Analysis of financial statements of thacogroup in nietnam

VIETNAM NATIONAL UNIVERSITY, HANOI INTERNATIONAL SCHOOL *************** MAI DUC THAO ANALYSIS OF FINANCIAL STATEMENTS OF THACOGROUP IN VIETNAM MASTER THESIS HA NOI - 2020 VIETNAM NATIONAL UNIVERSITY, HANOI INTERNATIONAL SCHOOL *************** MAI DUC THAO Analysis of financial statements of Thacogroup in vietnam PHÂN TÍCH BÁO CÁO TÀI CHÍNH CỦA TẬP ĐOÀN THACO, VIỆT NAM Major: Master in Financial Management Code: 8340202.01QTD MASTER THESIS Supervisor: Dr Nguyen, Thi Kim Oanh HA NOI - 2020 ABSTRACT Thesis Title: Analysis of financial statements of Thacogroup in Vietnam Pages: 66 University: Vietnam National University, Hanoi Graduate School: International School Date: Octorber, 2019 Degree: Master Graduate Student: Mai, Duc Thao Supervisor: Dr Nguyen, Thị Kim Oanh Keywords: financial analysis, ratio analysis, automobile industry Thacogroup is the largest automotive corporation in Vietnam and has shown immense success of the last few years Understanding the performance of such a powerful automotive corporation is vital for the overall industry development therefore this topic is considered highly significant and important within industry financial management This research aims at analyzing Thacogroup financial performance over the the last years from 2014 to 2018, in order to assess the corporation’s profitability, liquidity, solvency, asset management, short term and long term financial position, as well as to make recommendations to any red flags identified during the analysis The quantitative financial analysis flagged up a number of main areas that required further investigation: cash management, return on equity, operating efficiency, inventory management, and accounts receivable These issues were then further investigated using semi – structured interviews The red flags raised during the financial analysis were adequately explained by the interviewed individuals, who were all senior management at Thaco The interviewees recommended three way for improving business performance of Thaco: (1) more comprehensive information systems for a more decentralized management, (2) less bureaucratic procedures regarding completion of paperwork and processing of requests as well as payments, and (3) the need to reduce and eliminate resistance to change and fear of the unknown ACKNOWLEDGEMENT By extending my most sincere appreciation to International School, Vietnam National University, Thacogroup Vietnam, and my supervisor Dr, Nguyen, Thi Kim Oanh, I would like to express my thanks and gratitude for their input in helping me complete this master thesis Thank you! Mai, Duc Thao TABLE OF CONTENTS ABSTRACT ACKNOWLEDGEMENT LIST OF TABLES LIST OF FIGURES CHAPTER 1: INTRODUCTION 1.1 General research background on automobile industry and Thacogroup 1.1.1 General research background 1.1.2 About Thacogroup 1.2 Research aim and research question 13 1.2.1 Research aim 13 1.2.2 Research question 14 1.3 Scope of research and methodology 14 1.3.1 Scope of research 14 1.3.2 Research methodology 14 1.4 Limitations during research 15 1.5 Structure of the thesis 15 CHAPTER 2: LITERATURE REVIEW 16 2.1 Definition and objectives of financial statement analysis 16 2.1.1 Definition 16 2.1.2 Objectives 17 2.2 Sources of information 18 2.2.1 Balance sheet 18 2.2.2 Income statement 19 2.2.3 Statement of cash flows 20 2.2.4 Related documents 21 2.3 Financial statement analysis framework 22 CHAPTER 3: METHODOLOGY 29 3.1 Research type 29 3.2 Research methods 29 3.3 Justification of chosen methods 30 3.4 Data collection and analysis 31 3.5 Methodological limitations 33 CHAPTER 4: FINDINGS AND DISCUSSION 34 4.1 Data Sources and Interviewees’ Profiles 34 4.1.1 Data Sources 34 4.1.2 Interviewees’ Profiles 34 4.2 Content Analysis 34 4.2.1 Financial Analysis 34 4.2.2 Common – Size Analysis 39 4.2.3 Ratio Analysis 40 Horizontal Analysis 46 4.3 Semi – Structured Interviews 48 4.3.1 Interview Questions 48 4.3.2 Interviewee Profiles 49 4.3.3 Interview Response Analysis 50 4.3.3a Cash Management issue 51 4.3.3b Return on Equity issue 52 4.3.3c Operating Efficiency issue 52 4.3.3d Inventory Management issue 53 4.3.3e Accounts Receivable issue 54 4.3.3f Overall financial performance 54 4.3.4 Summary 55 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 57 LIST OF REFERENCES 60 APPENDICES 63 Appendix 1: Horizontal Analysis 63 LIST OF TABLES Table 1: Consolidated Statement of Financial Position 36 Table 2: Consolidated Statement of Profit and Loss .37 Table 3: Consolidated Statement of Cash Flows 38 Table 4: Liquidity 40 Table 5: Extracts from Thacogroup financial reports .41 Table 6: Operating Asset Management .42 Table 7: Financial risk .43 Table 8: Profitability 44 Table 9: DuPont Analysis 46 Table 10: Interviewees' Profiles 50 Table 11: Extract from financial statements (profit and loss account) .54 LIST OF FIGURES Figure 1: Thacogroup's Liquidity Financial Ratios graph 40 Figure 2: Thacogroup Financial Risk Financial Ratios 43 Figure 3: Thacogroup's Profitability Financial Ratios graph 45 CHAPTER 1: INTRODUCTION 1.1 General research background on automobile industry and Thacogroup 1.1.1 General research background Financial analysis provides managers with the reality aspect of their business by way of evaluating fluctuations in financial indicators; advantages and disadvantages of current financial position, business performance, debt situation, among others Based on preliminary evaluations, comprehensive and effective measures as well as strategies are given to improve profitability, liquidity, or other business goals, thus to create value for shareholders The analysis of financial statements not only provides financial information for managers and shareholders but also brings usefulness to other stakeholders such as investors, customers, suppliers, lenders, workers, regulatory agencies Financial analysis is particularly crucial for organizational decision making and forecasting The automobile industry in Vietnam ranks fourth in the ASEAN region, only after Indonesia, Thailand, and Malaysia (Vietnamnews, 2019) Experts claim that Vietnam is a highly potential market for automobile growth whereby production in 2018 constituted per cent of that produced globally and is expected to grow 10 per cent in 2019 (Nguyen Thanh Dam, 2019) On a monthly basis, in 2018, the average car sales in Vietnam have risen 17% (Hockey, 2018) Within the Vietnamese automobile industry, Thacogroup is a key player constituting almost half of market share, therefore it is noteworthy that its financial performance significantly affects the overall performance of the industry More detailed introduction of the company follows later in this thesis 1.1.2 About Thacogroup Thacogroup was established in April 1997 with the founder being Mr Tran Ba Duong, who now (2019) holds the position of Chairman of Board of Management It is the largest automotive corporation in Vietnam and has shown immense success of the last few years This enterprise manages the manufacturing and assembly of passenger cars, trucks, and buses in Vietnam at market share of 40% and localization rate of 16-50% Thaco vehicles are considered quality and affordable cars for the Vietnamese, whilst having scored top of Vietnam Automobile Manufacturers’ Association sales charts in 2014-2015 It continues to place in the top two rank as the most profitable private companies in 2017 Beside the continuous goal to maintain its mountaintop position domestically, Thaco aims to expand its operations to the ASEAN region, and even further internationally with the vision to utilize modern technology in their products, create a global platform, and spread its wings to become a multi-industry conglomerate on a regional scale Thaco’s focus of operations currently lays in two main areas being: manufacturing and maintenance of their vehicles The enterprise’s owned passenger car brands currently include South Korean Kia, Japanese Mazda, and French Peugeot As of 2019, Thaco employs approximately 22 thousand employees across the country Thaco’s corporate culture takes employees as the core of the sustainable development Employees are encouraged to have strong ambitions, positive work attitude, creativity, and continuous personal development The highlight feature of Thaco’s corporate culture is the 8T principles (T being the first letter of the principal words in Vietnamese): “Dedication - Honesty - Intelligence - Confidence Respect - Prestige - Commitment - Convenience” Due to the nature of manufacturing and maintenance industry, Thaco’s employees are trained to perform work with utmost discipline to ensure high quality and corporate vision, which constitutes one of the company’s biggest intangible assets Apart from adequate and systematic training, Thaco’s corporate culture is also manifested by way of compensation and benefits In terms of corporate social responsibility, Thaco supports social community through various channels such as national defense, social welfare, traffic safety, education, culture, musical, sports, charity Through their active involvement and significant contributions to the social community, in 2015, Thaco has been acknowledged and honored by the following awards: Certificates of Merit from the Prime Minister, Excellent Emulation Flags from the company’s financial prospects among the interviewees who all have faith in the long-standing growth and prosperity of their employer Interviewees 1, 6, and explicitly agreed that Thacogroup is a prosperous company and has a very bright future ahead Conversely, a few other interviewees (2, 4, 7, and 9) believe in the future of Thacogroup but also reserve opinions for the rapidly changing market environment in Vietnam, which in their words “could change things at any time” Interviewee stated: “The political and economic situation in Vietnam is not constant and it has a significant impact on what we and how we things at Thaco.” Reaching consensus on the financial analysis concepts and research aim was an important step to establish level playing field across all ten interviews, which were conducted separately from each other 4.3.3a Cash Management issue This section addresses the first interview question: Question 1: Net operating cash flow yield 2015-2016 increased from negative to an extreme peak, resulting in a flush in liquidity What could be the reason for this sudden fluctuation and is this a sign of increasing frozen funds, i.e inefficient cash management? The interviewees were asked about the cash management at Thacogroup and why there was a sudden increase in net operating cash flow yield between 2015 and 2016 The major opinion that emerged from the discussion related to the timing of recording accounts receivable and accounts payable The interviewees all believed that the fluctuation in the net operating cash flow yield did not indicate inefficient cash management, but merely a delay in accounting cut off Upon verifying the interviewees’ responses to the audited financial statements, it was noted that indeed from 2015 to 2016 there was almost no change in the level of accounts receivable (6.0 versus 5.9 trillion VND) but there was a sudden increase in accounts payable (3.9 versus 11.2 trillion VND) This level of accounts payable remained on a similar 51 level in the consecutive years, which resulted from a change in operations, rather than a cause for concern in cash management efficiency 4.3.3b Return on Equity issue This section addressed the second interview question: Question 2: Ratio analysis has shown return on equity significantly declining while net income and equity drastically increasing What could be the explanation for this? There may be a number of concepts and strategies, as well as treatments of certain transactions, that may be seen as hurdles and divergences which potentially impact on the financial figures Resulting from the various treatments, the bottom line being net income may be subject to these divergences When interviewees were asked about their concerns relating to the decline in return on equity, some displayed signs of surprise and unexpectedness When further shown figures from financial statements and calculations by the author, Interviewee explained that the decrease in percentage return on equity must have resulted from the inflow of new capital from 2014 to 2018 (from 8.4 to 27.8 trillion VND, which is an increase of 3.3 times) whilst net income increased from 3.3 to 6.3 trillion VND, which is an increase of 1.9 times As return on equity is calculated by dividing net income by owner’s equity, the decrease of the ratio resulted from the significant increase of the denominator In his view, the fluctuation can be entirely explained mathematically, rather than indicating any cause for concern for the external investors 4.3.3c Operating Efficiency issue This section addresses the third interview question: Question 3: According to the turnover ratios, the rate at which Thaco has sold its inventory, collected its debtor amounts, and paid its creditors have all drastically decreased from 2014-2018 Is this a potential cause for concern about company’s operating efficiency? With respect to the idea of financial ratios for operating efficiency, interviewees’ opinions were divided between those who believed in the accuracy and usefulness of the 52 turnover ratios and corresponding days ratios, and those who thought these were merely theoretical and provided very little real economic explanation Interviewee 4, who was in favor of the turnover ratios and their usefulness identified that there is a concern for timing of payments but not to a significant level The inventory turnover and payables turnover have all decreased because of the strategic decision to increase inventory purchase, which consequently resulted in an increase in accounts payable, which was also relevant in the first interview question The concern regarding payments timing was only at an acceptable level regarding normal trade and not a red flag in terms of Thaco’s business efficiency 4.3.3d Inventory Management issue This section addresses the fourth interview question: Question 4: Whilst days sales uncollected remained relatively low in the range from 38 to 80 days, days inventory on hand are quite high at 111 up to 214 days and days payable quite low at 36 to 99 days These indicate that there is potentially a problem in inventory management, which corresponds well with the other findings in the research where the sudden and significant fluctuations in cash flow yield was caused by the back log of inventory and increase in accounts receivables Please could you comment? An important issue connected the share theme among the interview questions, that is a sudden increase in inventory purchase, which resulted in higher accounts payable and higher accounts receivable These fluctuations led to numerous issues be flagged up from financial ratio analysis This claim was signalled more strongly by interviewees who worked in Finance / Accounting and Logistics / Operational Management The following two quotations from interviewees demonstrate the strong claims: “In my opinion, days inventory on hand reaching such a peak was simply and only the result of an increased inventory purchase towards the end of the year when we made a strategic change in decision making.” “I think that such fluctuations in fact accurately reflect what we have done and what we expected to happen We realize that from a financial analysis perspective, these fluctuations might raise cause for concern but because they result 53 from a conscious decision-making process with full awareness from management, they then represent a strategic change rather than a red flag.” 4.3.3e Accounts Receivable issue This section addresses the fifth interview question: Question 5: Trend analysis flagged up rather significant fluctuations in Accounts receivable when compared to the base year 2014 What could be the driver for this sudden fluctuation? The interviewees were asked their opinions about the sudden increase of accounts receivable from 2014 to 2018, as illustrated in Table which has been repasted below Account Name Inventory Accounts receivable Accounts payable 2014 opening balance 3,815,432,994 2,381,929,930 3,115,236,386 2014 6,409,499,353 2,185,324,109 3,552,298,468 2015 13,040,643,606 6,022,668,283 3,979,687,886 2016 26,463,181,213 5,908,118,212 11,164,238,210 2017 27,570,776,776 8,351,136,758 10,522,350,763 2018 27,933,055,068 17,417,644,352 15,237,543,073 Further presented with profit and loss statement extract as below, interviewees gave their responses Table 3: Extract from financial statements (profit and loss account) Account Name 2014 opening balance Revenue Returns, Refunds, Discounts Total Net Revenue: - Cost of goods sold - Gross Profit 2014 2015 2016 2017 2018 14,751,596,657 24,308,147,052 41,532,071,489 59,241,099,024 49,701,516,909 59,123,206,417 1,446,568,493 2,379,666,202 37,805,331 77,861,312 53,177,778 40,696,560 13,305,028,164 21,928,480,850 41,494,266,158 59,163,237,712 49,648,339,131 59,082,509,857 10,677,167,309 2,627,860,855 16,857,911,188 5,070,569,662 31,345,763,746 10,148,502,412 47,805,415,012 11,357,822,700 40,483,688,680 9,164,650,451 47,350,411,016 11,732,098,841 The most common response conveyed that “The three-fold increase of accounts receivable in 2015 corresponds with the increase in inventory and revenue in 2015 The figures continue to correspond well over consecutive years” Interviewees generally recognized the need for question, but overall perceived the fluctuations as explainable and suitable with the development of the company 4.3.3f Overall financial performance This section addresses the sixth and final interview question: Question 6: In your opinion, what could the company improve in near future in terms of its financial performance? 54 As presented through the previous five interview questions and responses, the interviewees portrayed strong belief and faithfulness towards the performance as well as the prospective future of Thaco One of the perceived ways for improvement, as indicated by the interviewees, was the ability to facilitate more comprehensive information systems across the group, so that to create a more decentralized management with a bottom up rather than top down approach as current This was seen to enhance better collaboration across employees at all levels and has been a suggestion for some time but has not yet been successfully implemented Interviewee exemplifies that this has been largely due to the power of politics for a large company in Vietnam, but is well on the way to being partially executed in near future Bureaucratic procedures acknowledged by the interviewees included the completion of paperwork, processing of requests as well as payments was also a considerable way for improvement of performance in the company as, in the eyes of the interviewees, especially those working in HR, this could speed up processes in the company, which will in turn enhance overall efficiency and effectiveness of tasks under performance Resistance to change and fear of the unknown were identified as major obstacles for strategic improvement 4.3.4 Summary This chapter provided a detailed qualitative analysis of interviews with 10 senior management staff at Thacogroup The first part of this chapter was designed to introduce the interviewees’ profiles and gain an understanding of their relevant backgrounds This part demonstrated a feature of representativeness of the interviewed sample and imply that their responses would be relevant, meaningful, and insightful for the questions asked The second part of the chapter was dedicated for an in-depth analysis of the interview responses with regards to each interview question The analysis revealed conforming as well as contrasting views of the interviewees on various issues discussed The final interview questions revealed three main areas where interviewees saw considerable room for improvement 55 These three areas will serve as recommendations for the purpose of this research, those are: (1) more comprehensive information systems for a more decentralized management, (2) less bureaucratic procedures regarding completion of paperwork and processing of requests as well as payments, and (3) the need to reduce and eliminate resistance to change and fear of the unknown 56 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS The conclusions and recommendations included in this chapter aim to capture the focus of the fore-mentioned content and present the results of this research With a view that the analysis of financial statements not only provides financial information for managers and shareholders but also brings usefulness to other stakeholders such as investors, customers, suppliers, lenders, workers, regulatory agencies, and is particularly crucial for organizational decision making and forecasting, this research aimed to analyze Thacogroup financial performance over the recent years, specifically over the last years from 2014 to 2018, in order to assess the corporation’s profitability, liquidity, solvency, asset management, short term and long term financial position, as well as to make recommendations to any red flags identified during the analysis The research proceeded to answer two research questions: What was Thacogroup’s financial situation in the period 2014-2018? What could the company improve in near future in terms of its financial performance? Using mix – method which included quantitative analysis of financial data and qualitative analysis of semi – structured interviews, the author successfully obtained answers for the set forth research questions The main research limitations consist of data limitations, in terms of time lengths and sample size Despite having chosen the most accessible and appropriate methodology for the research topic, the author acknowledges that for more accurate results, the studied time period could be extended further back into the past in order to recognize any trends or impact of historic events, which could be useful for future decision making Moreover, the sample size of interviewees could be extended beyond the company’s staff to other stakeholders, which could give a more representative view of the results 57 The company’s consolidated audited financial reports from 2014 to 2018 were obtained from the company’s website and analysed using a wide range of financial analysis tools such as financial ratios, common-size analysis, vertical and horizontal analysis, among others, to assess the corporation’s profitability, liquidity, solvency, asset management, short term and long term financial position Section 4.2.2 presents a detailed and in – depth analysis of financial data and portrays an overall prosperous and healthy growth of the company’s financial performance However, the author recognized a number of main areas that required further investigation Those areas included: cash management, return on equity, operating efficiency, inventory management, and accounts receivable Firstly, in 2015, cash flow yield (Table 4: Liquidity) turned negative (-0.15) implying there was a shortage of cash flow at the time Operating cash then reached its peak in 2016 and stayed positive in the following years This fluctuation seems to have resulted from a back log of inventory and increase in accounts receivables in 2015, which were stabilized by end of 2016, resulting in an increased inflow of cash By calculating inventory turnover, receivables turnover, payables turnover (Table 6: Operating asset management) the researcher identified the second red flag All three turnovers show a tendency of decline over the period from 2014 to 2018, imposing a potential cause for concern about company’s operating efficiency On top of that, whilst days sales uncollected remain relatively low in the range from 38 to 80 days, days inventory on hand are quite high at 111 up to 214 days and days payable quite low at 36 to 99 days These indicate that there is potentially a problem in inventory management In order to overcome this problem, Thaco could consider to restructure their purchasing scheme according to sale plan and pay more attention to stock management Thirdly, Thaco’s net income in 2014 was 3.3 trillion VND and almost doubled to 6.3 trillion VND by 2018 At the same time, shareholder’s capital has drastically increased from 8.4 trillion VND in 2014 to 27.8 trillion VND in 2018 58 Therefore, it can be seen that even though the monetary values of both net income and shareholder’s equity have both significantly increased, the percentage return on equity significantly decreased This indicates inefficiency in income generation and failure to utilise invested capital to the fullest potential and is likely to lead to financial issues in near future These issues were then further investigated using semi – structured interviews The red flags raised during the financial analysis were adequately explained by the interviewed individuals, who were all senior management at Thaco Responding to the second research question, and the sixth interview question, the interviewees recommended three way for improving business performance of Thaco Those areas include: (1) more comprehensive information systems for a more decentralized management, (2) less bureaucratic procedures regarding completion of paperwork and processing of requests as well as payments, and (3) the need to reduce and eliminate resistance to change and fear of the unknown For the purpose of this research, these three areas also align with author’s recommendations for the company’s near future However, Thaco could take a closer look at their strategy to reduce financial risk and operate stably 59 LIST OF REFERENCES Botosan, C.A., Koonce, L., Ryan, S.G., Stone, M.S and Wahlen, J.M., 2005 Accounting for liabilities: conceptual issues, standard setting, and evidence from academic research Accounting Horizons, 19(3), pp.159-186 Broome, O.W., 2004 Statement of cash flows: time for change! 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13,422,537,607 103% 114,550,071 -2% 7,184,550,324 181% 47,805,415,012 16,459,651,266 53% 13,422,537,607 6,791,393,354 102% 63 Horizontal Analysis: Consolidated Statement of Profit and Loss (Currency: Thousand VND) Account Name 2015 2016 Revenue Returns, Refunds, Discounts Total Net Revenue: 41,532,071,489 - 41,494,266,158 59,163,237,712 Cost of goods sold - 31,345,763,746 - 47,805,415,012 10,148,502,412 11,357,822,700 Gross Profit Other Revenue Other Expenses Profit/Loss from associate companies Total Profit Before Interest & Taxes Income Tax Expense Tax Refunds Net Income Basic earnings per share (VND/share) 37,805,331 Increase / (Decrease) 59,241,099,024 - 77,861,312 - - - 1,760,404,431 4,570,865,567 - - 13,504,246 - 16,624,853 - 298,775,084 - 17,204,777 8,530,736,711 - 549,068,587 11,003,491 40,055,981 106% 16,459,651,266 1,209,320,288 337,990,685 3,080,432,390 - Percentage 43% 17,668,971,554 - 7,392,556,461 Amount 17,709,027,535 1,422,413,746 1,490,433,177 3,120,607 1,138,180,250 - 43% 53% 12% 421% 48% 23% 15% 250,293,503 84% 28,208,268 -164% 7,076,576,600 7,992,671,615 916,095,015 13% 18,758 19,372 614 3% 64 Horizontal Analysis: Consolidated Statement of Cash Flows (Currency: Thousand VND) Account Name 2015 2016 Increase / (Decrease) Amount Net Cash flows from operating activities Net Cash flows from investing activities Net Cash flows from financing activities Net Increase/(Decrease) in Cash and Cash Equivalents Opening Cash and Cash Equivalents Foreign Exchange Effects Ending Cash Balance and Cash Equivalents - 1,085,569,806 12,452,442,880 2,943,288,469 - 13,639,234,607 4,223,743,271 1,490,778,521 194,884,996 303,986,794 Percentage 13,538,012,686 -1247% - 10,695,946,138 363% - 2,732,964,750 -65% 109,101,798 56% 491,483,328 685,888,556 194,405,228 40% 479,768 17,287 497,055 -104% 685,888,556 989,892,637 65 304,004,081 44% ... periods of enterprises Analysis of financial statements will provide information that can examine the potential, performance and future financial risks of the business as well Analyzing financial statements. .. research purposes, information collecting purposes (for external users) Phuc (2013) defined financial statement analysis as the process of reviewing, examining, and comparing financial data between... Extract from financial statements (profit and loss account) .54 LIST OF FIGURES Figure 1: Thacogroup' s Liquidity Financial Ratios graph 40 Figure 2: Thacogroup Financial Risk Financial Ratios