Corporate financial analysis through financial ratios and recommendations for german foods JSC’s development

Graduation thesis Academy of finance DECLARATION I hereby declare that this thesis is my own work and effort and that has not been submitted anywhere for any award Where other sources of information have been used, they have been acknowledged The data and results described in the thesis are derived from the actual situation of the practice company Hanoi, 27 April, 2016 Student Tran Thu Huong Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance ACKNOWLEDGEMENT Firstly, I am deeply indebted to my supervisor Ms Pham Phuong Oanh who gave me useful suggestions, encouraged me a lot during the time of doing research Secondly, I want to thank German Foodstuff Processing Joint Stock Company for giving me permission to commence this thesis in the first instance, to the necessary research work and to use departmental data Furthermore, I would like to appreciate the Director and the Sale manager as well as all seniors at German Foodstuff Processing Joint Stock Company for accepting and encouraging me to go ahead with the thesis My friends from Faculty of Foreign Languages also supported me in the thesis I am much obliged to them for all their help, support, interest and valuable hints Especially, I would like to give my special thanks to my family whose patient love enabled me to complete this work Finally, because of limitation of time and knowledge, mistakes are unavoidable, so I wish to have more opportunities to receive more contribution and suggestions to make the thesis better Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance ABSTRACT In the modern global economy, especially when there are a lot of organizations founded every day, corporate finance has become increasingly important, for all companies in general, and for GERMAN FOODS JSC in particular Therefore, the thesis with the topic “Corporate financial analysis through financial ratios and recommendations for German Foods JSC’s development” will point out the importance of having a healthily and effectively financial performance in order to survive and compete with others The main content is reflected in three chapters The first chapter is about literature review which provides general knowledge about the global economy as well as Vietnamese economy and introduces the financial situation of GERMAN FOODS JSC In chapter 2, by taking a scenario in GERMAN FOODS JSC, assessments of financial position through financial ratios analysis of GERMAN FOODS JSC through 2011-2013 will be demonstrated through figures from balance sheets, income statements and charts built from those figures And chapter will provide some recommendations for GERMAN FOODS JSC’s development basing on the general knowledge and assessments which have been achieved in chapter and of the study In conclusion, the thesis has already been completed in comparison with proposed objectives and targets in the introduction Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance LIST OF ABBREVIATIONS No Abbreviation GERMAN Full Phrase FOODS German Foodstuff Processing Joint JSC Stock Company DSO Days sales outstanding BEP Basic earning power EBIT Earnings before interest and tax ROA Return on assets ROE Return on equity ROS Profit margin Acc Account M&A Mergers and Acquisitions Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance TABLE OF CONTENT DECLARATION i ACKNOWLEDGEMENT ii ABSTRACT iii LIST OF ABBREVIATIONS iv TABLE OF CONTENT v LIST OF APPENDIXES viii INTRODUCTION CHAPTER I:LITERATURE REVIEW 1.1 Corporate finance 1.1.1 Definition 1.1.2 Role of corporate finance 1.2 Corporate financial management 1.2.1 Definition 1.2.2 Role of corporate financial management 1.2.3 Factors influencing corporate financial management 1.2.3.1 Form of business organization 1.2.3.2 Financial regulations 1.2.3.3 Corporate solvency 10 1.2.3.4 Securities markets 10 1.2.3.5 Business lending 10 1.3 Corporate financial analysis 10 1.3.1 Definition 10 1.3.2.1 Financial statement analysis is useful to different parties to obtain the required information about the organization 11 1.3.2.2 Knowing profitability, solvency of business and judging the growth of business 11 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance 1.3.2.3 Making comparison and selection of appropriate policy as well as forecasting and preparing budgets 12 1.3.4 Methods of corporate financial analysis 13 1.3.4.1 Horizontal and vertical analysis 13 1.3.4.2 Ratios analysis 15 1.3.4.3 Dupont Analysis 21 CHAPTER 2:ASSESSMENTS OF FINANCIAL POSITION THROUGH FINANCIAL RATIOS ANALYSIS OF GERMAN FOODS JSC THROUGH 2011-2013 23 2.1 Overview of GERMAN FOODS JSC 23 2.1.1 Business history 23 2.1.2 Business structure 24 2.1.3 Business activities 25 2.1 Corporate financial analysis 26 2.2.1 Liquidity ratios 26 2.2.2 Leverage ratios 29 2.2.3 Efficiency ratios 30 2.2.4 Profitability ratios 33 2.2.5 Dupont analysis 34 2.2 Assessments 36 2.2.1 Cash management 36 2.2.2 Receivable management 37 2.2.3 Inventory management 39 CHAPTER 3: RECOMMENDATIONS FOR GERMAN FOODS JSC’S DEVELOPMENT 41 3.1 Evaluation of business’s performance through financial analysis 41 3.1.1 Strengths 41 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance 3.1.2 Weaknesses 42 3.2 Recommendations for GERMAN FOODS JSC’s development 43 3.2.1 Quality as a key driver Reducing mistakes 43 3.2.2 Investing in training 44 3.2.3 Focusing on the customer 45 3.2.4 Exploring new markets or improving marketing 45 3.2.5 Financial forecasting 46 CONCLUSION 47 REFERENCES 48 SUPERVISOR’S EVALUATION 49 REVIEWER’S EVALUATION 50 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance LIST OF APPENDIXES Appendix Tables Table 2.1 Liquidity ratios 27 Table 2.2 Leverage ratios 29 Table 2.3 Efficiency 4ratios 31 Table 2.4 Related indicators 32 Table 2.5 Profitability ratios 33 Table 2.6 ROA 34 Table 2.7 ROE 35 Table 2.8 Cash management 36 Table 2.9 Receivable management 37 Table 2.10 Inventory management 39 Appendix Charts Chart 2.1 Liquidity ratios Chart 2.2 Leverage ratios Chart 2.3 Efficiency ratios Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance INTRODUCTION Rationale of the study In 1986, a program of broad economic reforms known as the Doi Moi or “renovation” introduced new market rules and improved the business climate By and large, the “Doi Moi” reforms brought about profound changes in the Vietnamese “social fabric.” In January 2007, Vietnam joined the World Trade Organization (WTO) following a long and tedious negotiation process which lasted over ten years And most recently, on February 2016, Vietnam along with eleven countries: Australia, Canada, Japan, United States,… came to an agreement of signing Trans-Pacific Partnership (TPP), which writes the rules for global trade helping increase Made-in-America exports, grow the American economy, support well-paying American jobs, and strengthen the American middle class New opportunities and challenges created by international economic integration have had significant impacts on the economy Domestic businesses, therefore, must follow the global rules as well as set up strategic plans in order to find potential partners, cooperate and maximize the market value of the business In order to survive and develop in the modern economy, each company has to show its positive financial performance through one useful tool, which is finance Finance is the language of business It is important to be circumspect in analyzing and choosing an ideal partner And financial statements are useful tools for managers to have a look through other companies’ financial situations Not only managers but also other different users could take advantage of financial statements for various purposes: to assess the business’s liquidity, profitability, solvency,… Therefore, corporate financial analysis will facilitate users with an overview about financial activities to determine factors impacting on the financial situation and suggest effective Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance solutions to strengthen their financial position German Foodstuff Processing Joint Stock Company founded in 2008 specializes in the production of German Foods and promotes the brand of sausage “Steffi” to a wide range of people all over the world Due to the small business scale and highly competitive business environment, GERMAN FOODS JSC still has to face difficult challenges to survive and compete with others Through financial statement’s analysis, GERMAN FOODS JSC could be able to find out strengths and weaknesses as well as opportunities and potential threats so that managers can build strategic plans to develop the value of the company, Because of the importance of the corporate financial analysis, the researcher has chosen “Corporate financial analysis through financial ratios and recommendations for German Foods JSC’s development” Aims of the study The study primarily aims to study the financial position of GERMAN FOODS JSC from 2011 to 2013 through financial statements such as balance sheets, income statements, notes to financial statements Thus, it is easy to assess the company’s strengths and weaknesses based on financial ratios as well as identify potential opportunities and threats influencing the health of the company Depending on these analysis, the thesis could also suggest recommendations to enhance position of GERMAN FOODS JSC not only in Viet Nam but in global economy as well Scope of the study The thesis mainly focuses on analyzing financial ratios and assessing financial position of GERMAN FOODS JSC in accounting fiscal year 2011-2013 Methodology 4.1 Data collection In my study, analysis and assessments will be based on data from two sources 10 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance For two years, the amount of account receivable increased gradually from 453,924,712 VND in 2011 to reach its peak of 930,603,677 VND in 2013 Additionally, one year after 2012, account receivable increased by 392,897,601 VND, which grew up by more than 173.07 percent and was faster than the previous year The reason for this development came from company’s strategy to expand the market share so they had to develop relationship with more customers and it was necessary to manage account receivable carefully Besides that, there was a steady increase in the proportion of account receivable, which occupied an amount of 12.05 percent in 2011, then 15.37 percent in 2012 an stayed at 22.7 percent in 2013 From 2011 to 2012, account receivable still occupied a small proportion in the total amount of short-term assets However, on year after 2012, it sharply grew up to over 20 percent, which was the highest level of three years In practice, selling products and services on credit is extremely common Almost firms offer credit in order to attract customers and obviously increase sales Offering credit helps a firm to create incentive to customers in purchasing its products, resulting in increased revenues However, the costs associated with granting credit are significant These costs include a probability of customers’ default on payments and the additional costs of setting up and carrying receivables as well as opportunity costs of funds tired up in receivables In case of GERMAN FOODS JSC, this company owned an increasing level of receivables, which meant that credit sales was one of the decisions for the development of company According to the increase in receivables, business’s revenues reduced a huge amount loss, which showed the benefits of adopting credit sales in a small business However, this firm needs to be circumspect in 46 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance managing receivables as it could bring unexpected results 2.2.3 Inventory management Inventory 2011 2012 2013 505,180,482 498,932,056 370,188,406 3,497,848,190 4,099,638,537 Total short-term 3,765,531,789 assets Table 2.10 Inventory management Table 2.10 demonstrates changes in business’s stock control Overall, the most significant trend is the gradual decrease in the amount of goods in stock from 2011 to 2013 Another noticeable trend is the fluctuation in the proportion of inventory in the total amount of short-term assets with the equivalent years It can be seen that the amount of goods in stock reduced from the highest level of 505,180,482 VND in 2011 to 498,932,056 VND in 2012 and remained at the lowest level of 370,188,406 VND in 2013 After two years, inventory decreased by nearly 1.5 times of the amount in 2013 According to real situation, goods were taken out of stock to be distributed new markets all over Viet Nam, so it led to the reduction in the stock Moreover, from 2011 to 2012, the proportion of inventory in total amount of short-term assets grew up from 13.42 percent to 14.26 percent However, one year after 2012, it fell sharply to 9.03 percent in 2013, which also was the lowest point during the period The fluctuation in the development of total short-term assets along with the gradual decline in the amount of inventory throughout three years caused this fluctuation Like receivables, inventories represent a significant investment for many firms Inventory management concerns about what level of inventory a firm 47 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance should hold and when the new order should be made to effectively operate its business If a firm has low inventory levels, it consequently faces the costs related to inventory shortages, which means that it has to reorder frequently with the purpose of providing sufficient input to operate continuously and when inventories are run out, the business cannot supply customers due to the inadequate stocks of finished goods For short-term, this leads to the loss of sales and profit fall, but in the long run, the customer goodwill is lost and there is a high probability of closedown the production line On the other hand, if a firm holds high inventory levels, it incurs carrying costs or holding costs, opportunity costs and deterioration costs So it is important to balance these costs and find out the optimal inventory level In case of GERMAN FOODS JSC, the level of goods in stock decreased year by year, which could lead to the shortage of finished goods when the demand in markets might increase Furthermore, ordering goods from outside suppliers could take time and it is easy to lose customers, therefore, other competitors would take advantage of this opportunity to carry out M&A activities On the whole, during the period, GERMAN FOODS JSC witnessed its development with huge amount of cash, an increasing level of receivables and the downward trend of inventory level These matters requires company bosses to keep an eye on their sale policies, credit policies, inventory policies in order to reinforce its resources CHAPTER RECOMMENDATIONS FOR GERMAN FOODS JSC’S DEVELOPMENT 3.1 Evaluation of business’s performance through financial analysis 3.1.1 Strengths 48 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance Over the past seven years, GERMAN FOODS JSC has achieved great success as a result of taking advantages of company’s resources and running the business smoothly with the help of considerate managers GERMAN FOODS JSC is a small business founded in 2008 when economic crisis took place all over the world and it put great pressure on corporates to find out suitable strategies to survive and develop Appearing in such difficult situation, company’s bosses consisting of people having good background knowledge, practical working experience and willingness to expand the business scale have developed a small company to a bigger one that can be reached by most of Vietnamese people over the country Besides skillful managers, the firm owns advanced technology and modern production line which were imported from Germany From the beginning, company bosses considered that customers are worth being served the best products with best quality, which is the reason why business always attempts to modernize its production, varies its ranges of products: sausage, jumbong, smocked meat in order to satisfy customers’ needs and wants Knowing that product’s quality is the core value of the company’s development, all staff highly focus on making sure that all products are well-produced before reaching consumers Not only does a variety of products with high quality but also good pricing strategies attract a lot of customers In the highly competitive environment, there is a many of business specializing in producing foods such as Ha Long Canfoco, which occupies a large proportion of market share or another famous brand is Duc Viet foods, which has entered into Vietnamese markets for many years Carefully studying the market as well as evaluating the ability of competitors has helped business’s bosses develop suitable pricing strategy which ensures to cover all expenses incurring during the production procedure 49 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance and bring benefits to the company Vietnamese people always pay attention to products’ price before deciding what to buy and where to buy, this creates opportunities for GERMAN FOODS JSC to set up suitable but competitive price compared with that of competitors in the same industry Furthermore, skillful staff with academic knowledge in business and marketing have helped to advertise products to as many users as possible Company always offer the best convenience for their staff through providing training course to improve staff’s ability, holding outside activities such as travelling, team-working or inviting special consultant to share experience By doing this, all staff highly commit to contribute to the development of the firm as well as find new ways to expand business scale to reach more and more consumers: they advertise not only on newspapers, magazines but also on social networks, which could create great influence on many people like facebook, website “thucphamduc.com” or pop-ups advertisements on other websites Good customer service has brought the company good chances of introducing German Sausage to a wide range of Vietnamese people 3.1.2 Weaknesses Besides these advantages, the business also has to face many difficulties in competing with others and expanding production Firstly, the external factors have great impacts on business’s results The economy always change day after day, there are a lot of new companies founded every day all over the world so it forces each company to develop to survive or else they will end up with bankruptcy Moreover, the government plays important roles in controlling the domestic economy to ensure a safe and sound environment for all participants Government brings in new policies, collects corporate income tax and always keeps an eye on 50 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance businesses’ activities as well as intervenes to prevent monopoly or unfair activities Additionally, customers now have more power than the past, they have chances of studying the mechanism of the company, the way they produce and compare different products from different sources Therefore, consumers now become harder to satisfy and it forces businesses to change to target their customers Secondly, the internal factors creates challenges to the development of the business Importing technology and production line from Germany pushes the total input expenses higher, which contributed to the loss of company between 2011 and 2013 Holding high level of cash on hand means that the business has lost potential investment opportunities with high interest rates Moreover, the increase in the amount of receivables forces managers to highly pay attention to collect all the debts but remaining good relationship with customers with suitable credit sale policies Another difficulty is the decrease in the amount of inventory could incur related costs when company orders from outside and it may not satisfy users’ needs and wants 3.2 Recommendations for GERMAN FOODS JSC’s development 3.2.1 Quality as a key driver Reducing mistakes It is necessary to put emphasis on quality of products as a core value of the business For manufacturers, this process involves statistical quality control, the process of setting a product's specifications and then sampling a small number of units from the production line to see how closely they measure up to those specs Besides that, suppliers are important partners due to the quality of input materials greatly affect the quality of finished goods Managers have to choose truthful suppliers with good material to carry out production smoothly Moreover, almost modern businesses have to pay attention to waste treatment 51 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance matter A company not only provides good products and services but also has to take responsibility to deal with waste disposal from their production before they reach the environment By doing this, it could reinforce its status on the market for its contribution to protect the environment from wastes and industrial disposals 3.2.2 Investing in training Quality experts recommend that businesses train workers at all levels to look for ways to improve quality and to ameliorate problems It can be seen that almost workers have to be trained to get used to the modern technology and new production line The more advanced the technology is, the more essential it is for business to provide their staff with trainings These trainings could happen at the office through conferences, workshops with special consultants coming to share experience, or they could facilitate their staff with chances to study abroad about how to apply new technology so they can apply in their procedures Employees with good degree always try to find a suitable company where they can develop their talents as well as have chances of gaining more working experience Offering training courses could be an attractive point that appeals to job seekers On the other hand, the firm must have detailed plans for trainings due to the fact that it is probable to incur training costs especially when they have their staff study abroad Managers need to calculate the expenses based on revenues to ensure that the business still could earn profits after reducing all expenses 3.2.3 Focusing on the customer Customers are the most important people for any organization They are the resource upon which the success of the business depends Organizations are dependent upon their customers If they not develop customer loyalty and 52 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance satisfaction, they could lose their customers Without customers the organization would not exist and the purpose of the organization is to fulfill the needs of the customers Customers’ demands are changing every day, in the past they wanted to satisfy their hunger but now they prefer goods and services with high quality to enhance their spiritual lives In order to satisfy customers’ demands, company bosses have to carry out research and development process, which analyzes users’ opinions about their ideals of products and then they can develop detailed plans for production More importantly, customers’ feedbacks also give business information about new products that have been launch, about the quality, the success or failure of advertising campaign so that business could study all of these information and apply in the next production 3.2.4 Exploring new markets or improving marketing It is clearly seen that the distribution channels of GERMAN FOODS JSC have only focused on big cities especially in supermarkets or big stores There is a wide range of markets besides these markets they have explored to reach more consumers in every province Moreover, apart from producing fast foods, it can be a good idea for the firm to produce some kinds of traditional foods such as “banh chung, gio” with advanced technology and modern production line so they can bring users familiar but special products If the business can this, it could gain much more benefits from this investment The company has used various types of advertising but it seems that they still not attract customers as expectation It is imperative to improve the quality of marketing teams by recruiting creative staff or providing frequent trainings so they can update new trends, apply new techniques to make advertisements more interesting and attractive 53 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance 3.2.5 Financial forecasting Financial forecasting does not increase profits, but it does allow Leadership to make informed and wise decisions Without forecasting, poor decisions can be made that could waste money or result in less than ideal profits It is ideal to prepare best case, worse case and realistic case forecasts so that the business is ready under each of these scenarios Consider that even the under best case scenario, problems could arise such as inadequate capacity or insufficient cash flow and how to pay off all the obligations Knowing the development trend as well as customers’ demands let the business be active in preparing budget estimation, analyzing innovative products and participating in every potential investment opportunities CONCLUSION In conclusion, the thesis with the topic “Corporate financial analysis through financial ratios and recommendations for GERMAN FOODS JSC’s development” has already achieved its aims step by step Firstly, the thesis has completely reflected the theoretical background of corporate financial analysis, its importance as well as different ways to the analysis 54 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance Secondly, basing on financial statements of GERMAN FOODS JSC between 2011 and 2013, almost financial activities and transactions were listed and analyzed Thirdly, through the above analysis, the strengths and weaknesses of business were also revealed After completing all the information provided from financial statements as well as gained from working at the company, the thesis has drawn some recommendations about the way to improve business’s performance with the expectation that the firm could run the business more effectively and earn profits as much as possible in the near future 55 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance REFERENCES Stephen A Ross, Randolph W Westerfield, Bradford D Jordan, “FUNDAMENTALS OF CORPORATE FINANCE” (10th edition) John Maynard Keynes, “The General Theory of Employment, Interest, and Money” PhD Vu Van Ninh and lecturers of Corporate Finance Faculty, Academy of Finance, “Corporate Finance” (1st edition) GERMAN FOODS JSC – Annual Financial Statements 2011-2013 Websites: www.aof.edu.vn www.accountingcoach.com www.investopedia.com www.myaccountingcourse.com www.studyfinance.com 56 Tran Thu Huong Class: CQ50/51.02 Graduation thesis Academy of finance 57 Tran Thu Huong Class: CQ50/51.02 SUPERVISOR’S EVALUATION Name of supervisor: Ms Pham Phuong Oanh Student’s name: Tran Thu Huong Class: CQ50/51.02 Topic: “Corporate financial analysis through financial ratios and recommendations for German Foods JSC’s development” Evaluation: ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… …………………………………… Score: In number: In word: Supervisor’s signature REVIEWER’S EVALUATION Name of reviewer: Student’s name: Tran Thu Huong Class: CQ50/51.02 Topic: “Corporate financial analysis through financial ratios and recommendations for German Foods JSC’s development” Evaluation: ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………… Score: - In number: - In word: Reviewer’s signature PHIẾU NHẬN XÉT THỰC TẬP Họ tên sinh viên: Trần Thu Hương Trường: Học viện Tài Chính Lớp: CQ50/51.02 Đơn vị thực tập: Công ty Cổ phần chế biến thực phẩm Đức Đề tài: “Corporate financial analysis through financial ratios and recommendations for German Foods JSC’s development” Giáo viên hướng dẫn: Phạm Phương Oanh Chức vụ: Giảng viên môn Lý Thuyết Tiếng Dịch – Khoa Ngoại Ngữ, Học viện Tài Chính Nhận xét đơn vị thực tập: Về tinh thần, thái độ ý thức tổ chức kỉ luật Về đề tài ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………… Xác nhận đơn vị thực tập Hà Nội, ngày , tháng , năm 2016 Cán hướng dẫn thực tập ... importance of the corporate financial analysis, the researcher has chosen Corporate financial analysis through financial ratios and recommendations for German Foods JSC’s development Aims of the study... through financial ratios and recommendations for German Foods JSC’s development will point out the importance of having a healthily and effectively financial performance in order to survive and. .. helpful for the management to make forecast and prepare budgets 1.3.3 Objectives of corporate financial analysis The objective of financial statement analysis is to understand and diagnose the information