Capital structure – case study in thang long mechanical four and construction joint stock company

Capital Structure theory – Traditional approach...5 CHAPTER 2: SITUATION OF CAPITAL STRUCTURE OF COMPANY THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT STOCK COMPANY...19 2.1 Overview

TABLE OF CONTEND

ENGAGEMENT i

LIST OF ABBREVIATED WORDS v

PREFACE 1

CHAPTER 1: OVERVIEW OF CAPITAL STRUCTURE AND TARGET CAPITAL STRUCTURE 3

1.1 Capital structure 3

1.1.1 Definition 3

1.1.2 The theories of capital structure 4

1.1.2.1 Modigliani and Miller approach 4

1.1.2.2 Capital Structure theory – Traditional approach 5

CHAPTER 2: SITUATION OF CAPITAL STRUCTURE OF COMPANY THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT STOCK COMPANY 19

2.1 Overview of company Thang Long mechanical four and construction joint stock company 19

2.1.1 The basic information about company Thang Long mechanical four and construction joint stock company 19

2.1.1.1 The basic information 19

2.1.1.2 The organization chart of Thang Long mechanical four and construction joint stock company 20

2.1.1.3 The system of accounting of the company 21

PICTURE 2.2: SYSTEM OF ACCOUNTING OF THE COMPANY 21

2.1.2 The business characteristics of company Thang Long mechanical four and construction joint stock company 22

2.1.2.1 Material and technical facilities 22

2.1.2.2 Situation of material supply 23

2.1.2.3 The capability of skilled workmanship of Thang Long mechanical

four and construction joint stock company 24

2.1.2.4 Output market and the ability to compete of the company 24

2.1.3 Overview of financial situation and performance of company Thang Long mechanical four and construction joint stock company 25

2.2 Situation of capital structure of Thang Long mechanical four and construction joint stock company 27

2.2.1 Situations of capital structure 27

2.2.1.2 The situation of financial leverage 34

2.2.2 Evaluating the effect of capital structure to the firm 35

2.2.2.1 The effect of financial leverage to ROE 35

2.3 Assessment of the company’s capital structure decisions 41

2.3.1 The achievements 41

2.3.2 The shortcomings and reasons 42

2.3.2.1 The shortcomings 42

2.3.2.2 The reasons 43

CHAPTER 3: SOLUTIONS FOR ESTABLISHING THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT STOCK COMPANY ’ TARGET CAPITAL STRUCTURE 45

3.1 The development strategies of Thang Long mechanical four and construction joint stock company 45

3.1.1 Social and economic background 45

3.1.2.1 Objectives of business operation 46

3.1.2.2 The orientation of business 46

3.2 Solutions for establishing Thang Long mechanical four and construction joint stock company ’ target capital structure 47

3.2.1.Improving capital structure by decreasing gearing 47

3.2.2.Strengthening the management of recievable account to recover capital

in short term 50

3.2.3 The solutions to improve the situation of net working capital of the company 52

3.2.4 The company should have solutions to improve the performance in next fiscal year to increase the benefit for shareholders 53

3.3 The petitions for the government 54

CONSCLUTION 55

BIBLIOGRAPHY 56

LIST OF ABBREVIATED WORDS

DFL : Degree financial leverageEBIT : Earning before interest and taxEPS : Earning per share

NWC : Networking capital

ROE : Return on equity

WAC

C : Weight average cost of capital

LIST OF TABLE AND PICTURE

In the market economy, to start a business, people need to the certainamount of capital Capital is the important condition with business process ofthe company Morever, when the competition between companies in themarket is more and more violent, the decisions which relate to capitalmanagement will influence on the success of the companies, so they are noteasy for managers And one of those decisions is to establish capital structure

to maximize the value of the company and owners It also decides thecompany’s product ability in the market

Because of Understanding the importance of establishing capitalstructure, I decided chose the topic “ Capital structure – case study in ThangLong mechanical four and construction joint stock company”

1 Research problem.

Research problem is about overview and the solutions of capitalstructure in Thang Long mechanical four and construction joint stockcompany: capital structure and target capital structure with its affects

2 Purpose and thesis questions

- Systematizing the issues about capital structure in the companyand the factors affecting target capital structure

- Researching situation of capital structure :

+ Studying and evaluating about situation of capital structure in ThangLong mechanical four and construction joint stock company

+ Proposing solutions for establishing capital structure in mechanicalfour and construction joint stock company

3 Scope of research

- About space: Studying about capital structure and solutions forestablishing capital structure for Thang Long mechanical four and

construction joint stock company

- About time: the figures provided by financial statements of thecompany in 2014 and 2015

mechanical four and construction joint stock company

Chapter 3: Solutions for establishing the Thang Long mechanical four

and construction joint stock company ‘s target capital structure

Because of limited time and knowledge, my thesis also has somemistakes in research process I would like to express my thanks to PhD PhamThi Thanh Hoa and the managers of Thang Long mechanical four andconstruction joint stock company because they helped me finish this thesis

CHAPTER 1 OVERVIEW OF CAPITAL STRUCTURE AND TARGET CAPITAL

Capital structure is a term that refers to the propotion of capital sources

in total of capital which the company finances for its business operations Inother word, it can show how a company decides to finance its assets byvarious sources of capital like: borrowing from banks, issuing shares orbonds, retained earning from the business…

The dicision about capital structure is very important with the companybecause:

- Capital structure of the company affects the cost of capital

- Capital structure affects the company’s return on equity or earning pershare and financial risk

Capital structure of the company is usually expressed by the relationshipbetween debts and equity ( owner’s capital) Capital structure is discribedthrough some main ratios:

Total assets∨source of capital This ratio shows the percentages of debt in capital structure of thecompany

Debt/ Equity¿ Debt

Shareholder s ' equity The company can have various capital structure, but all of them are tomaximize the value of the company

1.1.2 The theories of capital structure

1.1.2.1 Modigliani and Miller approach

This theory was devised by Modigliani and Miller during 1950s.Modigliani and Miller advocates capital structure irrelevancy theory Thevaluation of a firm does not depend on the capital structure of a company.Whether a firm is highly leveraged or not in the financing mix, the value ofthe company is not affected

Modigliani and Miller Approach proposes that the market value of a firm

is affected by its future growth prospect apart from the risk involved in theinvestment If a company has high growth prospect, its market value is higherand its stock prices would be high

Assumptions of Modigliani and Miller Approach

o There are no taxes

o Transaction cost for buying or selling securities and bankruptcycost are zero

o There is symmetry of information This means that an investorcan have access to same information that a company can access

o The cost of borrowing is the same for investors as well ascompanies

o Debt financing does not affect to companies EBIT

Modigliani and Miller Approach: Two Propositions without Taxes

Proposition 1: With the assumptions of no taxes, the capital structure

does not influence the valuation of a firm In other way, if the company

finances debt, it does not increase the market value of the company

Proposition 2: It says that financial leverage is in direct proportion to the

cost of equity With increase in debt component, the investors realize a higherrisk for the company So the cost of equity is higher to make up the risk, theweight average cost capital of the company does not change, because theincrease in the cost of equity is same to the decrease in the cost of debt

Modigliani and Miller Approach: Propositions with Taxes (The Trade-Off Theory of Leverage)

Proposition 1: The value of the company which combines debt in capital

structure is higher than the value of the company which does not use debt Inother word, the value of the company which has a mix of debt and equityequals the value of the company which does not use plus present value taxshield

Proposition 2: If there is income tax, the cost of equity of a company

which has a mix of debt and equity is higher than the company whichdoesnot The more debt financing the company uses, the higher required rate

of return of the owners is, because of the higher risk However, the increase inthe cost of equity is lower than the defference between the rate of return ofasset and the cost of debt, the weight average cost capital decreases

1.1.2.2 Capital Structure theory – Traditional approach.

This theory states that there is a optimal capital structure where the value

of the company can be magnified by suitable financial leverage level.According to this theory, the cost of capital can be decreased by using debtfinancing However, when the company increases debt financing, risk of thecompany will increase too The creditors require the higher rate of return.When the gearing increases to a certain level, risk is higher, the increase in the

required rate of return of debt and equity makes the cost of capital increasetoo It makes the the benefit of using debt disappear.

Assumptions under Traditional Approach:

1 The rate of interest on debt is constant for a certain period andthereafter with increase in leverage, it increases

2 The expected rate by equity shareholders remains constant or increasegradually After that the equity shareholders starts perceiving a financial riskand then from the optimal point and the expected rate increases speedily

3 As a result of activity of rate of interest and expected rate of return,the WACC first decreases and then increases The lowest point on the curve isoptimal capital structure

Diagrammatic Representation of Traditional Approach to Capital Structure

PICTURE 1.1 COST OF CAPITAL AND TRADITIONAL APPROACH

1.1.2.3 Capital Structure theory – Net operating income approach

This theory believes that WACC and the value of the company do notchange when financial leverage level changes In other word, the theoryclaims there is no optimal capital structure, the value and the price of shares

of the company do not depend on capital structure

This means that when the company finances more debt, the general rate

of return of the company is fixed, so the price of share and the value of thecompany do not change

Assumptions under Traditional Approach:

1 The overall capitalization rate remains constant irrespective of thedegree of leverage At a given level of EBIT, value of the firm would be

“EBIT/Overall capitalization rate

2 Value of equity is the difference between total firm value less value

of debt i.e Value of Equity = Total Value of the Firm – Value of Debt

3 WACC (Weightage Average Cost of Capital) remains constant; andwith the increase in debt, the cost of equity increases Increase in debt in thecapital structure results in increased risk for shareholders As a compensation

of investing in highly leveraged company, the shareholders expect higherreturn resulting in higher cost of equity capital

1.1.2.4 Capital Structure theory - Pecking order theory.

In fact, there is not symmetry of information That means the directorsunderstand about their company clearlier than thr investors from outside Sothe projects first financed by internal sources of capital, usually retainedearning, then issuing new debt and final is issuing shares Issuing shares is thefinal choice when the company had used debt which can be financed Thistheory explains why the companies which have the low profitability usuallyuse more debt financing because they don’t have internal capital and debtfinancing is at top of external sources of capital

The companies having the high profitibility and limited investmentchances will try to establish the low rate of debt, the companies havinginvestment choices more than internal source of capital must borrow more.This theory is not right with all of companies, there are many firms still

issue common shares althought they can borrow easilly But this theory canexplain why most of them prefer debt financing in raising fund.

1.2 Effect of capital structure to the firm value

1.2.1 The financial leverage

In maitaining the business operation, the company uses debts orliabilities to make up a deficit of capital and increase return on equity (ROE)

or earning per share (EPS) This decision also increases the company’sfinancial risk

Financial risk refers to the uncertainty of return on equity or earning pershare and it can affect the company ‘s payable at maturity when the companyuses debt or the other type sources of capital which have fixed financial cost Althougt financing by debt or liabilities can increase ROE or EPS, it canmake ROE waver more drasticlly When basic earning power ratio (BEP) ofthe company is higher than the cost of debt, financial leverage can make anincrease in ROE But if BEP is lower than the cost of debt, financial leveragecan make a decrease in ROE quicklier On the other hand, if the firm financesdebt, it must pay the fixed cost for the creditors and this cost does not depend

on its profit The more a firm finances debt, the riskier it can face to

Financial leverage is the degree of debt financing use in a firm’s capitalstructure to increase ROE or EPS of the company The more debt financingthe company uses, the higher its financial leverage

- Effect of financial leverage to ROE or EPS:

When the company uses financial leverage, its managers hope to make

an increase in ROE However, if it does not use the debt effectivelly, thatmeans earning before income tax is lower than the interest, ROE or EPS willdecrease more rapidlly

BEP: basic earning power ratio

t: corporate income tax rate

So we have formular to caculate ROE:

ROE= (EBIT −I ) x (1−t)

Proposition 1: BEP >r, the more debt financing the company use, the

higher ROE is That means financial leverage magnifies an increase in ROE

Proposition 2: BEP <r, the more debt financing the company uses, the

lower ROE is and the higher financial risk That means financial leveragemagnifies a decrease in ROE

Proposition 3: BEP = r, ROE is the same in the different situation of

P: Price per good or service

V: Variable cost per good or service

F: Fixed cost

Example: With Newco's current production:

V= 100 million VND with D= 50 million VND, r= 10% a year, Q=10.000 products, P= 20.000VND, V= 14.000 VND, F= 40 million VND

DFL= 10.000(20.000−14000)−40 million

10.000 (20.000−14.000 )−40 million−5 million=1,33

Given the company's 1% increase in EBIT, the DFL indicates EPS willincrease 1,33%

1.2.2 The relationship between EBIT and EPS

The relationship between EBIT and EPS shows the effect of differentfinancing plan to EPS Although manager choses different financing plan, wecan find a EBIT level which results in the same EPS It is break -even EBITlevel

Break - even EBIT level is the different point where EPS underalternative financing plan is the same

Mathematically, the break-even EBIT level is:

1.3 The target capital structure

1.3.1 Definition

1.3.1.1 Weight average cost of capital.

 The cost of debt

To meet demand of capital for business, the company has to borrowmoney from banks or financial organzations or issuing bonds The investorslend the company money with a required rate of return It is the cost of thissource capital

- The cost of debt before tax

rdt: The cost of debt before tax

n: the periods of borrowing

- The cost of debt after tax:

rd=rdt(1-t%)

rd: The cost after tax

t%: Rate of income tax.

 The cost of preferred shares

The cost of preferred shares is the required rate of return of preferredshareholders when the company raises fund bu issuing preferred shares

r p= D p

P p(1−e)

rp:The cost of preferred shares

D p: Devidend of a preferred shares.

P p: The price of issuing

e: Rate of the cost of issuing

 The cost of retained profit

Cost of retained earnings (r e) is the return stockholders require on thecompany's common stock

There are three methods one can use to derive the cost of retainedearnings

a) Capital-asset-pricing-model(CAPM) approach

r e= r f + β × ( r m - r f )

r f: Risk free rate

r e: Required rate of return

r e=Long term bond yield+risk premium

c) Discounted Cash Flow Approach:

Also known as the "dividend yield plus growth approach" Using the

dividend-growth model, we can rearrange the terms as follows to determine r e

d t:Devidend at tst year.

r e: Required rate of return

 The cost of new common stock

When evaluating a new project, a company is presented with thedecision of financing the project using internal or external sources If amixture of these sources is used, the company must then decide the proportion

of internal versus external sources that will be utilized, and subsequently themarginal cost of capital

If a company plans to issue new common equity, or external equity, inorder to finance a new project, the cost of that equity must be calculated andfactored into the weighted average cost of capital to be used during theevaluation process The cost of external equity is higher than the cost ofexisting equity, or retained earnings We can determine how much higher thecost of external equity will be by factoring in flotation cost

r e = d1

P ' 0 ×(1−e)+ g

r e: The cost of new common stock

d1: The devidend for a current year

P '0: The price issuing of a new common share

e: The percentage flotation cost

g:The constant rate of growth

 The weight average cost of capital

The weighted average cost of capital (WACC) is the rate that a

company is expected to pay on average to all its security holders to finance its

assets The WACC is commonly referred to as the firm’s cost of capital.Importantly, it is dictated by the external market and not by management TheWACC represents the minimum return that a company must earn on anexisting asset base to satisfy its creditors, owners, and other providers ofcapital, or they will invest elsewhere

WACC = ∑

i=1

n

W i × r i

W i: The percentage of finance of each source of capital

r i: The cost of a source of capital

1.3.1.2 The definition of target capital structure

Capital structure is an important issue in financial management of thecompany To establish an capital structure, managers need to consider twomain issue:

- Cost of capital depends on the company ‘s capital structure

- There is an optimal capital structure

The key point in capital structure is gearing and the manager has todecide the optimal percentage of debt in capital structure Establishing capitalstructure bases on principle of exchange of risk and return The more debtfinancing makes increase in risk of the company but brings the higherexpected rate of return The increase in risk makes the price of sharesdecrease while the high rate of return makes the price of shares increase, so anoptimal capital structure is the capital structure that balances risk and theowner’s rate of return; maximizes the value of the company Therefore, theoptimal capital structure can minimize the company’s weight average costcapital

In fact, it is difficult for the manager to establish an optimal capital structureexactly They need to base on the principle of optimal capital structure;

consider risk and rate of return in the company’s condition, situation toestablish capital structure.

1.3.2 The factors affecting target capital structure.

1.3.2.1 The factors inside of the company.

- Stability of sales and profit of the company: sale and profit affectsdirectly to the size of capital As usually, if sale and profit are stable, thecompany can pay for loans within required time In this case, the percentage

of debt in capital structure is high and in opposite situation, it is lower

- The features of business operation of the company: The firms whichproduce finished goods and use a lot of material, equipment and machineryusually have the low percentage of debt in capital structure The firms whichare in commercial services industry have the higher gearing in capitalstructure

- The relationship between BEP and interest rate: If BEP is higher thaninterest rate, the company usually wants to establish capital structure withmore debt than equity to increase ROE, that means it uses higher financialleverage level

- Business leverage: If a firm has great fixed business cost, it usuallyuses less debt in capital structure because it needs long term source of capitallike owner’s equity to invest in fixed assets

- The right of control: If the owners of the company don’t want to sharethe right of management, they will use more debt to finance projects inspite ofissuing shares That means it has higher gearing than the others

- Growth rate of the company: If a company has lots of chances todevelop and a high gearing, its owners usually don’t want to invest inprojects Because earing from projects is helpful for creditors than the owners

So the company will use more equity for business than debt

- The payable ability of the company: A company has higher payableability than the others, it can finance more debt for its projects because it isable to pay back money within required time.

- Management style: If the qualification of managers is not good,establishing capital structure will be not sensible If the manager is prefer riskthan stability, he or she usually choses capital structure with more debt thanequity to finance the company’s projects

- Asset structure of the company: According to theories, the higher therate of fixed assets on total assets is, the more debt the company uses.Because if the company goes bankrupt, the fixed assets for ensuring debt areworth more than the others

1.3.2.2 The factors ouside of the company.

- Market condition: Market conditions can have a significant impact on acompany's capital-structure condition The development of capital marketmakes the company be able to raise fund more favourably and decrease cost

of capital The company can raise money by issuing shares, bonds or the othersecurities This makes an increase in long term capital in capital structure ofthe company

If the company predicts that interest rate will increase in the future, itshould borrow more money by long term loan inspite of short term loan inorder to reduce expense In opposite case, the company should stop to borrowbecause it can raise money with lower cost in the future when interest ratedecreases

- The economic policy of the government:

+ Investment policy: The government can orient the companies toinvest in some main industries through investment policy This can limit orencourage the business of the company and change the company’s capital

structure

+ Monetary policy: The policies that involves credit, interest rate,exchange rate,…affects typically money surpply in the market and theborrowing activity of the company If the policy is sensible, the company canborrow money favourably and its gearing is higher

+ Tax policy: Debt payments are tax deductible As such, if a company'stax rate is high, using debt as a means of financing a project is attractivebecause the tax deductibility of the debt payments protects some income fromtaxes

- The attitude of lenders: The creditors usually prefer to lend thecompany which use more equity than debt because their money can beensured better

CHAPTER 2 SITUATION OF CAPITAL STRUCTURE OF COMPANY THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT STOCK COMPANY

2.1 Overview of company Thang Long mechanical four and construction joint stock company

2.1.1 The basic information about company Thang Long mechanical four and construction joint stock company

2.1.1.1 The basic information.

+ The name of the company: THANG LONG MECHANICAL FOURAND CONSTRUCTION JOINT STOCK COMPANY

+ Address: Hai Boi commune- Dong Anh district- Ha Noi City

- Phone number: (84-4 ) 3951 6678

- Fax: 3951 6680

- Email: thanglong@meco.vn Website: meco.vn

Thang Long mechanical four and construction joint stock company wasstate company established since 1974 belong to Thanglong ConstructionCorporation – Ministry of Transport and at present it is become the joint stockcompany from June 2007 which compliance with decision No.1564/QD –BGTVT dated June 1st issued by Ministry of Transport and following to theregistration of business activity No.0100104436 include:

- Manufacturing and installing steel structure and steel girder fortransportation fied and other line of business

- Manufacturing and installing towers for electrical transmission line,telecomunation, broadcast station

- Installing, managing and constructing high – voltage system 35kv

- Manufacturing bridge crane and elevating machineries

- Manufacturing pressure – producing equipments and pressure vessels.

- Manufacturing standard size and non standard size with a lot of kindbolt

- Inspect welding quality by non destroy method: penetration testing,magnetic testing, ultrasonic testing, radio graphic testing

- Construction of transport projects, civil projects, hydraulic power plantprojects

- Construction of infrastructure of urban area, industrial zone, residentarea

- Trade in exporting, importing material, equipment machinery

2.1.1.2 The organization chart of Thang Long mechanical four andconstruction joint stock company

PICTURE 2.1: THE ORGANIZATION CHART OF THE COMPANY

- Board of general management: this department is in charge of general

management of the activities of the company, making decisions concerningall of operations of the firm.

- General director is the person that represents the board of general

management to run directly the daily operations of the company

- Supervisor board will control and check the management of the general

director and general board management

- Dubty general directors are the persons that supports the general

director in management and decisions of aspects such as: marketing,economic, technical economic and industrial

- There are many departments which are in charge of studying,managing, planning and reporting about the situation of the company for themanagements like: market department, finance department, technicaldepartment, material department…

2.1.1.3 The system of accounting of the company.

PICTURE 2.2: SYSTEM OF ACCOUNTING OF THE COMPANY

- Chief accountant is in charge of organizing, checking, directing the

jobs of the accountants and he or she must has resposibility in front of theboss

- Cost and financial accountant collects information about expense of

Chief accountant

Pay acc

Cash acc

-Treasur e

Salary acc

Cost

-acc

Stores acc

-business through the books, establishes balance sheet, income statement andthe others

- Stores and fixed assets accountant follows, records and expresses the

situation of fixed assets and material, goods, products unfinished products…

- Payment accountant follows and records the situation of payment with

customers, surppliers and the others…

- Cash and equivalents accountant follows expenditure and receipt

through vouchers, carries out the transactions with banks

- Accountant about salary expense: this person will follow, check and

caculate salary expense and the others, allocate salary for staffs

- Treasurer is in charge of ensuring that cash at the budget of the

company, make an entry to the cash and pay out through the vouchers whichare suitable and report the situation or adjust mistakes

2.1.2 The business characteristics of company Thang Long mechanical four and construction joint stock company.

2.1.2.1 Material and technical facilities.

The machineries of the company all have the best quality because theyare imported from Europe and the countries which are good at technology likeChina, Japan or Russia…

- Power capacitor 0,4KV from Korea with the capacity of 6x30 KVAR

- Generator 600KA from Germany with 600KVA

- Generator 25KVA from Japan which is the equipment has greatcapacity in building or constructing projects

- The compressed air dryer system with the best quality:

+ Air compressor cyclon 6075 from France with the capacity of 10m3/p.+ Compare Set 1200 Air – cleaning equipemt from Italya

The cutting, punching, sawing, bending machine of the company which

support the worker to buil and construct projects, such as:

+ MIB 610 KN steel plate cutting machine from France It can operate atthe capacity of 7,5 kw

+ FICEP – 604N punching and shearing machine is imported fromGermany with the capacity of 15kw

+ Q34-16 Gouging machine with 2 center punchs from Japan

+ VPIAP angle steel Gouging machine from France

- Plate - bending machine – edge beveling machine such as:

+ NIKATA hydropierce Plate bending machine which is imported fromJapan with the capacity of 30kw

+ ZB41 Plate bending machine which is from China has the capacity of22kw

To ensure the quality of the projects built by the company, there are theothers miiling machine, machine lathe and drilling machine All of them arechecked carefully and imported from China or Russia

Totally, the company has more than 120 equipments which are allimported from the countries having excellent technology This is animportant condition to evaluate the ability and it helps the company be morecompetitive in the market

2.1.2.2 Situation of material supply.

The company has to spend a great cost to invest in purchase material forbulding projects and manufacturing machanical equipments So price in themarket affects the business operation of the company Almost material used

in production are the goods whose prices change drasticlly like iron, steel…The situation of material supply of the company is always ensured by variouspartners over Viet nam The company usually finds the suppliers at thelocation where the project is being built so that it can help save the

expenditure and ensure supplying material.

2.1.2.3 The capability of skilled workmanship of Thang Long mechanical four and construction joint stock company.

The workmanship in Thang Long mechanical four and construction jointstock company all are well schooled in machanical and construction beforeworking at the company

TABLE 2.1: THE CAPABILITY OF SKILLED WORKMANSHIP

THANG LONG MECHANICAL FOUR AND CONSTRUCTION JOINT STOCK

COMPANY

(Source : The document of the capacity)

2.1.2.4 Output market and the ability to compete of the company.

In 2016, there are many global events happening and this is a conditionfor the company to develope: Asian economic community (AEC) established,Trans – Pacific Partnership is signed between 12 countries in Pacific area…The construction will develop quicklier which makes the company has morechances to expand the size of business operation There are a lot of bigprojects which are built by the company in many years: manufacture clad forCat Linh Ha Dong Rail – transit project, construction of 11 bridge in LaoDRP, construction of Minh Dao bridge project, construction of 3-2 Ha Giangbridge project, and more than 100 others This shows ability of competition

of the company in the market and it helps the reputation of Thang Longmechanical four and construction joint stock company be well known in VietNam market

2.1.3 Overview of financial situation and performance of company Thang Long mechanical four and construction joint stock company

TABLE 2.2: SOME FINANCIAL RATIOS OF THE COMPANY IN RECENT

YEARS.

Acorrding to this table, we can show some features of financial stuation

of the company in recent years:

- Average capital or average assets of the company in 2015 increased44.013,5 million dong, from 293.847,5 million dong in 2014 to 337.861million dong in 2015, corresponding with 15%.The assets of the companydeveloped because the great increase in receivable account of over 133 billionVND and the great decrease in inventory of over 35 billion VND Thefluctuation of receivable account and inventory is based on the characteristics

of industry The construction projects usually have the great value, so itspayments for each project is usually finished within long time In 2015, the

company had some projects finished but the partners haven’t pay for themyet, so this target increased quickly compared to 2014 Inventory in fiscal

2015 had a fall but it is not signicant to show the decrease in size of operation

In fact, the company almost doesn’t keep inventory in the store and bringthem directly to build constructions Fiscal 2015 also is a year in which thecompany finished many projects and new works have been begun for 1 or 2months They are the reasons why the company had a great fall of inventory

- Meanwhile, average equity of the company increased from 33.042million dong in 2014 to 47.880,5 million dong in 2015, which resulted in adifference of 14.838,0 million dong It means that average equity in 2015increased of 45% compared to 2014 This situation made gearing of thecompany in 2015 decrease from 0,89 in fiscal year 2014 to 0,84 in fiscal

2015 Because of raising from issuing common shares to finance 3 newprojects and a newfactory, the size of assets in 2015 went up, meanwhile,gearing went dow It helps the company decrease financial risk and thefinancial dependence on outside

- Net revenues come from sale of the company’s construction projects inthe year Net revenues went down 479.486 million dong in 2014 to 378.298million dong in 2015, difference by (-101.188) million dong, correspondingwith -21% Cost of goods sold decreased from 439.776 million dong to 350.173million dong, corresponding with -20% However, net income in 2015 hasexcellent performance with an 1.445 million dong increase or a 40% growth.Because of the features of the business, revenues depend on the progress ofprojects The decrease in net revenue is not that the company is restrictingbusiness In fiscal 2015, the company only had some projects finished torecord revenue such as Chanh Hoa Bridge , 1A highway, Bo Ao Bridge,…and others when almost projects are at first steps of process The fall in netrevenue didn’t result in the decrease in net income It determined that the