Financial statement analysis at song minh development investment joint stock company in the period of 2018 2020

ACADEMY OF POLICY AND DEVELOPMENT INTERNATIONAL SCHOOL OF ECONOMICS AND FINANCE GRADUATION THESIS Topic: “Financial statement analysis at Song minh Development Investment Join Stock Company in the period of 2018-2020” Supervisor: M.Sc Dang Thuy Nhung Student: Le Xuan Thanh Student ID: 5083402213 Class: TCCLC8.3 Hanoi, Jun 2021 i ACADEMY OF POLICY AND DEVELOPMENT INTERNATIONAL SCHOOL OF ECONOMICS AND FINANCE GRADUATION THESIS Topic: “Financial statement analysis at Song minh Development Investment Join Stock Company in the period of 2018-2020” Supervisor: M.Sc Dang Thuy Nhung Student: Le Xuan Thanh Student ID: 5083402213 Class: TCCLC8.3 Hanoi, Jun 2021 ii ACKNOWLEDGEMENTS SONG MINH Development Investment Joint Stock Company gave me a lot of experience on construction and the documents related to the company’s privacy I would like to thank and wish SONG MINH Development Investment Joint Stock Company success in the future I would like to thank the Academy of Development and Policy for giving me the opportunity to participate in a reality project and let me learn valuable knowledge in the year-period Finally, I would like to thank Mrs Dang Thuy Nhung for following closely and helping me to edit and build this thesis from the most basic stages to the details so that I can complete the thesis Thank you sincerely! iii Table Categories Table 1.1: Contracts that the company get involved .25 Table 2.1: Balance sheet 35 Table 2.2 Income statement 44 Table 2.3 Cash flow statement .47 Table 2.4: Short term solvency ratios 50 Table 2.5: Long-term solvency ratios 52 Table 2.6: Asset utilization ratios 54 Table 2.7: Profitability ratios 55 Table 2.8 DuPont Analysis 57 iv Charts, Pictures Categories Pictures 1.1: Organizational structure 26 Picture 1.2: Business orientation of SONG MINH .29 Chart 2.1 Assets, Liabilities and Owners' Equity structure of Song Minh 39 Chart 2.2 Current assets structure of Song Minh 41 Chart 2.3 Liabilities and Owners’ Equity structure of Song Minh structure of Song Minh .42 Chart 2.4 Short term solvency ratios 50 Chart 2.5 Long term solvency ratios 52 Chart 2.6 Asset utilization ratios 54 Chart 2.7 Profitability ratios 55 Chart 2.8 DuPont Analysis 59 v Table of Contents OVERVIEW OF THE RESEARCH PROJECT CHAPTER 1: LITERATURE REVIEW ON FINANCIAL STATEMENT ANALYSIS 1.1 Overview of financial statements 1.1.1 Definition of financial statements 1.1.2 Functions of financial statements 1.1.3 Categories of financial statement 1.2 Overview of the financial statements analysis 1.2.1 Definition of financial statements analysis 1.2.2 Roles of financial statements analysis 1.2.3 Process of financial statement analysis – EIC analysis 1.2.4 Financial statements analysis methods 10 1.3 Factors affecting financial statements analysis .20 1.3.1 Subjective factor 20 1.3.2 Objective factor 21 CHAPTER 2: FINANCIAL STATEMENT ANALYSIS OF SONG MINH DEVELOPMENT INVESTMENT JSC.’S FROM 2018 TO 2020 .22 2.1 Overview of SONG MINH Development Investment Join Stock Company 22 2.1.1 Establishment and Development 22 2.1.2 Functions and areas of activity 23 2.1.3 Organizational structure 26 2.1.4 Business orientation of SONG MINH Development Investment Join Stock Company toward 2030 27 vi 2.2 Financial statement analysis at SONG MINH Development Investment Join Stock Company in the period of 2018-2020 2.2.1 EIC analysis 2.2.2 Balance sheet an 2.2.3 Income statemen 2.2.4 Cash flow statement analysis 2.2.5 Ratio analysis 2.2.6 DuPont identity 2.3 Assessment 2.3.1 Advantages 2.3.2 Limitations CHAPTER 3: SOLUTIONS TO IMPROVE THE FINANCIAL SITUATIONS OF SONG MINH DEVELOPMENT INVESTMENT JSC TOWARD 2025 3.1 Economic Background towards 3.2 SWOT analysis 3.3 Solutions to improve the fina Development Investment Join Stock Company 3.3.1 Solution for the inefficient in generating profits 3.3.2 Solution for lack of short-term receivable management CONCLUSION REFERENCES vii OVERVIEW OF THE RESEARCH PROJECT Origin of the study: In the continuous development of the country's economy, the field of construction, technical infrastructure and transportation, is an important area not only for the country but also especially important to large, small businesses, at home or abroad With the repair of infrastructure, a large number of companies can face many obstacles when doing this work when they not know how to improve, repair as well as related regulations There are a few subsidiaries formed by large cooperation with expertise related to construction, infrastructure, and transportation However, it is extremely difficult for both small domestic and foreign companies to work directly in this field Companies will spend a lot of time and resources to improve their understanding of construction fields, technical infrastructure, and not only that it can also cause obstacles to the development of companies, enterprise Therefore, the development of construction companies is becoming bigger and bigger In order to expand and develop over time, Song minh Development Investment Joint Stock Company needs to use the Financial statement analysis This would help to understand more about its financial situation, the operation and figure out the weakness and then create several solutions fit to the company situation With the understanding about the importance of financial statement analysis, I chose the graduation thesis topic “Financial statement analysis at Song minh Development Investment Joint Stock Company in the period of 2018-2020” Objective of the Study Object of the Study is: - Common goal: analyzing the financial situation of Song minh Development Investment Joint Stock Company in the period of 20182020 - Detail goals: the detail goals include main aspects: o Literature review on financial statements analysis o Financial statement analysis of Song Minh Song minh Development Investment Joint Stock Company in 2018-2020 o Solutions to improve the financial situations of Song minh Development Investment Joint Stock Company toward 2025 Scope of the Study - Space of research: Song minh Development Investment Joint Stock Company - Time implement assess: 2018- 2020 - Time implement resolve: 2021- 2025 - Content of research: - The subject of research: Financial activities at Song minh Development Investment Join Stock Company - The objective of research: Financial activities Research Methodology of the study Data collection method: collect the information through the financial statement and further documents about Song Minh - Processing data method: process the correct data from financial statements and further documents about Song Minh for the analysis - Using analysis methods: EIC analysis, common-size analysis, trend analysis, ratio analysis, DuPont identity Structure of the study The graduation thesis consists chapter: - Chapter 1: Literature review on financial statement analysis - Chapter 2: Financial statement analysis at Song minh Development Investment Join Stock Company in the period of 2018-2020 Chapter 3: Solutions to improve the financial situations at Song minh Development Investment Joint Stock Company period (2018-2020) showing the intension of the company, however the total asset turnover increased significantly in 2019 but decreased in 2020 The assets turnover in 2020 declined 33% compared to 2019, the assets of the company had not been used properly in 2020 The company faced the struggle on managing the assets The profit margin increased significantly in 2019 from a very low point of -13.14% to 0.90% The profit margin in 2020 continued to increase by 1.16 times the figure for 2019, to about 1.94% This mean that the net revenue in 2020 generated 1.19 dong in profit With the small amount of profit, the company still tried to improve its ROE The equity multiplier also increased over time The figure for 2018 was 1.19, equity multiplier declined slightly to 1.11 however, due to the struggle in 2020, the number increased by 17%, get the number from 1.11 to 1.29 This growth was mainly from a short-term debt in 2020 Through that, the growth of ROE was mainly on two factors: the profit margin and the equity multiplier The increase from profit margin was a good sign for the company because it making some profit despite its struggle in the beginning The second increase from equity multiplier was a very bad signal, the factor for this increase was mainly on debt This situation would contain a large amount of risk potential 58 Chart 2.8 DuPont Analysis 2.3 Assessment 2.3.1 Advantages After analyzing the performance of Song minh Development Investment Joint Stock Company over the 3-year period of 2018, 2019, 2020, the advantages from the company are quite significant 59 Firstly, the company mainly invested in the product as the Net revenue from sale of goods in 2019 and services shot up remarkably 4.7 times over the previous year Secondly, the slow improvement of the company on effectively using capital In 2020, cost of goods sold and services rendered dropped 17.75% showing that the company is on the rise to optimize its production Thirdly, the company always tries to push to finish the uncompleted project in order to give it right on schedule for their partner, even pushing hard in the covid-19 situation Fourthly, the company supports itself and does not increase the operations with borrowing status Due to the total equity being owner’s equity, the company will face less risk of default on debts, more flexibility and last but not least the company has the capacity to add more debt if required With this, the total return will not be divided or shared with other shareholders Fifthly, there is a source of cash to meet the payment immediately to fasten the company due to the lack of company's inventory Mover, Song Minh company knows their disadvantages and tries to improve them The growth of the company indicates that information 2.3.2 Limitations 2.3.2.1 The inefficient in generating profits The performance on creating profit was very poor, the net profit after tax of the company was too low (-110,743,136 VND in 2018, 44,394,355 in 2019, 73,724,311 in 2020) This inefficient caused by many factors: - The inefficient in company management: The company has a large percentage of cash in its assets, the company is in the process of equitization so it turned cash into other short-term receivables But this just basically not helping the company operation but only reducing the cash and making unknown use of that cash 60 - The lack of long-term asset: The lack of long-term assets may help reduce the risk and the commitment but it also pushes the cost of services rendered Song minh Development Investment Joint Stock Company is a construction company so the need for long-term assets is necessary The lack of all sorts equipment makes the company cost a lot to hire -Most of the company’s equity still from the owner The company is fairly new so it used too much of its own equity and it does not have the capital increase from shareholders Still 2020, the company still has 77.2% of owner’s equity in total equity The owner has the money for the operation but put the company in the process of equitization, this can be seen through the amount of cash converted into a short-term receivable (from more than billion VND in 2018 to only almost billion VND in 2019) The company was in the process of equitization, but 100% of the company was still under the original owner - Fixed cost are too high: The company also took on a lot of large projects at the same time, this also caused the company to lack of cash to operate the company smoothly The push in order to finish the project on time is very harsh and the projects all have a long time to finish In 2020, the company needs to have Short-term debts The cash paid to people providing goods and services of the company over the years were very high due to the lack of long-term assets Song Minh had to rent all of its tools in the operation from transportation to equipment 2.3.2.2 Lack of short-term account receivable management The company is granted to poor credit risks and the collection efforts are ineffective This situation made the short-term account receivable shoot up to 76.1% and 79.1% The receivable turnover also pointed out the highest figure of the company was only 0.59 in 2019 and the industry figure was 5.72 The 61 number helped find that the average collection period of 2020 was far too long 964 days, while the average collection period was only 63.81 days (compared with 848 days in 2018, 620 days in 2019) The company was in the process of equitization, but 100% of the company was still under the origin owner This might be a good move after the company proves itself in the field so it can provide the evidence on its efficiency in operating in order to call out for more capital 62 CHAPTER 3: SOLUTIONS TO IMPROVE THE FINANCIAL SITUATIONS OF SONG MINH DEVELOPMENT INVESTMENT JSC TOWARD 2025 3.1 Economic Background towards 2025 The industry has many complicated impact factors, there are three main factors from long run to short run: - Demographic factors: create a potential long-term growth rate - Economic factor: affecting the investment decision of the customer in mid-term - Legal system: restructure the competitive environment, have an important affection on business in short-term The demographic factors: due to the youth population and the high urbanization rate of Viet Nam are the two factors that push the need of construction, focus on households, factories, offices and the urban infrastructure The youth population has not just become abundant in human resources but can also be considered as the motivational trend of the need in construction for the long-term The high urbanization rate of Viet Nam has pushed the need for households, commercial and public infrastructure and urban infrastructure The economic factor: the growth rate of the economy is high, stable and the slightly low control on inflation and interest rate are the benefits for the construction industry The need for construction has pushed Viet Nam economy to be more stable and have a growth rate on the top of the world The legal system: construction is a business industry with the condition, every construction activity is controlled by the government through legal documents The construction legal system of Viet Nam has not keep up with the development speed of the economy- society and needs to be adjusted continuously over time The improvement of the legal system is a long complicated process in order to work properly 63 In all of the industry, the Covid-19 only has an average impact on the construction industry The negative impact of the Covid-19 was mainly through discontinue of the economy and the reduction in the need of investment The discontinue of the economy has direct effect to short-term growth rate of the industry; opposite that the reduction of investment need would has affect in the long-term Although the industry only needs to face an average impact, it is still very rough for the construction company with big projects but it is just a small business and still has a low net profit margin The competitive pressure between contractors is also very high in this tough period, with the competitive strategies mainly on price making the revenue and net profit margin fall The Covid-19 slows everything down but due to the strict rules from the government and the agreement of the people, Viet Nam has basic control on all of the previous impact of Covid-19 in the community Now Viet Nam is facing another big wave of Covid-19, but with the expectation from the abilities of the government and the large amount of vaccine, the prediction of coming back to work in the smallest amount of time is understandable The large amount of material and human resources inside Viet Nam would meet the need of the construction and have a small impact on the shortage from global supply The prospects of the construction industry depend on the economic recovery and prospects in every industry, which rely on corresponding customer groups affected by diseases The non-residential house construction has the largest impact, the impact on residential houses was less, and the infrastructure on the other hand might have benefited if the government increased the public investment in order to push the economic recovery The prospects of the construction industry through the positive scrip about the economy recovery Firstly, the impact of Covid-19 to Viet Nam economy was low compared to others, because of the control on community infection and wide range supporting solutions deployed on time Secondly, Viet Nam has stable 64 macro elements, this will push the economy back on its feet after the Covid-19 wave The infrastructure construction would have benefits if the government increased public investment The government considered that increase the public investment would be a perfect tool to push the economy However, the government also has many difficulties in order to this due to the limited budget, especially plus the disease supporting policy 3.2 SWOT analysis Strength: - The infrastructure construction would have benefits if the government increase the public investment The government considered that increase the public investment would be a perfect tool to push the economy recovery - According to the company’s profiles, when all the projects are finished, the company will make quite a large profit from 70% of the process (50% of the payment) - With a more appealing financial situation, the company can increase the capital through calling out for shareholders and invest in long-term to improve the efficiency in operation Weakness: - The construction legal system of Viet Nam has not keep up with the development speed of the economy- society and need to be adjust continuously over time - Due to the wave of Covid-19, it is still very rough for the construction company with big projects but it just only a small business and still have a low net profit margin - The company has an inefficient in company management because the company have a large percentages of cash in its assets 65 - The company not have any long-term asset, fixed cost are too high This make it inefficient in generating profit - most of the company’s equity still from the owner while the company is in the need for capital - The company also have a poorly management in account receivable Opportunities: - The construction industry is very important to Viet Nam, which is a developing country In the long run, due to the youth population and the high urbanization rate of Viet Nam, the construction industry is already in the need - The growth rate of the economy is high, stable and the slightly low control on inflation and interest rate also help this business - The Covid-19 only has an average impact on the construction industry The infrastructure sector, which the company is now operate in, might have benefit if the government increase the public investment in order to push the economy recovery - The large amount of material and human resources inside Viet Nam would meet the need of the construction company and the company only have a small impact on the shortage from global supply - The company have many projects that about to end and it can receive the payment for it Threats: - The competitive pressure between contractor also very high in this tough period, with the competitive strategies mainly on price make the revenue and net profit margin fall - The government also has many difficulties in order to increase the public investment due to the limited budget, specially plus the diseases supporting policy 66 - Due to the lack in account receivable management, the company can take a lot of time to receive all the payment - The profile of the company might not look appealing to the investors, this make it hard for the company to expand - The continuous of social distancing from Covid-19 will make the projects slowing down and this will make the financial situation of Song Minh more badly overtimes 3.3 Solutions to improve the financial situations of Song minh Development Investment Join Stock Company 3.3.1 Solution for the inefficient in generating profits - Solution for the in efficient in company management: The company should establish an optimal financial plan with an accurate cash flow in order to operate the company smoothly Because cash is a non-profitable asset, the company's most essential purpose is to maximize the amount of cash in circulation In the meantime, because cash is required to run the business, Song Minh Development Investment Joint Stock Company must acquire the necessary funds on a daily basis Cash management refers to the control of a company's liquid assets If the cash flow is excessive, the organization would miss out on other chances On the other hand, the 2020 issue will repeat itself if the amount of money in operation is incorrect As a result, one of the most crucial things for the company to consider is how to efficiently invest in stock The financial-accounting department of the company should make a plan on receipt and expenses in order to recognize the need of the company The cost of goods sold was very high in both 2019 and 2020, and the figures did not reduce in a significant way The company also needs to improve on its accounting report The accounting sector should write down the payment on the project in several periods, not write down the combination of all payments from one project This would help the 67 company to calculate the use of cash so with that it could improve the efficiency of cash management - Solution for the lack of long-term asset: For the long term process, the company is in the need of long-term assets to optimal the cost of goods sold In order to afford the long-term assets, the company faces on big problems, which is the lack of capital With that in mind, it can convert its short-term receivable back or call for capital from shareholders With long-term assets like tools, machines, offices, … the company can decrease its cost from operating The owner of the company needs to make a commitment with the industry which the company targets too, so the company can have long-term assets The company should develop a plan for 15 years to find out what is the appropriate industry for it - Solution for high fixed cost: The company has been in the field for over years and has the same offer with the service provider, so in order to reduce the fixed cost, it needs to calculate the right amount of payment needed to run the projects With that, the company can negotiate again with the service provider with a correct amount of payment monthly, annually, … The company should also invest on the long-term assets, this will help the company reduce the fixed cost The company should start with transportation and offices When the company not have a target in mind for the industry, transportation is needed in all of the three industry the company involved in - Solution for most of the company’s equity still from the owner The company is fairly new so it used too much of its own equity and it does not have the capital increase from shareholders This problem can be solved by a call for capital through the future shareholder But this can be very tough for the company, mainly from the view of the current financial situation 68 In conclusion, in order to have an efficient performance on generating profits, Song minh Development Investment Joint Stock Company needs to make its profile more appealing through the investor and also it needs to make sure that the amount of future projects will be appropriate for the size of the company 3.3.2 Solution for lack of short-term account receivable management The company should improve vastly on management tightly the account receivable: Managing the account receivable is a very important and complicated object in managing a company With Song Minh Development Investment Joint Stock Company, the account receivable occurred a large amount in current assets (up to 79.1% of total current asset) The increase in account receivable also pulls the debt management expenses and the interest in expenses for loan repayment to increase Moreover, this increase also makes the risk of the company higher and makes the debt become long-term hard to receive due to bankruptcy of the partner To overcome this, the company must first conduct extensive research on the investor, the source of funds, and other contractors participating in the project The corporation must pay attention to the contract condition and the price for late payment when negotiating and signing the contract, as a result of which the company will be able to collect the money from the contract in a more effective way The second is to assess and aim to improve the efficiency of receivables procedures Money transfer, client credit monitoring, and debt collection are the three main procedures involved in receivings The third step is to create indicators to track account receivables performance Managers will be able to view and assess the performance of their accounts receivables using these metrics Accounts receivable turnover, accounts receivableto-revenue ratio, and debt age arrangement are three main metrics that companies should use to assess the success of their receivables These criteria 69 must meet three standards: they must be consistent, standardized, and informed and understood by the company's key divisions The fourth step is to maintain a positive relationship Customers' interactions and connections with various departments inside the company are examples of relationships (such as sales departments) To encourage clients to pay their debts on time, the company's debt collection department can announce the terms of getting discounts or offer further information about the items and relevant papers to establish a friendly, trustworthy relationship The connection between debt accounting and the sales department is critical within the organization since any contract from the sales department must be recognized right once To avoid any loss or omission of client receivables, debts should be placed on the watch list as away 70 CONCLUSION Construction, technical infrastructure and transportation, are a longstanding field in the business environment in Vietnam, it requires a lot of expertise and information about these fields as well as experience with the continuous development of the country's economy, the field of construction, technical infrastructure and transportation, is an important area not only for the country but also especially important to large, small businesses, at home or abroad Song Minh Investment and Development Joint Stock Company is a construction company that has just been established for more than years without much experience or long-term partner, but the company is still trying its best so Song Minh is on the way to developing In recent year, the economy has had a huge fluctuation due to the Covid-19 situation Outside the duty of paying taxes, the company also cares about the staff’s life situation and their salaries, also improving the working environment, while paying contributes to the growth of Vietnam The company still has several problems in business operation so it needs to be said that the company needs solutions for these situations to improve the company’s optimal profit Given the current situation, the company can develop further in the future This thesis has analyzed the business activities and the disadvantages of the company However, with the limitation of time and knowledge, there are some faults in the graduation thesis that could not avoid I would like to receive feedback from teachers in order to refine the graduation thesis 71 REFERENCES Associate professor of PhD Nguyen Nang Phuc, 2009, “Financial statement analysis” textbook, National Economics University Michael E Porter, 2016, Competitive Strategy: Techniques for Analyzing Industries and Competitors Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, 2011, “Corporate Finance” textbook, McGraw-Hill Irwin Charles H Gibson, 2011, “Financial Reporting and Analysis” textbook, The University of Toledo, Emeritus Song Minh Development Investment Joint Stock Company’s profile Financial statements of Song Minh in 2018, 2019, 2020 https://www.stockbiz.vn https://www.investopedia.com/ United Nations, 2021, World Economic Situation and Prospects 2021, United Nations, New York 2021 10 United Nations, 2020, World Economic Situation and Prospects 2020, United Nations, New York 2020 11 United Nations, 2019, World Economic Situation and Prospects 2019, United Nations, New York 2019 12 https://www.gso.gov.vn/en/data-and-statistics/2021/01/socio- economic-situation-in-the-fourth-quarter-and-the-whole-year-2020/ 13 https://www.gso.gov.vn/en/data-and-statistics/2020/01/socioeconomic-situation-in-the-fourth-quarter-and-the-whole-year-2019/ 14 https://www.gso.gov.vn/en/data-and-statistics/2019/05/report-socialand-economic-situations-in-the-fourth-quarter-and-the-year-of-2018/ 72 ... Investment Joint Stock Company in the period of 2018- 2020? ?? Objective of the Study Object of the Study is: - Common goal: analyzing the financial situation of Song minh Development Investment Joint Stock. .. Song minh Development Investment Joint Stock Company in 2018- 2020 o Solutions to improve the financial situations of Song minh Development Investment Joint Stock Company toward 2025 Scope of the. .. financial statement analysis - Chapter 2: Financial statement analysis at Song minh Development Investment Join Stock Company in the period of 2018- 2020 Chapter 3: Solutions to improve the financial