Debt financing - A case study of AMATA power (BIEN HOA) limited : Luận văn thạc sĩ

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECNOMICS HOCHIMINH CITY K - NGUYEN THI THANH THAO DEBR FINANCING – A CASE STUDY Ò AMATA POWER (BIEN HOA) LIMITED MASTES’S THESIS In Banking Ology code: 60.31.12 Supervisor: Dr.TRUONG TAN THANH Ho Chi Minh City – 2010 ACKNOWLEDGEMENT The research is completed due to the contribution of many people First of all, I would like to express my deepest gratitude to my supervisor, Dr Truong Tan Thanh, for all he has done for me The thesis could not been finished without his great encouragements and kind helps Again, I would like to extend my sincere appreciation to him I would like to express my thanks to Dr Nguyen Minh Kieu for his valuable advices He always took care, encouraged and supported us during our course I acknowledge all instructors at Faculty of Banking Finance and Postgraduate Faculty, University of Economics of Ho Chi Minh for their valuable knowledge My gratitude is extended to my classmates for their enthusiastic supports in conducting the research, especially Ms Nguyen Thi Kim Dung and Mr Duong Binh Hung Finally, I sincerely thank my parents and my husband who have always tried their best to help me overcome difficulties during the time of attending the course as well as preparing the thesis ABSTRACT The economy has been developing more and more strongly, the competition among firms is fiercer and fiercer In order to run the firm’s business operation in the competitive market, capital is one of necessary elements to speed up the development It likes the blood of the firm There are three financing alternatives to set up the capital which are retained earnings, capital from shareholders and loans from credit institutions The choice of internal or external financing is an extremely vital decision Some of firms like the internal financing (retained earnings, capital from shareholders) due to avoiding the financial risks Some of firms prefer the external financing (loans from credit institutions) due to taking advantages of tax shield and controlling management position However, too much debt can result in increasing dramatically capital costs due to financial distress in terms of increased bankruptcy and agency costs So, the careful consideration to the advantages and disadvantages of each financing resource should be conducted to balance between returns and risks And financial analysis should be done in order to minimize financial risks in case of debt financing The purpose of this thesis is to evaluate the effectiveness of debt financing process of a defined firm, Amata Power (Bien Hoa) Limited The research is conducted by collecting and analyzing the empirical data in order to understand debt repayment ability as well as the impacts of debt on expenses and profits TABLE OF CONTENTS Acknowledgement Abstract Table of contents Abbreviation List of figures List of tables Chapter 1: Introduction 1.1 Introduction 1.2 Research problem 10 1.3 Methodology 11 1.4 Significance and scope of the study 11 1.5 Structure of the study 12 Chapter 2: Theoretical background 14 2.1 Introduction 14 2.1.1 The Miller and Modigliani theory 14 2.1.2 The trade-off theory 17 2.1.3 The pecking order theory (Myers, 1984) 18 2.2 An overview of debt financing 19 2.3 Financial ability to repay debt 21 2.4 Financial risks of debt financing in a foreign currency 27 2.4.1 Interest rate risk 27 2.4.2 Foreign exchange risk 27 2.5 Conclusion 28 Chapter 3: Research methodology 29 3.1 Introduction 29 3.2 Analysis of debt settlement ability 29 3.2.1 Liquidity 29 3.2.2 Activity 30 3.2.3 Debt management ratios 30 3.2.4 Earnings ratios 31 3.2.5 Profitability measurement ratios 31 3.3 Analysis on financial risks of debt financing in a foreign currency 34 3.3.1 Interest rate risk 34 3.3.2 Foreign exchange risk 34 3.4 Impacts of debt financing on profit 34 3.5 Conclusion 35 Chapter 4: Introduction to Amata Power (Bien Hoa) Limited 37 4.1 An overview of Amata Power (Bien Hoa) Limited 37 4.2 Financial performance 38 4.2.1 Capital structure 38 4.2.2 Business operation 39 4.2.3 Profitability measurement 41 4.2.4 Debt management policy 43 4.3 Recent development and outlook 43 Chapter 5: Analysis on debt financing of Amata Power (Bien Hoa) Ltd 45 5.1 Introduction 45 5.2 An overview of debt financing of APBH 45 5.2.1 Short-term borrowings 45 5.2.2 Long-term borrowings 45 5.3 Analysis on debt settlement ability 48 5.3.1 Debt settlement ability 48 5.3.2 Debt control method 50 5.3.3 Method of cash flow management 52 5.4 Analysis on debt impacts 55 5.4.1 Impact of debt on expenses 55 5.4.2 Risks related to debt in a foreign currency 57 5.4.2.1 Foreign exchange risk 57 5.4.2.2 Interest rate risk 60 5.4.3 Impact of debt on profits 61 5.5 Conclusions 65 Chapter 6: Research conclusion 66 6.1 Summary of study 66 6.2 Implications and recommendations 67 6.3 Future research and limitations 69 Bibliography 70 ABBREVIATION APBH Amata Power (Bien Hoa) Limited AP Amata Power Limited Amata VN Amata Viet Nam Joint Stock Company BP Banpu Public Company Limited BIDV Bank for Investment and Development of Vietnam DEG Deutsche Investitions - Und Entwicklungsgesellschaft MBH EBIT Earnings before interest and tax KfW Kreditanstalt fur Wiederaufbau ROA Return on assets ROE Return on equity ROIC Return on invested capital ROS Return on sales TIE ratio Times-Interest-Earned ratio VCB Bank for Foreign Trade of Vietnam (Vietcombank) LIST OF FIGURES Figure 2.1: Effect of leverage on the value of a firm’s stock 18 Figure 2.2: Liquidity analysis 25 Figure 2.3: Analysis on debt repayment ability 26 Figure 4.1: Structure of shareholders of APBH as of December 31, 2009 39 Figure 4.2: Growth of assets and resources of APBH from 2005 to 2009 40 Figure 4.3: Growth of revenue and profit/loss of APBH from 2005 to 2009 41 Figure 4.4: Profitability ratios of APBH from 2002 to 2009 41 Figure 4.5: Profitability of APBH from 2004 to 2009 42 Figure 5.1: Liquidity ratios of APBH from 2002 to 2009 48 Figure 5.2: Growth of current assets and current liabilities 50 Figure 5.3: Debt management ratios of APBH from 2002 to 2009 51 Figure 5.4: Earnings coverage ratios of APBH from 2002 to 2009 52 Figure 5.5: Cash conversion cycle of APBH from 2002 to 2009 53 Figure 5.6: The cash conversion cycle model in 2009 54 Figure 5.7: Assets – equity turnover of APBH from 2002 to 2009 55 Figure 5.8: Financial expenses of APBH from 2008 to 2010 56 Figure 5.9: Impact of debt on expenses of APBH from 2002 to 2009 57 Figure 5.10: Interest rate risk of APBH from 2005 to 2009 60 LIST OF TABLES Table 2.1: Summary of financial ratios from the lending viewpoint 22 Table 2.2: Summary of financial ratios from the investors’ viewpoint 23 Table 2.3: Financial ratios combining ratio analysis with cash-flow analysis 24 Table 2.4: Foreign exchange risk of Pha Lai Thermal Power JSC 28 Table 3.1: Financial analysis of APBH from 2002 to 2009 33 Table 4.1: Capital Structure of APBH as of December 31, 2009 39 Table 4.2: Growth of assets and resources of APBH from 2005 to 2009 40 Table 4.3: Growth of revenue and profit/loss of APBH from 2005 to 2009 40 Table 4.4: Profitability ratios of APBH from 2002 to 2009 41 Table 4.5: Comparison ROE and free-risk interest rate 42 Table 5.1: Loan disbursement and repayment schedule of APBH 47 Table 5.2: Liquidity ratios of APBH from 2002 to 2009 48 Table 5.3: Growth of current assets and current liabilities 50 Table 5.4: Debt management ratios of APBH from 2002 to 2009 50 Table 5.5: Earnings coverage ratios of APBH from 2002 to 2009 51 Table 5.6: Activity ratios of APBH from 2002 to 2009 52 Table 5.7: Assets – equity turnover ratios of APBH from 2002 to 2009 55 Table 5.8: Costs structure of APBH from 2008 to 2010 56 Table 5.9: Impact of debt on expenses of APBH from 2002 to 2009 57 Table 5.10: Foreign exchange rate (USD/VND) on settlement date to creditors 59 Table 5.11: Interest rate of creditors and two banks in Vietnam 60 Table 5.12: Comparison with firm in the same industry in 2009 62 Table 5.13: Components of return on equity for APBH 62 Table 5.14: Extended Dupont System Analysis for APBH: 2002-2009 63 CHAPTER INTRODUCTION 1.1 INTRODUCTION The globalization has brought countries together and made countries integrate deeply into the world Nowadays the economic competitiveness does not limit in the national border, it has extended to the international market The capital is means to create favourable conditions for the successful business Most firms prefer the capital mobilization from debt There are many kinds of debt which are bank loans, sponsor loans, bonds, and account payable In comparison with equity, debt is cheaper and has more tax advantages In the upturn, using leverage helps companies to maximize their profit But in the downturn, the debt management becomes more difficult Facing with huge debts, only a little downtrend can lead to insolvency Borrowing to run business is not wrong, but too much debt is problematic Brigham and Ehrhardt (2002, p.619) also indicated that debt has two important advantages First, the interest paid is a tax deduction, which lowers debt’s effective cost Second, debt holders get a fixed return, so stockholders not have to share the profits if the business is extremely successful However, debt also has disadvantages as following: First of all, the higher the debt ratio, the riskier the company, hence the higher its cost of both debt and equity Secondly, if a company falls on hard times and operating income is not sufficient to cover interest charges, its stockholders will have to make up the shortfall, and if they cannot, bankruptcy will result In this thesis, debt financing in form of loans from credit institutions and parent companies is mainly discussed In order to get bank loans and sponsor loans, the company needs to demonstrate its financial solidity to its bankers by the financial analysis The goal of analysis is to assess an obligor from a financial trading range for the dong has been moved to VND18,364-19,500 per dollar due to maintaining the daily trading band of per cent As Standard Chartered Bank forecasted that the VND-USD exchange rate would be VND19,900 in the last quarter of 2010, VND20,000 in the first quarter of 2011 and VND20,400 in the second quarter of 2010 Due to changed exchange rate, many firms whose activities related to foreign currency have to face many difficulties The firms have to pay many costs in dollars, but not all of customers pay them in dollars Only exporters have certainly benefited from the dong’s devaluation However, the additional money earned from dollar payments through exports was not so significant, because input cots for materials, employees, petrol, water and electricity have already soared (Thanh Tung, 2010) APBH have also meet with many difficulties due to borrowing loans in US dollar Exchange rate between USD and VND experienced a strong increase in two last years In the period of USD shortage, to fulfill obligations with creditors, firm had to buy USD with extremely high prices In order to avoid the regulations of State Bank, firm had to buy USD with the offered exchange rate, but commit withdrawing deposit prior to term with no-term interest rate or sign consultancy contracts or other service contracts 58 Table 5.10: Foreign exchange rate (USD/VND) on settlement date to creditors Date AP, BP Amount % Date DEG, KfW Amount % Jun-00 14,487 Dec-00 14,524 0.26% Jun-01 14,606 0.56% Dec-01 15,063 3.13% Jun-02 15,319 1.70% Jan-02 15,110 Aug-02 15,322 1.40% Dec-02 15,405 0.56% Jan-03 15,433 0.72% Jun-03 15,489 0.55% Jul-03 15,502 0.45% Dec-03 15,695 1.33% Jan-04 15,663 1.04% Jun-04 15,780 0.54% Jul-04 15,737 0.47% Dec-04 15,791 0.07% Jan-05 15,787 0.32% Jun-05 15,867 0.48% Jul-05 15,885 0.62% Dec-05 15,908 0.26% Jan-06 15,914 0.18% Jun-06 15,985 0.48% Jul-06 15,993 0.50% Dec-06 16,100 0.72% Jan-07 16,070 0.48% Jun-07 16,120 0.12% Jul-07 16,138 0.42% Dec-07 16,037 -0.51% Jan-08 15,986 -0.94% Jun-08 16,300 1.64% Jul-08 16,848 5.39% Dec-08 16,986 4.21% Jan-09 17,481 3.76% Jun-09 17,793 4.75% Jul-09 17,802 1.84% Dec-09 18,025 1.30% Source: Applications for transfer of APBH (2000-2009) 59 5.4.2.2 Interest rate risk Table 5.11: Interest rate of creditors and two banks in Vietnam Date DEG KFW AP-BP VCB BIDV Jun'05 5.4% 4.9% 5.3% 11.4% 5.6% Dec'05 6.3% 5.7% 6.1% 5.6% 5.6% Jun'06 7.3% 6.8% 7.2% 6.7% 6.7% Dec'06 8.1% 7.5% 7.9% 7.3% 7.4% Jun'07 8.0% 7.5% 7.9% 7.4% 7.4% Dec'07 8.1% 7.5% 7.9% 7.5% 7.4% Jun'08 7.5% 7.0% 7.4% 8.0% 10.0% Dec'08 5.8% 5.3% 5.7% 7.5% 7.0% Jun'09 5.0% 4.5% 4.9% 5.5% 5.0% Dec'09 3.9% 3.4% 5.5% 6.2% Source: Debit notes of DEG, KfW, AP, BP (2005-2009) Figure 5.10: Interest rate risk of APBH from 2005 to 2009 Interest rate risk 12.0% Percentage 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Jun'05 Dec'05 Jun'06 Dec'06 Jun'07 Dec'07 Jun'08 Dec'08 Jun'09 Dec'09 Date DEG KFW AP-BP VCB BIDV Source: Debit notes of DEG, KfW, AP, BP (2005-2009) The interest rate at which BIDV granted the long-term facilities from the end of 2005 to 2007 was quoted in SIBOR (six months) plus 2% In the same period, VCB also lent money with the interest rate dominated in SIBOR plus 2% or 1.85% 60 From 2008 up to now, BIDV and VCB have offered the definite interest rate for a definite time It was adjusted every three or six months In comparison with overseas borrowing in period of 2005-2007, the longterm interest rate of these banks was lower From the above figure, interest rate policy of two these banks is unstable The interest rate changes suddenly While borrowing from overseas banks, the interest rate is dominated in LIBOR or SIBOR plus a fixed number of basis points LIBOR or SIBOR is rather stable and change of them is not much From 2008, APBH paid lower interest expenses compared to borrowing by foreign currency from domestic banks SIBOR is set daily by the Association of Banks in Singapore (ABS) The SIBOR serves as a benchmark, or reference rate for borrowers and lenders that are directly or indirectly involved in an Asian financial market Because of its location, political stability, strict legal and regulatory environment as well as the volume of business undertaken in Singapore, the city state is regarded as a major hub of Asian finance LIBOR is fixed on a daily basis by the British Bankers' Association The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year The LIBOR is the world's most widely used benchmark for short-term interest rates It's important because it is the rate at which the world's most preferred borrowers are able to borrow money It is also the rate upon which rates for less preferred borrowers are based [2] 5.4.3 Impact of debt on profits In comparison with other firms (Thac Ba Hydropower Joint Stock Company – TBC, Can Don Hydro Power Joint Stocks Company – SJD, Thac Mo Hydro Power Joint Stock Company – TMP, Pha Lai Thermal Power Joint Stock Company – PPC) in electricity industry, the debt ratio of APBH is a medium level, the profitability of APBH is higher [2] http://www.topmba.vn/forum/index.php?PHPSESSID=ed189e23588753c185491d6dcac3c616&topic=1174.msg241 94#msg24194 61 Table 5.12: Comparison with firm in the same industry in 2009 APBH TBC SJD TMP PPC Debt ratio 25.36% 8.72% 57.11% 42.92% 63.23% ROA 21.69% 15.38% 10.48% 11.57% 7.58% ROE 29.01% 16.85% 24.44% 20.27% 20.61% Source: Financial statements of APBH in 2009, Analysis reports on Thac Ba Hydropower Joint Stock Company – TBC (Habubank securities, 2010), Can Don Hydro Power Joint Stocks Company – SJD, Thac Mo Hydro Power Joint Stock Company – TMP, Pha Lai Thermal Power Joint Stock Company – PPC (Artex securities, 2009) Table 5.13: Components of return on equity for APBH Ratios Unit 2002 2003 2004 2005 2006 2007 2008 2009 - Total assets turnover ratio Times 0.47 0.57 0.66 0.66 1.01 1.33 1.52 1.38 - Net profit margin (ROS) % 2.76 4.02 5.97 10.52 8.57 11.76 12.63 15.69 - Net return on assets (ROA) % 1.29 2.29 3.94 6.96 8.68 15.65 19.17 21.69 Times 9.31 7.90 5.62 4.01 2.99 2.10 1.62 1.34 % 11.99 18.10 22.19 27.89 25.91 32.78 31.03 29.01 - Financial leverage multiplier - Return on equity (ROE) Source: Audit reports of APBH (2002-2009) In accordance with The Dupont System, ROE can be broken down into ratios that are net profit margin and equity turnover Equity turnover ratio equals total assets turnover times the ratios of total assets to equity Combining these two breakdowns, ROE is composed of three ratios as follows (Reilly and Brown, 2006, p.322) ROE = Net profit margin x Total assets turnover x Financial leverage multiplier Net profit margin and total assets turnover ratio experienced a considerable increase from 2.76% to 15.69% and from 0.47 time to 1.38 times, respectively Net return on assets is the combination of these two ratios, which also increased rapidly from 1.29% to a peak value of 21.69% It means that the firm became more profitable and managed its assets to generate sales more productively A financial leverage multiplier in 2002 of around 10 indicates that one-tenth of total assets were financed with equity, and nine-tenths of total assets must have been financed with debt While this ratio in 2009 of 1.34 indicates that for every 62 1.34 VND of assets there is one VND of equity and 0.34 VND of assets was financed by debt It showed that debt was reduced significantly from 2002 to 2009 Return on equity rose stably from Y2002 to Y2007 with a total range of 11.99% to 32.78% due to the increasing return on assets and the declining financial leverage After that, it fall to 29.01% in Y2009, although return on assets also went up and financial leverage multiplier still went down In order to make clearer the impact of debt on profit, the extended Dupont System is considered Table 5.14: Extended Dupont System Analysis for APBH: 2002-2009 Ratios Unit Notes % (1) Sales / Total assets Times (2) EBIT/Total assets % (3)=(1)x(2) % (4) % (5)=(3)-(4) Times (6) % (7)=(5)x(6) % (8) % (9)=(7)x(8) EBIT / Sales Interest expense / Total assets Earnings before tax / Total assets Total assets / Common equity Earnings before tax / Common equity 100% - (Income tax / Earning before tax) Net income / Common equity 2002 2003 2004 2005 2006 2007 2008 2009 12.29 9.65 11.49 17.46 13.95 15.75 15.18 17.31 0.47 0.57 0.66 0.66 1.01 1.33 1.52 1.38 5.73 5.50 7.59 11.55 14.12 20.96 23.05 23.92 4.44 3.21 3.65 4.59 5.45 4.45 2.66 1.11 1.29 2.29 3.94 6.96 8.68 16.51 20.39 22.81 9.31 7.90 5.62 4.01 2.99 2.10 1.62 1.34 11.99 18.10 22.19 27.89 25.91 34.59 33.01 30.50 100.00 100.00 100.00 100.00 100.00 94.78 94.00 95.09 11.99 18.10 22.19 27.89 25.91 32.78 31.03 29.01 Source: Investment analysis and portfolio management, Frank K Reilly and Keith C.Brown (2006); Audit reports of APBH (2002-2009) The gross return on assets (ROA) is a product of gross return on sales (ROS) and total assets turnover ratio The gross ROA experienced an stable increase and obtained a peak of 23.92% in 2009 It was mainly affected by the steady rising of total assets turnover ratio which went up from 0.47 to 1.38 within eight years whereas gross ROS was unstable Gross ROS fell to the lowest level of 9.65% in 63 2003, then increased and got a peak of 17.46% in 2005; after that declined to a low point of 13.95% in 2006, increased to a new peak of 15.75% in 2007, and finally reached another peak of 17.31% in 2009 after decreasing in 2008 Besides, gross ROA is also combined by interest expense rate and earnings before tax dividing total assets Interest expense rate accounted for rather high percentage of gross ROA from 2002 to 2004 After that, the ratio of earnings before tax dividing total assets rose quickly and accounted for over half of gross ROA from 2005 to 2009 Row of the above table reflects the firm’s operating performance before impact of financial leverage multiplier and taxes Row reflects the impact of debt financing on the firm’s operating performance The ratio increased quickly from 1.29 to 22.81 due to the decrease in interest expense over years Namely, financial leverage multiplier also fallen rapidly from 9.31 to 1.34 It means that the lower the ratio of assets to equity, the lower the proportion of debt to equity Lower corporate income tax rate leads higher tax retention rate Tax retention rate was 100% in 2002-2006 Under the terms of APBH’s Investment Licence, APBH has an obligation to pay the government income tax at the rate of 10% of taxable profits The provisions of APBH’s Investment Licence allow APBH to be exempt from income tax for four years commencing from the profitable year (2002) and receive a 50% reduction in income tax for the four succeeding years (2006 to 2009) Because some expenses were not accepted by General Department of Taxation, the corporate income tax rate is greater than 5% Using debt financing leads the tax savings However, during the period of 2002-2009, APBH was in the period of four tax-exemption-years and four 50%-taxreduction years So, APBH did not take many advantages of tax savings due to financial leverage 64 5.5 CONCLUSIONS The above analyses show that APBH has good debt repayment ability during borrowing process The credit-worthiness is reflected through three elements as following: • Liquidity of APBH from 2002 to 2009 maintained a good level with the high ratios APBH can fulfill its short-term liabilities and overcome difficulties in the uncertain conditions of business environment which affects profitability of firm • The firm has controlled debt efficiently Debt ratios reduced quickly during the period of 2002 – 2009 • Business activity of firm is more and more profitable due to the efficiency of using assets and equity Fixed assets turnover and total assets turnover moved fast over years Debt impacts the firm’s financial performance through three aspects as followings: • Debt creates the interest expenses which makes the reduction in profit Although using debt financing has a advantage of tax savings, APBH was in the time of four tax-exemption-years and four 50%-tax-reduction years during the period of 2002-2009 So, APBH did not gain many advantages of tax savings due to financial leverage • Debt in a foreign currency causes the financial risks as following: o In comparison with the interest rate of two big state-owned banks in Vietnam, APBH does not have to face interest rate risk when borrowing from two overseas banks and two parent companies in Thailand o The table 5.11 shows that the foreign exchange rate risk is not clear although the exchange rate between USD and VND in two last years changed so much • The outcomes of the above analyses indicate that the return on equity increases, when the financial leverage decreases 65 CHAPTER RESEARCH CONCLUSION This chapter will draw conclusions from the data analysis, present recommendations as well as the limitation of the study The first section summarizes the conclusion of the research The second section presents the implication of the study and some recommendations The last section ends with the limitation of the study 6.1 SUMMARY OF STUDY Electricity industry plays a key role in the country It is less affected by turmoil of economy like other industries, because its supply ability has not still met enough demand yet Although the firms in the industry have to operate with maximum capacity, Electricity of Vietnam has still bought from outside firms The tariff of the firms in industry is fixed in the agreement with Electricity of Vietnam, so there is not any competition between the electricity firms However, the electricity firms have to incur the changes in tariff of input data Risks are the materials shortage, the damages of engine APBH is a joint-venture company which operates in the power market in Vietnam APBH monopolizes the electricity supply in Amata industrial park with the tariff considered by Electricity Regulation Authority of Vietnam and approved by Dong Nai People’s Committee The particular risks of APBH in business activity are the changes in EVN tariff, fuel prices, foreign exchange rate, and the number of running hours APBH is a typical case study in terms of debt financing due to the initial ratio of total long-term borrowings (USD10,900,000) and total equity from the owners (USD4,428,571) is 2.46 times Under the rather high debt ratio, the semiannual installments are the huge burden to the company However, during eleven 66 years APBH not only paid off over a half of loan and interest but also accumulate profits to expand business operation As of 31 December 2009, APBH has repaid USD8,842,112 The balance is USD2,057,888 will be paid within four periods from 2010 to June, 2011 Total of accrual interest was paid with the amount of USD4,537,282 The findings in chapter reflect APBH has managed debt efficiently In accordance with the traditional Dupont system, the return on equity is improved when the firm becomes more profitable, efficient and leverage However, the findings in chapter indicate that return on equity of APBH increases overtime due to: • Increase in net profit margin • Increase in total asset turnover ratio • Decrease in financial leverage multiplier The outcome is consistent with the extended Dupont system because the extended model shows that high financial leverage does not always increase ROE The higher financial leverage may offset the benefits of higher leverage due to higher interest expense rate 6.2 IMPLICATIONS AND RECOMMENDATIONS According to the analysis on debt financing of APBH and findings in chapter 5, to use debt efficiently, the firms should understand thoroughly their own financial ability, prepare a definite disbursement plan as well as have a debt repayment policy in detail The results in chapter also shows that APBH has managed liquidity comprehensively because the firm has set up and applied sound and prudent liquidity policies Although APBH has monitored, measured and controlled the liquidity demands well, APBH uses idle cash in banks rather conservatively It will be better if the firm invests the idle cash in other business operations instead of deposit with term of three months Because the interest rate of fixed deposit with term of three months is not high 67 Another factor affecting debt repayment ability is inventory management Product of APBH is the power, producing or buying and selling the power occur at the same point of time So APBH does not have to tie up money due to storing goods in process, and finished goods Inventories of the firm are mainly raw materials (fuel oil, diesel oil, lubricant, chemical, …) and spare parts for maintenance APBH always concentrates on the raw materials, controls them rather tightly and maintains them at low level, but still insures that the low stock keeping is not affected the production schedules However, the figures in the reports during eight years indicate that the spare parts are stored too much in the long time So APBH should decrease the level of spare parts on hand by considering the balance of the costs of spare parts with the benefits of spare parts, namely estimating exactly the true costs of carrying spare parts such as direct costs of storage, insurance, taxes and the cost of money tied up in spare parts Otherwise, keeping spare parts too much in the long time leads many obsolete spare parts; that is inefficient and costly and the firm can not maximize profits Analyzing the financial risks in chapter indicates that foreign debt has more benefits than local debt because its interest rate is rather stable However, foreign debt will be more options for APBH as well as other firms if the foreign exchange risk can be managed In the recent years, a large difference between the foreign exchange rate stipulated by the State Bank of Vietnam and the market foreign exchange rate causes many difficulties for APBH in buying USD to repay the interest and principal to foreign creditors In order to avoid in a passive position in buying foreign currency, the firm should find some big banks in Vietnam and has a good business relationship with these banks When a foreign currency deficiency in the market occurs, these banks always reserve the definite amount of foreign currency for their important customers Besides, the government should support the firms in repaying foreign debt as well as settling the other costs to foreign suppliers by creating more flexible foreign exchange policies One of the policies is foreign exchange rate stabilisation The 68 difference between the foreign exchange rate stipulated by the State Bank of Vietnam and the market foreign exchange rate should be as narrow as better 6.3 FUTURE RESEARCH AND LIMITATIONS Due to the limit of time as well as the difficulties in finding the financial data from electricity firms which operate from loan capital in a foreign currency, the study is only conducted at APBH Because it is just a case study, the result of the study can not be applied to other firms The study mainly conducted time-series analysis or comparing with its past performance The results should be compared with the aggregate economy, its industry or industries, its major or competitors within the industry 69 BIBLIOGRAPHY Vietnamese Nguyen Minh Kieu (2008) Tai Chinh Doanh Nghiep Nha Xuat Ban Thong Ke Nguyen Thi Ngoc Trang and Nguyen Thi Lien Hoa (2007) Phan Tich Tai Chinh, Nha Xuat Ban Lao Dong Xa Hoi L.H.T (2007) “Kinh doanh bang tien cua nguoi khac.” Tap chi tai chinh no (515) 2007 : 25-27 L.H.T (2007) “Cac chi so bao ve “suc khoe” tai chinh cua doanh nghiep.” Tap chi tai chinh, no 12 (518) 2007: 26-29 Nguyen Van Tien (2008) “Phong ngua rui ro ty gia toan quoc te.” Tap chi tai chinh no (523) 2008: 47-49 English Andrew Fight (2004) Credit Risk Management, Elsevier Butterworth-Heinemann Artex securities JSC (2009) Analysis report on Pha Lai Thermal Power JSC Van Anh (2010) “Devaluation is seen as benign.” Vietnam investment review no 987/September 13-19, 2010: 15 Bank of Jamaica, (2005), Standards of sound business practices Brigham, E.F and Ehrhardt M.C (2002) Financial Management: Theory and Practice, 10th edition, South-Western Frank K Reilly and Keith C.Brown (2006) Investment Analysis and Portfolio Management, 8th edition, Thomson South-Western Thai Hang (2010) “Forex reserve fears still stalk economy.” Vietnam investment review no 989/September 27-October 3, 2010; 15 70 Joseph Tham (2003) Estimating the cost of capital with debt financing in a foreign currency Nguyen Minh Kieu (2001) Financial Management and Profitability of Small and Medium Enterprises Ninh Kieu (2010) “Monetary changes in pipeline.” Vietnam investment review no 961/March 15-21, 2010: Ninh Kieu (2010) “Dong devaluation may miss mark.” Vietnam investment review no 986/September 6-12, 2010: 14 Ninh Kieu (2010) “Vinashin investigation set unmask wrongdoings.” Vietnam investment review no 986/September 6-12, 2010: Le Xuan Nghia (2010) “Devaluation not a knee-jerk action.” Vietnam investment review no 985/August 30-September 5, 2010: 15 Nhu Ngoc (2010) “Vinashin still afloat.” Vietnam investment review no 988/September 20-26, 2010: Ross, S.A., Westerfield, R W and Jaffe, J (2005) Corporate Finance, 7th edition, Irwin and Mc Raw-Hill, Boston Nguyen Thanh (2010) “Firms feel heat from FX changes.” Vietnam investment review no 985/August 30-September 5, 2010; 15 Thanh Tung (2010) “Exchange rate change is squeezing enterprises.” Vietnam investment review no 961/March 15-21, 2010: 15 William G.Zikmund (1997) Business Research Method, 5th edition, The Dryden Press http://www.businessfinance.com/debt-financing.htm http://www.kpmg.com.sg/brochures/BPS_Brochure_Liquidity_Mgmt.pdf 71 http://www.topmba.vn/forum/index.php?PHPSESSID=ed189e23588753c185491d6 dcac3c616&topic=1174.msg24194#msg24194 http://www.sba.gov/idc/groups/public/documents/sba_homepage/pub_mp22.pdf 72