development of the company – Six Senses Saigon River Project (Appendix 1), was started on the 1st of May, 2009 This will not only be a transit point for leisure from Saigon to Nha Trang, Phu Quoc, Dalat, Bangkok, Phnom Penh, Singapore… but also the convergence of internally tourist However, according to the result of operating during the period of 2013 – 2015, profit has decreased significantly and did not achieve the annual plan In 2013, earning before tax (EAT) of the company was 39.8 billion Vietnam dong but in 2014 EAT decreased to 25.6 billion Vietnam dong while the plan for that year was 45 billion Vietnam dong In 2015, EAT was -122.9 billion Vietnam dong, which decreased significantly in comparison with 2014 and in comparison with the plan of 9.1 billion Vietnam dong From NVT’s financial results, questions were raised: Is that a problem of the company? If yes, what are the reasons and what are the solutions, organizations’ action plans to solve the problem? This study was implemented to answer the questions CHAPTER 2: SITUATION ANALYSIS 2.1 Problems finding process In order to identify these company problems, these following steps will be executed: - Group meeting with the company to understand the division symptoms and possible problems The division is Financial Department and the group meeting includes of three staffs: Mr Tran Kim Nhan, Mr Truong Quang Phu and Mrs Tran Nguyen Thi Mai Suong, they are all financial executives of NVT; - Review the literatures related to the symptoms and further study of the company financial and accounting reliable sources as NVT had listed in the Ho Chi Minh Stock Exchange and their financial reports are audited regularly The study also gathered information from the industry and competitors in the market by reliable sources as the information had listed in the Ho Chi Minh Stock Exchange Then the literatures were reviewed which related to any new discovery; - Deep interview with persons in charged for more details: Mr Hoang Anh Dung - the General Director of NVT, Mrs Ngo Thi Thanh Hai – the Chief Accountant of NVT; - Additional intelligent information may be acquired from competitors for further references 2.2 Problem symptoms From datas calculated from annual reports, supportive theories associated with the first meeting with responsible members, the symptoms revealed company’s ineffective profitability as the following details: - Profit has decreased significantly while revenue showed a different trend; - Profitability decreased sharply over the period 2013 to 2015; - Basic Earning Power ratio decreased under interest rate 2.2.1 Significant profit decrease The first symptom of NVT’s problem is gross profit, earning before tax (EBT), earnings after tax (EAT) dropped significantly from 2013 to 2015 while revenue did not change much In comparison with companies in the same industry of NVT in the same period of time, their revenues had the same trend with NTV However, profit margin had the sharply down trend opposite to the profit trends of other companies This symptom can be proved by the financial data and ratios below Table below shows revenues and profits of NVT from 2013 to 2015 for a clearly picture about the performance of the company Value (in billion VND) Position (%) Year 2013 2014 2015 2013 2014 2015 Revenue 207.5 210.7 189.1 100% 100% 100% Gross profit 95.6 97.6 25.9 46.07% 46.32% 13.70% EBT 39.8 25.6 -122.9 19.18% 12.15% -64.99% EAT 40.5 22.3 -127.6 19.52% 10.58% -67.48% Table Revenue and profit of NVT from 2013 – 2015 (Unit: billion VND) From table 1, revenue of the company slightly increased from 2013 - 2014 and a little decreased from 2014 - 2015 In general, revenue of the company did not change much On the other hand, profits of the company significantly decreased throughout the years which have opposite trends with revenues Gross profit to revenue down from 46.07% in 2013 to 13.70% in 2015 EBT dropped sharply from 39.8 billion Vietnam dong in 2013 down to 25.6 billion Vietnam dong in 2014 and dramatically decreased to -122.9 billion Vietnam dong in 2015 As a result, EAT to revenue had a same sharply down-trend from 19.52% in 2013, 10.58% in 2014 and down to 67.48% in 2015 A more clearly picture of two opposite trends of profits and revenues is shown in figure below Revenue and Net profit of NVT 2013 - 2015 (billion VND) 300 210.7 207.5 189.1 200 100 40.5 22.3 2013 -100 2014 2015 -127.6 -200 Revenue Net profit Figure Revenue and Net profit of NVT from 2013 - 2015 A comparison with other companies in the same industry with NVT was shown in table 2, figure and below Some companies in the same industry of tourism real estate are: Ocean Hospitality (OCH), Sao Mai Group (ASM) and Thanh Thanh Cong Tourist (VNG) Revenue (in billion Percentage change (%) Company Profit margin VND) name 2013 2014 NVT 207.53 210.69 189.08 OCH 669.36 788.05 729.57 32.26% 17.73% ASM VNG 2015 2013 2014 0.65% 1.52% -10.26% 19.50% 1182.02 1222.98 952.78 -0.26% 57.56 54.84 87.96 2015 2014 60.39% 2015 10.06% -67.50% -7.42% 17.80% -110.00% 3.47% -22.09% 7.37% -4.73% 2013 2.90% 2.20% 7.30% 9.00% 0.90% 0.90% 2.60% Table Revenue and profit margin of companies in the same industry from 2013 – 2015 Based on the comparison, NVT has the same trend in revenue with OCH and ASM: increase from 2013 to 2014 and decreased from 2014 to 2015 However, profit margin of NVT over the time has the significantly down-trend In the meanwhile, the other three companies have the up-trend profit margins This illustrates the problem in decreased profit from 2013 – 2015 Figure Revenues of companies in the Figure Profit margins of companies in same industry with NVT 2013 - 2015 the same industry with NVT 2013 - 2015 2.2.2 Profitability decrease The second symptom of NVT is the remarkably decreased performance efficiency from 2013 to 2015 which has an opposite trend to other companies in the same industry Salim et al (1) indicated that firm performance, which is measured by return on asset (ROA), return on Equity (ROE) and earning per share (EPS) have negative relationship with short term debt (STD), long term debt (LTD), total debt (TD) Chen-Ying (2) used operating ratio and return on assets (ROA) for the two kinds of profitability indicators to measure insurers’ profitability 10 50 51 52 53 54 55 Income Statement 56 57 58 Appendix Board of Directors of NVT explains the results in 2015 59 60 61 Appendix The results of issuing 230 billions Vietnam dong bonds 62 63 Appendix Goodwill allocation in NVT’s Consolidated Financial Report in 2015 64 ... lack of cash 19 Gill et al (16) sought to extend Abor's (2005) findings regarding the effect of capital structure on profitability by examining the effect of capital structure on profitability of. .. they measured profitability by return on equity Therefore, the ineffective utilization of leverage factor as the ineffective capital structure using debt is the main problem of the company High... become the financial burden for Ninh Van Bay From Mr Dung, the original and main reason in a long-term why business of Ninh Van Bay inefficient is because the company has invested in projects