According to the financial assessment and all the information that was provided by the company, it was well operated in the year 2010 and 2011. Despite an overall crisis especially for the small and medium enterprises, HaanJSC is able to generate good income by dint of good subjects and area that the company focuses on. And the result of the analysis below was accompanied to complement with that brief piece of comments.
The data in the two below tables indicates that HaanJSC was performing well in 2010 and at an acceptable level in 2011 although having to face with the financial crisis. In 2011, the company experienced a 12.13% decrease of the total sales in 2010; the Cost of goods sold had been controlled strictly by the company and saw a 9% decline of the total cost of goods sold in 2010. Therefore, in 2011 HaanJSC’s gross profit was at the level of 16% less than the total gross profit in 2010 and more than 20% of total net income after tax. It was likely known beforehand that the estimation will give out the result that the total net income of company in 2011 is more than 20% lower compared with its in 2010. Besides, the company also control the inventory better with the percentage of inventory over total asset dropped from 5.57% in 2010 to 4.85% in 2011. Furthermore, it was shown on the financial statements that the company had a plan to reduce their fixed costs by changing to another place. The rate of fixed asset over total asset dropped clearly by 4% from 20.96% in 2010 to 16.96% in 2011.
The purchase of fixed asset was sponsored from the inventory sales made in the term.
Horizontal and vertical analysis was used to evaluate and its results, which is the financial ratio analysis, will be shown as follows:
Table 2: Cursory Balance Sheet of HaanJSC in the 2010 and 2011
A Asset (In VND million) 2010 2011 2010 2011
%/ Total Asset %/ Total Asset
I Current Asset 8,838 8,571
1 Cash 5,816 5,829 52% 56.48%
2 Account Receivable 1,917 1,703 17.14% 16.5%
3 Inventory 623 501 5.57% 4.85%
4 Other current asset 582 538 5.2% 5.21%
II Noncurrent Asset 2,344 1,750
1 Fixed Asset 2,344 1,750 20.96% 16.96%
Total Asset 11,182 10,321
B Liabilities and Capital
(In VND million) 2010 2011 2010 2011
%/ Total Asset %/ Total Asset
I Current Liability 830 942
1 Account Payable 151 98 24% 30%
2 Short-term debt 676 830 14% 10%
3 Other current liability 3 14 0% 0%
II Noncurrent Liability 1,000 1,000
III Equity 9,352 8,380
Capital 9,352 8,380 62% 60%
Total Liabilities and Capital 11,182 10,321
*Source: Balance sheet of HaanJSC in 2010 and 2011
Table 3: Cursory Income Statement (In VND million) of HaanJSC in the 2010 and 2011
2010 2011
{2}-{1}/{1} %
{1} {2}
Sales 7,735.5 6,797 -12.13%
Cost of goods sold 4,257 3,873.87 -9%
Gross profit 3,478.5 2,923.13 -16%
Net income after tax 521.25 405.8 -22.14%
*Source: Income statement of HaanJSC in 2010 and 2011 3.2.1.1 Asset Turnover Ratio
We can observe two different trends in the two turnover ratio. While inventory turnover experience an increase in the period from 2010 to 2011, receivables turnover tend to stay the same as the difference is just some percentage point between the two. The rise from merely above 12 times to nearly 14 times in inventory turnover tends to declare a more effective sales strategy with higher speed of inventory to go out. But since the company’s inventory level is not very high (one of the main reasons is because they are an information technology service provider), these ratio does not imply anything too significantly about the situation of the company.
Figure 3: Asset turnover ratio of HaanJSC in 2010 and 2011
*Source: Balance sheet of HaanJSC in 2010 and 2011
On the other hand, HaanJSC had the same amount of the receivables turnover ratio from 2010 to 2011, showing that the company maintains an acceptable number of times to collect receivables in the period of one year. Although a higher receivables turnover ratio is better for the company, this is for sure that they are not going to experience any difficulties in maintaining their operations since four times collect receivables per year is a good figures for them to do.
3.2.1.2 Financial leverage
The graph (Figure 6) illustrated the changes in the debt ratio and debt to equity ratio of HaanJSC during the period between 2010 and 2011. Clear rise with the same pattern was observed in both of debt ratio and debt to equity ratio. The two ratio increase at the same time shows a downside of the company but in a planned and expected manner by the company at that moment. Although two ratios increased, the absolute value of them was still in the acceptable interval. Therefore, HaanJSC doesn’t have to face too much risks and has the favorable condition to continue doing business with a high level of certainty.
Figure 4: Financial leverage ratio of the HaanJSC in 2010 and 2011
*Source: Balance sheet of HaanJSC in 2010 and 2011
3.2.1.3 Profitability Analysis
The graph (Figure 7) shows the changes in the gross profit margin and net profit margin of HaanJSC through the period from 2010 to 2011. During the period from 2010 to 2011, HaanJSc, as all the figures we have gone through in this document, show a negative cases of doing business. With the gross profit margin slightly decline by nearly 3% from 44.97% in 2010 to 43.01% in 2011, the net profit margin also saw the same trend of merely 1% decrease. The two declines of the margin were also expected by the company and they have prepared themselves to move on with a new year with more aims and ambitions.
However, there is one special thing we can see at the ratio here is the big proportion of the gross profit and also the difference between the gross profit and the net profit on the calculation basis of the revenue. On the first thing, high gross profit margin tends to show a very efficient management of costs of goods sold, but in his case it is by virtue of the nature of a information technology service provider with very limited amount of cost of goods sold.
The second thing may be more questionable. This may comes up a question about other expenses that the company has incurred during the period. If you look at the salary level at HaanJSC, you may see that they spend a lot on keeping their staff receiving a high level of attractive treatment to keep them stay. But in the long term, the managers will have to consider letting them know all the long vision and have some agreement on retaining the necessary capital for another level of progress of the company as a whole. That is a question that the manager should answer themselves in a serious manner.
Figure 5: Gross profit margin ratio and Net profit margin ratio of HaanJSC in 2010 and 2011
*Source: Balance sheet of HaanJSC in 2010 and 2011
3.2.1.4 Liquidity Analysis
In the current environment The company stays very healthy in the short run financially, and looking from these results only, they are good with the liquidity aspect.
Figure 2: Current ratio and quick ratio of the HaanJSC in 2010 and 2011
*Source: Balance sheet of HaanJSC in 2010 and 2011
A slight decline was seen in both two ratios declare a negative trend in the operation.
The current ratio was still very high though, in 2010 and 2011 with over and then under 10 times respectively, the quick ratio being after subtracting the inventory from the current ratio was also nearly to the number 10 in 2010 and come down to more than 8 in 2011. From this figures we can see that the inventory does not make up noticeable proportion in the current asset of HaanJSC, so it seems that HaanJSC is truly a standard information technology service provider with low inventory level and also low level of the current liabilities.
The level of cash ratio and net working capital can also be a good measure of liquidity. The cash ratio and the net working capital is 6.19 times and 7,629 (million VND) respectively. These show a very good performance of the company in the terms of a small one. They use very well the operating process and the neat structure of a small firm to ensure the high level of current liability. As the scale of the company move larger and larger, they should be aware of more incurred long term assets and liabilities in order to maintain this healthy state.
3.2.1.5 The cost of capital
The cost of capital is also a very important number to show the way the company doing the funding process in order to get their capital to do their business.
The cost of capital comprises of two components:
- The first one is the cost of debt.
- The second one is the cost of equity.
Since they are the only sources of funding in this company, the cost of capital will only be of these two figures.
Calculate the cost of debt
The cost of debt in the company is simply the effective rate that they are now bearing on their debt. HaanJSC have a quite stable amount of debt in their capital, which accounts for 30% of all their capital that they are now possessing. This is a very difficult times for the financial world, and it affects the companies as the lending rate for business in Vietnam was so high that anybody comes here for a plan to do business would shake their head, even my international professors that arrive in Vietnam to be the instructors in my class say the same things. In this year 2012, the lending rate for some business sectors was reduced to the cap of 15%, which is still an extraordinarily high one compared to the world. Borrowing anything from the banking system in Vietnam today is a situation that not many people can think of as a good source.
HaanJSC realizes this problem, and at the same time they had the very fortune to have a source of debt which agrees on an exceptional low rate of return as 1.1% a month, which can be interpreted as 13.2% a year approximately. This is an extremely advantages of HaanJSC to have such a good source of debt to engage in the business funding process that they are now going through. After accounting for the corporate tax rate, which is newly down to 25% (source: http://nif.mof.gov.vn), we can calculate the after-tax cost of debt for HaanJSC as: 13.2% (1-0.25) = 9.9%.
Calculate the cost of equity
The cost of equity of HaanJSC is calculated using the CAPM model which has the following formula:
Where:
Es: The expected return for a security
Rf: The expected risk-free return in that market (government bond yield) βs: The sensitivity to market risk for the security
RM: The historical return of the stock market/ equity market (RM-Rf): The risk premium of market assets over risk free assets.
The risk-free return in our market is the government bond yield right now is 12.1%.
To calculate the market return for stock price, we use the VNIndex as the standard figures. VNIndex figures will be collected on the first day of the month and the last of that month for the beta calculation. For the market return, we just use the first day of the year with the last day.
The VNIndex tables and HaanJSC monthly return will be listed respectively:
Table 4: Return for the market and HaanJSC
VNI Jan Feb Mar Apr Thu Jun Jul Aug Sep Oct Nov Dec
5.35 -9.64 -0.05 4.11 -12.23 2.65 -6.21 4.69 0.68 -1,59 -9.53 -7.66
HaanJSC Jan Feb Mar Apr Thu Jun Jul Aug Sep Oct Nov Dec
1.23 -3.82 2.17 -3.64 -1.81 -5.2 -4.43 -1.63 -2.89 2.06 -3.07 -1.3
*Source: HaanJSC return figures and hsx.vn
The sensitivity of HaanJSC stock to the market calculated by using the Microsoft Excel software sees the result of 0.08, which means the HaanJSc stocks tend to varies very little according to the market (in which I use the VNIndex as the reference for the market).
The market return in a year is -31.15% (I also use the VNIndex as the reference for the market).
So, the cost of equity for HaanJSC using the CAPM model is calculated as:
Ce= 12.1+ (0.08) (-31.15-12.1) = 8.64%
3.2.2.3. The weighted average cost of capital:
After all, the cost of capital for HaanJSC is:
0.3 x 9.9% + 0.7 x 8.64% = 9.018%
As the company is still not public yet, we use the book value of the debt and equity sources of funding to allocate the weight to the amount of funding sources.
The cost of capital is at the level of slightly higher than 9%, which is a truly good rate in the business community. But if HaanJSC is trying to expand their business scale to serve as a payment system provider, they should be aware of the possible IPO, so that the market value will be the decisive factor and more than that because it is not possible for doing business as a large scale but still keep the mind of a small one.
Another fact is that as a small company currently, HaanJSC also does not have so much profit in the year 2011, the fact that they use only a persistent and small enough amount of debt funding is a good idea because they can minimize the default risk, which can be higher if they use a larger proportion of debt funding.