Luận Văn The Problems Of Control Account Receivables Turnover And Ineffective Finance Leverage.doc

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UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------
Nguyen Trang Kieu Diem
THE PROBLEMS OF CONTROL
ACCOUNT RECEIVABLES
TURNOVER AND INEFFECTIVE
FINANCE LEVERAGE OF MINH PHU
SEAFOOD JOINT STOCK COMPANY
MASTER OF BUSINESS ADMINISTRATION
SUPERVISOR: Dr. PHAM PHU QUOC
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TABLE OF CONTENTS
Executive Summary ................................................................................................................................................5
CHAPTER 1: INDUSTRIAL OVERVIEW AND COMPANY BACKGROUND..................................6
1.1. Industry overview........................................................................................................................................6
1.2. Company background................................................................................................................................7
CHAPTER 2: IDENTIFICATION AND DEFINITION OF THE PROBLEM.....................................11
2.1. Problems finding process.........................................................................................................................11
2.2. Company’ symptoms ................................................................................................................................11
2.2.1. The significant decrement of profitability in 2015..........................................................................11
2.2.2. The remarkable much lower of profitability compared with average industry’s ratio in 2015 . 13
2.3. Possible reasons behind the circumstance...........................................................................................14
2.4. Actual reasons behind the circumstance..............................................................................................16
2.4.1. Bad management of gross margin, operating expense, interest and taxes resulted in the lower
profit margin....................................................................................................................................................16
2.4.2. Ineffective control accounts receivable days, inventory days and fixed-asset turnover resulted
in the lower asset turnover.............................................................................................................................18
2.4.3. Ineffective financial leverage .............................................................................................................21
CHAPTER 3: DESIGN SOLUTIONS AND SUGGESTIONS...................................................................26
3.1. Possible solution to improve efficiency in asset turnover and use effective finance leverage . 26
3.2 Suitable solutions to improve efficiency in asset turnover and use effective finance leverage in
Company’s circumstance ................................................................................................................................28
3.2.1. Revise credit collections .....................................................................................................................29
3.2.2. Increase collect efficiency...................................................................................................................30
3.2.3. Manage inventory effectively.............................................................................................................30
3.2.4. Using finance leverage in appropriate time......................................................................................31
CHAPTER 4: ACTION PLAN ..........................................................................................................................32
Reference .................................................................................................................................................................35
Appendix..................................................................................................................................................................37
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LIST OF FIGURES
Figure 1. Minh Phu Seafood Join Stock Company structure
Figure 2. Minh Phu’s profitability ratios in the period 2013-2015
Figure 3. Minh Phu’s ROA, ROE compared with industry’s ratio over the period 2013-2015
Figure 4. Financial ratios linked to return on equity
Figure 5. Possible solutions of Minh Phu’s case
Figure 6. Minh Phu Seafood Joint Stock Company Action Plan
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LIST OF TABLES
Table 1. Minh Phu’s profitability ratios in the period 2013-2015
Table 2. Minh Phu’s ROA, ROE compared with industry’s ratio over the period 2013-2015
Table 3. Minh Phu’s gross profit from 2013 to 2015
Table 4. Minh Phu’s portion of each components in income statement from 2013 to 2015
Table 5. Minh Phu’s account receivable and account payable turnover over the period 2013 –
2015 Table 6. Minh Phu’s inventory day over the period 2013 - 2015
Table 7. Indicators reflecting the asset structure of Minh Phu over the period 2013 - 2015
Table 8. Minh Phu’s indicators reflecting the resource structure Table 9. Effects of some
factors to Return on equity of the Company
Table 10. Analysis the possible solutions of Minh Phu
Table 11. Minh Phu Seafood Joint Stock Company Action Plan
4

Executive Summary
Minh Phu Seafood Joint Stock Company (Minh Phu), the largest shrimp processor in
Vietnam and was known as the shrimp king of Vietnam had always operated at high profit since
2012. However, the Company’s performance faced a significant down trend, even made loss in
2015. After a thorough investigation on the case, the circumstance was found there are two main
problems related to control over account receivables turnover and ineffective finance leverage of
the Company. In detail, the accounts receivable turnover in 2013 was 13.27 and 13.02 in 2014,
while the figure decrease 10.28 in 2015 which show that management of account receivable has
the problem. About the using finance leverage, the debt ratio in the period from 2013 to 2015
always high and maintain at 74% - 75% while the aquatic economic face many challenges and
difficulties in 2015. In the bad economic times, the high financial leverage made the profitability
worse. In addition, the interest rate is higher than the return on equity before tax and interest
means that the Company use the loan will decline return on equity. Financial leverage to amplify
reduce return on equity and financial risk of the company in 2015 increased.
As for solution, the author recommends on improving the problems through improve
account receivable turnover and the efficiency of finance leverage. Firstly, Minh Phu can
improve account receivables turnover through revise credit term, tight control the account
receivables and increase collection efficiency. Secondly, Minh Phu can use the finance leverage
effectively by reduce financing the debt, increase equity and use finance leverage in appropriate
time based on the economic status.
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CHAPTER 1: INDUSTRIAL OVERVIEW AND COMPANY BACKGROUND
1.1. Industry overview
Even Vietnam has a great potential for marine aquaculture, the sector also faces many
challenges. According to some reports, the country is blessed with nearly 250,000 hectares of
total area of marine and island aquaculture, of which the aquaculture area is over 150,000
hectares, the lagoon, hinterlands and islands are nearly 80,000 hectares, and the rest is open sea.
This area can be used to develop marine aquaculture including bays, coastal tidal areas and parts
of islands and open seas. Additionally, Vietnamese sea houses many species of fish that can be
naturally distributed into the sea such as grouper, snapper, orange fish, sea bass, cobia, sea bass.
In fact, in a brief report presenting in Norway in August 2016, the emerging East Asia economy
was stated to have an estimated seafood production of 6.55 million tons, making the country the
4th
largest seafood producer, the 8th
largest fishing nations, and 3rd
world largest exporter of fish
and fisheries products. Furthermore, Vietnam is also the 3rd
largest in the world in breeding,
raising, and selling Tiger Prawns, and Shrimps. Most recently, in 2017, with export growth of
more than 10% in the second quarter, total seafood export value of Vietnam in the first half of
2017 was about USD 3.6 billion, up 14.6 percent over the same period last year. Such explosive
growth and potential has made marine aquaculture a key industry in the development of Vietnam
economy.
Beside the geographical advantages mentioned above, Vietnam also faces many
challenges and difficulties. Most companies in the country remains small scale both in capital
and modern technologies. The lack in capital and technologies hinder the sector’s ability to enter
into the developed market with high requirement in quality. For instance, the Europe is the
largest importer of agricultural, forest and food products in the world. But the European market
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requires high quality of goods to ensure the safety for local consumers. In an interview with Ms.
Miriam Garcia - Ferrer, First Counselor, Delegation of the European Union in Vietnam, the lady
representative of the Europe has expressed great concern on the capability to ascertain marine
products’ quality of Vietnam. She even presented the case of Vietnam's bivalve molluscs has
been approved by the EU on the list of Vietnamese exporters, but now banned by the European
Union because of the problematic inspection by the EU as an example. In another example,
Vietnamese pangasius have also been stopped recently by some French super markets not
because of food safety but also environment problems. Nonetheless, with such geographical and
weather advantages, Vietnam marine aquaculture has great future and potential to be tapped into.
1.2. Company background
Minh Phu’s precursor was a private enterprise. It was established on 14th
December
1992. After over 20 years of continuous development, so far Minh Phu has become one of
leading seafood corporations with largest seafood export revenue nationwide as well as in the
region and all over the world.
The principal activities of the Company are to process and trade in aquatic products,
aquatic breeds and aquatic foods, machinery and equipment for aquaculture. The structure of
Group was showed in the charge below:
7

Figure 1: Minh Phu Seafood Join Stock Company structure
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Principal targets of the corporation:
- Focus on its main business production lines in 2011, which are producing disease-free
and clean baby shrimp, expanding areas for raising commercial shrimp, producing
biological products for the aquaculture industry, producing and processing shrimp for
export.
- Make best efforts to maintain its role as one of Vietnam’s leading seafood exporters.
- Maintain current export markets, continuously develop new export market and
especially build Minh Phu as strong brand.
- Continuously expand areas for disease-free and industrial shrimp and associate with
forestry and fishery farms in Ca Mau to raise shrimp in large scale in other to provide
raw materials of clean shrimp to Minh Phu’s processing factories.
- Enhance the tasks of business administration, personnel organization and payment
policy, consistently give training, attract excellent employees, have good incentive
policies to the company’s leading officers, management personal and workers.
- Associate with Vietnam’s leading producers of shrimp feed to invest in building
factories producing feed for shrimp to supply the feed to Minh Phu’ shrimp raising
enterprises, forming a full circle process from producing feed and disease-free shrimp
babies, raising clean shrimp to processing for export. Our target is for Minh Phu to
feed 5.000ha of industrial shrimp and make improvement to over 70% of whole
shrimp needs of the Corporation by 2015.
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- Invest strongly in science and technology to study and select the line of chemical
treatments of shrimp. Breeding white leg shrimp for desirable general characteristics
such as fast growth and adaptability to changes in climate and weather.
- Research and build a modern model, which achieves high rates, low prices and
ensures safety in the biological work to foster sustainable and profitable shrimp
production.
- Associate with manufacturers of carton packaging, coated PA/PE, plastic trays, tray
soap, flour production as well as the leading manufacturers of sauce in Vietnam and
the world to build packaging, supplies, materials, etc. factories to create a system of
surrounding factories around Minh Phu – Hau Giang factory to provide for factories
of Minh Phu Seafood Joint Stock Company.
- Join with local and foreign partners to build the Container Port on Hau Giang.
- Establish shrimp distribution companies in EU, Russia and China, etc. in order to
increase export profits and enhance the efficiency of producing, processing, exporting
and distributing shrimp globally.
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CHAPTER 2: IDENTIFICATION AND DEFINITION OF THE PROBLEM
2.1. Problems finding process
In order to identify the company’s problems, these following steps will be executed:
- Analysis the financial statement, finance ratio and compare with the industry to identify
the symptoms;
- Review the literature related to the symptoms;
- Further study of the company financial, accounting data and the industry;
- Interview with management personnel, Board of Management of the Company, for
further information.
2.2. Company’ symptoms
After deep analysed the financial statement and investigated the financial ratios, the
symptoms of the problem had revealed as following:
- The significant decrement of profitability in 2015 and ;
- The remarkable much lower of profitability compared with average industry’s ratio in
2015.
2.2.1. The significant decrement of profitability in 2015
Minh Phu experienced the toughest year 2015 in the last decade with the loss of VND 6.9
billion even though it was the largest shrimp processor in Vietnam and was known as the shrimp
king of Vietnam, it had always operated at high profit since 2012. The table 1 below shows the
profitability ratios over the period from 2013 to 2015:
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2015 2014 2013 2015 against 2014 against
Amount % Amount %
Net operating profit 7,740 1,052,7 375,906 (1,044,97 -99% 676,80 180%
Profit before tax 12,136 1,047,5 365,756 (1,035,40 -99% 681,78 186%
Profit/(loss) after tax (6,946) 921,048 293,834 (927,994) -101% 627,21 213%
Basic EPS 474 10,930 3,882 (10,456) -96% 7,048 182%
Return on asset -0.08% 10.89% 4.23% - 6.66%
Return on equity -0.31% 42.88% 17.28% - 25.60
Table 1. Minh Phu’s profitability ratios in the period 2013-2015
The table shows that the profit decreased significantly, even loss in 2015. Profit after tax
was reach VND 921 billion in 2014 while it was negative VND 6.9 billion in 2015, that
decreased by 101%, equivalent to 928 billion VND. Return on assets rose sharply from 4.23% in
2013 to 10.89% in 2014 and went down significantly to -0.08% in 2015. In 2014, the ROA of
10.89% means that every 100 VND capital of the enterprise will generate after-tax profit of
10.89 VND. While every 100 VND capital in 2015 made a loss 0.08 VND. In addition, it can be
seen that the return on equity increased from 17.28% in 2013 to 42.88% in 2014 and decreased
noticeably to -0.31% in 2015. The indicator show that while each 100 VND of equity generated
17.28 VND and 42.88 VND of profit-after tax respectively in 2013 and 2014, each 100 VND of
equity in 2015 made loss of 0.31 VND. The EPS showed the noticeable down-ward trend in
2015. From 2013 to 2014, the EPS increased steadily from VND3,882 per share and got the peak
at VND10,930 per share in 2014. However, in 2015, the EPS went down steeply and reached the
lowest point was VND474 per share. The figure below show the overall picture of decrease of
profitability from 2013 to 2015:
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1200000
1000000
800000
600000
400000
200000
0
2013 2014 2015
-200000
Net operating profit Profit before tax
Profit/(loss) after tax Basic EPS
2015
2014
2013
-0.1 0 0.1 0.2 0.3 0.4 0.5
Return on equity Return on asset
Figure 2. Minh Phu’s profitability ratios in the period 2013-2015
2.2.2. The remarkable much lower of profitability compared with average industry’s ratio
in 2015
2015 2014 2013
Return On Assets (ROA) -0.08% 10.89% 4.23%
Average ROA of aquatic industry in Vietnam 1% 2% 3%
Return On Equity (ROE) -0.31% 42.88% 17.28%
Average ROE of aquatic industry in Vietnam 4% 4% 7%
Table 2. Minh Phu’s ROA, ROE compared with industry’s ratio over the period 2013-2015
The table 2 shows that the average ROA of aquatic industry also experienced the down-
trend, ROA decreased from 3% in 2013 to 2% in 2014 and 1% in 2015. However, it can be seen
that the ROA of Minh Phu went down noticeably from 10.89% in 2014 to negative 0.08% in
2015. The much lower ROA compared with average one of aquatic industry in Vietnam
demonstrates the lower efficient of using assets of the Company.
The return on equity increased from 17.28% in 2013 to 42.88% in 2014 and decreased
noticeably to -0.31% in 2015. When compared with the average ratios of the same industry in
Vietnam, it showed the significant lower of ROE of the Company.
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0.5
0.4
0.3
0.2
0.1
0
2013 2014 2015
-0.1
ROA Industry's ROA ROE Industry's ROE
Figure 3. Minh Phu’s ROA, ROE compared with industry’s ratio over the period 2013-2015
2.3. Possible reasons behind the circumstance
Kostini el at (1) measured the profitability based on analysis of Return on Asset (ROA),
Kostini states that ROA is the effective profitability measurement used to assess the
effectiveness in generating profit of the company’s assets.
Collier (2) presents financial analysis of a bank by DuPont analysis which based on
analysis of return on equity which is disaggregated into net profit margin, total asset turnover and
the equity multiplier.
Isberg (3) carried out a study to get insight of the firm’s performance, liquidity, leverage,
operating efficiency and profitability used the DuPont ratio. The formula is defined clearly as:
Net Income/Total Equity = (Net Income/Net Sales) x (Net Sales/Total Asset) x (Total
Asset/ Total Equity); or it can be rewritten as
Net Income/Total Equity = (Net Income/Net Sales) x (Net Sales/Total Asset) x (Total
Asset/Total debt) x (Total debt/ Total Equity).
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Kieu Minh Nguyen (4) stated that profitability is affected by profit margin, asset turnover
and financial leverage and impacted by below factors:
Figure 4. Financial ratios linked to return on equity
The figure 4 provides the quick insight into factors affecting the profitability including:
gross margin, operating expense, interest, taxes, accounts receivable days, inventory days, fixed-
asset turnover, leverage and coverage.
Therefore, there are 3 possible problems below can cause the decline of ROE:
- Bad management of gross margin, operating expense, interest and taxes resulted in
the lower profit margin;
- Ineffective control accounts receivable days, inventory days and fixed-asset turnover
resulted in the lower asset turnover;
- Ineffective financial leverage.
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2.4. Actual reasons behind the circumstance
The author performed deep analysis on financial statement by measure all factors showed
in Figure 4 to investigate the real problem of the Company in 2015 and found that there are 2
actual reasons cause the problems:
- Ineffective control accounts receivable days;
- Ineffective financial leverage
2.4.1. Bad management of gross margin, operating expense, interest and taxes resulted
in the lower profit margin
2.4.1.2. Analysing gross margin over the period from 2013 to 2015
2015 2014 2013
Revenue from sales of goods 12,472,342,348,524 15,224,802,761,482 11,206,430,460,422
Revenue deductions 185,717,938,569 130,061,808,523 -94,480,405,091
Net revenue 12,286,624,409,955 15,094,740,952,959 11,111,950,055,331
Cost of sales 11,214,768,939,264 13,078,415,992,602 9,955,628,683,286
Gross profit 1,071,855,470,691 2,016,324,960,357 1,156,321,372,045
Table 3. Minh Phu’s gross profit from 2013 to 2015
The gross profit from VND2,016 billion in 2014 to VND1,072 billion in 2015, decreased
by VND944 billion, approximate 47%. This is the problem of not only Minh Phu but also of
whole aquatic industry in Vietnam in 2015. Vietnam Association of Seafood Exporters and
Producers reported that global shrimp industry during 2015 was not facing trouble relating to
EMS syndrome, diseases that lead to the significant increase in globally source of materials as
well as processed shrimp while consumption demand decreased. That resulted in the significant
decrease in unit price during 2015 and lost some foreign customers, as Vietnamese companies
had to experience the competition for foreign company offering the competitive price. The
decrease of selling price, loss market and the competition with foreign competitors resulted in
the total cost divide total revenue was high are the common problems of whole aquatic industry
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in Vietnam. Therefore, the decrement of gross margin is not due to bad management cost of sales
of Minh Phu’s management.
2.4.1.2. Analysing operating expense over the period from 2013 to 2015
In order to identify if operating expense including selling expense and general and
administration expense is the main factor leading to the decrement of gross margin, the table 4
showed the portion of each components in net revenue over the period from 2013 to 2015.
VND Portion (%)
2015 2014 2013 2015 2014 2013
Net revenue 12,286,624,409,955 15,094,740,952,959 11,111,950,055,331 100% 100% 100%
Cost of sales 11,214,768,939,264 13,078,415,992,602 9,955,628,683,286 91% 87% 90%
Financial
270,405,669,954 146,635,796,390 113,758,468,639 -2% -1% -1%
income
Financial
440,583,234,855 257,698,717,542 305,521,702,030 4% 2% 3%
expenses
Selling
729,270,070,995 694,714,723,573 478,047,143,198 6% 5% 4%
expenses
GA expenses 164,667,684,883 157,837,686,476 110,604,902,548 1% 1% 1%
Other income 20,918,014,777 9,762,705,782 6,074,024,049 0% 0% 0%
Other
16,521,947,296 14,934,290,801 16,224,376,412 0% 0% 0%
expenses
EBT 12,136,217,393 1,047,538,044,137 365,755,740,545 0% 7% 2%
Table 4. Minh Phu’s portion of each components in income statement from 2013 to 2015
The table 4 show that the operating expense including selling expense and GA expense
made up the small portion in total net revenue. The portion of operating expense kept the quite
stable portion. In detail, the selling expense only holds 4%, 5% and 6% respectively in 2013,
2014 and 2015. In addition, the GA expense only occupies 1% in whole 3 years in this period.
For this reason, the management of operating expense also not the actual problems of Minh Phu
in 2015.
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2.4.1.3. Analysing interest expense over the period from 2013 to 2015
The tables 4 indicates the opposite trend of interest expense from 2013 to 2014 and 2014
to 2015. The interest expense decreased by VND47.8 billion, approximate 16% from 2013 to
2014. On the contrary, the interest expense increase significantly by VND182.9 billion,
approximate 71% from 2014 to 2015. In addition, in can be seen that the portion of interest
expense in 2015 made up 4% double the one in 2014. Correspondingly, the management over the
interest expense in 2015 is the main reasons lead to the decrease of profit margin in this year.
Kieu Minh Nguyen (8) concluded that the larger interest expense implied the increase in
financial leverage. The financial leverage was deeply analysed in the part 2.4.3 below.
2.4.2. Ineffective control accounts receivable days, inventory days and fixed-asset turnover
resulted in the lower asset turnover
2.4.2.1. Analysing accounts receivable days over the period from 2013 to 2015
2015 2014 2013
1 Net revenue 12,286,624 15,094,741 11,111,950
2 Liabilities 6,981,588 7,010,269 5,616,870
3 Total asset 9,225,148 9,285,489 7,637,543
4 Average account receivable 1,194,664 1,159,468 837,094
5 Account receivable turnover 10.28 13.02 13.27
6 Days of account receivable turnover 33.11 30.83 34.29
7 Average account payable 158,718 332,402 334,151
8 Cost of sales 11,214,769 13,078,416 9,955,629
9 Account payable turnover = (13)/(12) 70.66 39.35 29.79
10 Days of account payable turnover = 5.17 9.28 12.25
Table 5: Minh Phu’s account receivable and account payable turnover over the period
2013 – 2015
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The accounts receivable turnover in 2013 was 13.27 and 13.02 in 2014, while the figure
decrease 10.28 in 2015. The amount decreased by 2.73, approximate 21% compared with 2014.
The Company's accounts receivable turnover decreased at the end of 2015 show that the
management of account receivable has the problem. The lower the turnover, the longer the time
between sales and collecting cash. There is an opportunity cost of holding receivables for a
longer period of time, resulted in the lower asset turnover. Days of account receivable turnover is
the length of time it takes to clear all Accounts Receivable, or how long it takes to receive the
money for goods it sells. According the table above, the average collection period in 2013 was
34.29 days, 30.83 days in 2014 and increased to 33.11 days in 2015. The collection period
increased by 2.28 days or 7% compared with 2014. The reason is that in 2015 the rate of increase
of the Company's accounts receivable at a 3%, equivalent to VND 35 billion while the average
revenue had a down trend by VND 7.6 billion, approximate 19%. This represents the problem in
collecting receivables from customers of the Company.
Account payable turnover of Minh Phu had a significant increase from 29.79 in 2013 to
39.35 in 2014 and 70.66 in 2015. The amount increased by 31.31, approximate 80% compared
with the turnover in 2014. This indicated that Minh Phu had to follow the strict credit term of
suppliers while the Company manage the collecting from customer not good, the Company had
to borrow loans to make payment for suppliers. Correspondingly, accounts payable days also
decreased from 12.25 days in 2013 to 9.28 days in 2014 and 5.17 days in 2015.
Compared the account receivables and account payables, the author found that Minh
Phu’s capital was noticeably occupied in 2015. The poor management over the account
receivables turnover lead to the lower asset turnover in 2015.
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2.4.2.2. Analysing inventory day over the period from 2013 to 2015
2015 2014 2013
1 Cost of sales 11,214,769 13,078,416 9,955,629
2 Average inventory 4,382,090 3,457,881 2,346,352
3 Inventory turnover = (1) 2.56 3.78 4.24
4 Days in inventory = 140.67 95.18 84.85
Table 6. Minh Phu’s inventory day over the period 2013 - 2015
The inventory in 2013 was 4.24 and rotation period was 84.85 days inventory, in 2014
inventory turnover reduce to 3.78, correspondingly the period of rotation went up by 95.18 days.
In 2015, inventory turnover was 2.56 and the period of rotation was 140.67 days. Inventory
turnover increased in 2015 compared to 2014 1.22 shows that the company faced the difficult in
selling goods in 2015. As mentioned in the part 2.3.1, Vietnam Association of Seafood Exporters
and Producers (5) reported that global shrimp industry during 2015, the difficulty in selling
goods due to the lower global’ demand is the common problems of the industry. Hence, the
management over the inventory is not the main reason affecting the lower asset turnover.
2.4.2.3. Analysing fixed asset turnover over the period from 2013 to 2015
Steven Bragg (6) stated that a manufacture services business including trading business
that requires a minimal amount of fixed assets may have few or no noncurrent assets. For this
reason, the non-current is much lower than the current asset that indicated by the table 7 below:
The Company Aquatic industry
2015 2014 2013 2015 2014 2013
1 Current assets 7,264,439 7,592,303 5,871,493
2 Long-term assets 1,960,709 1,693,186 1,766,050
3 TOTAL ASSETS 9,225,148 9,285,489 7,637,543
4 Current asset ratio = (1)/(3) 78.75% 81.77% 76.88% 76% 74% 74%
5 Long-term asset ratio = 21.25% 18.23% 23.12% 24% 26% 26%
Table 7. Indicators reflecting the asset structure of Minh Phu over the period 2013 - 2015
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The current asset ratio was 76.88% and long-term assets ratio is 23.12% in 2013. In 2014,
the ratio current assets was 81.77%, while the rate long-term assets was 18.23%, that means in 1
VND of total assets, the current assets accounted for 0.7688 VND, and long-term assets
accounted for 0.2312 VND. In 2015, the rate short-term assets was 78.75%, while the rate of
long-term assets is 21.25% means that 1 VND of copper assets, the short-term assets accounted
for 0.7874 VND, while long-term assets accounted for 0.2125 VND. The ratio of assets invested
in current asset and long-term asset of the company over three years did not fluctuate too much.
It can be seen that the proportion of assets invested in current asset was higher proportion of
long-term asset. This percentage is reasonable when compare with the average percentage of
aquatic industry as the Company is operating as a commercial business. Accordingly, the
management over the fixed assets turnover is not the main reason of the lower asset turnover.
2.4.3. Ineffective financial leverage
2.4.3.1. Analysing the leverage over the period from 2013 to 2015
The Company can use of financial leverage in the capital structure that maybe contributes
heavily in the success or failure of companies, based on their ability to balance the general
positive and negative possible effects of it. The table 8 below provide the overview on the level
using financial leverage of the Company compared with the aquatic industry in Vietnam.
The Company Aquatic industry
2015 2014 2013 2015 2014 2013
1 Liabilities 6,981,588 7,010,269 5,616,870
2 Equity 2,243,560 2,275,219 2,020,673
3 Total resources 9,225,148 9,285,489 7,637,543
Liabilities ratio = (1)/(3) 76% 75% 74% 75% 67% 63%
Equity ratio = (2)/(3) 24% 25% 26% 25% 33% 37%
Liabilities/Equity=(1)/(2) 311% 308% 278% 298% 203% 168%
Table 8. Minh Phu’s indicators reflecting the resource structure
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Debt ratio increased due to higher grow rate liabilities compared with the grow rate of
total capital. The Company's liabilities ratio increased during 3 years due to the Company use the
loan to expand the business scale. Loans increased mainly due to increase of long-term debt,
which is mainly due to the Company issue bonds with amount VND 3,500 billion in 2015.
Increasing debt ratio means that the financial risk of the company increases, the company is
using the financial leverage to contribute to higher profit margins and return on equity as well.
The equity ratio measures how much of the Company’s assets were financed by investors. In
other words, this is the investors' stake in the company. The ratio had a down trend through 2013
to 2015, that decreased from 26% in 2013 to 25% in 2014 and 24% in 2015. A lower ratio also
shows potential creditors that the company is less sustainable and more risky to lend future loans.
Moreover, the equity ratio is always less than 0.5 show the low level of financial autonomy of
the Company so the financial risk the company also increased.
The use of financial leverage has both positive and negative impact on the business
performance. If the Company manage the loans well, or using financial leverage effectively, the
return on the equity will increase. However the financial leverage also means increased financial
risks of the business, if the Company borrows too much, that can lead to loss the ability to pay
the principal and interest expense. How effective the Company use the financial leverage would
be analyzed more in the following part.
2.4.3.2. Analysing the interest coverage over the period from 2013 to 2015
Kraus (7) stated that the optimal capital structure is determined by balancing the positives
& negative effects of financial leverage. In other words, balancing the benefits of debt financing,
that includes: tax savings, reducing agency cost, with the cost associated with the debt, that
include direct and indirect bankruptcy costs.
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The use of financial leverage proven to be beneficial when the investment made by the
leverage earn returns more than the cost of debt. Miller (8) suggested that although that debt
financing is affiliated with a higher chance of bankruptcy risks & costs. These disadvantages are
relatively small as compared to the tax shield that associates the use of financial leverage.
Perinpanathan (9) showed that the financial leverage may have a negative impact if the
investment that has been mad did not achieve sufficient returns (higher than the cost of debt)
having no recognizable income to shield, meaning that the if the returns is lower than the cost of
debt the company will be at a higher risk due to the level of debt they undertook, resulting in
reducing the overall value of the company.
Furthermore, Baxter (10) suggested that the use of financial leverage is linked to a higher
possibility of bankruptcy risks & financial defaults. Due to the commitment that is associated
with the use of debts, such as the periodic interest payments, and the principle paid by the
company, and because of these risks shareholders will demand a higher return, which puts the
company in a critical situation.
Abdallah (11) stated that there is another way to calculate the ROE as follow:
ROE = [ROAE + D/E (ROAE – i)] x (1 – t)
Therein:
- ROAE: Return on asset before tax and interest expense
- D: Debt
- E: Equity
- i: interest rate
- t: CIT rate
23

2015 2014 2013
1 Interest expense 217,115 167,134 249,916
2 Debt 6,981,588 7,010,269 5,616,870
3 EBIT 229,251 1,214,672 615,672
4 Average total asset 9,255,318 8,461,516 6,953,737
5 Interest rate (i) = (1)/(2) 3.11% 2.38% 4.45%
6 Return on asset before tax and 2.48% 14.36% 8.85%
interest expense
7 Interest Coverage (5/6) 0.80 6.02 1.99
Table 9: Effects of some factors to Return on equity of the Company
It can be found that in 2013, i = 4.45% <ROAE (8.85%) means that the company uses
many loans and increase the margin equity. Financial leverage has amplified the return on equity.
Similarly, in 2014 the Company continued to use financial leverage to increase the rate of return
of equity, i = 2.38% <ROAE (14.36%). However the use of financial leverage is potential risks,
the Company should have the appropriate management measures.
On the contrary, in 2015, i = 3.11%> ROAE (2.48%) means as companies use the loan
will decline return on equity. Financial leverage to amplify reduce return on equity and financial
risk of the company in 2015 increased.
If the Company did not use finance leverage (i.e. the Assets-to-Equity Ratio is 1):
In 2013, ROE0 = 1.60 x 2.64 x 1
If the Company uses the finance leverage:
ROE = 1.60 x 2.64 x 4.09 = 4.09 x ROE0
The using of finance leverage help to magnify the Company’s ROE to 4.09 times
compared with the no finance leverage condition.
24

Similarly, the using of finance leverage help to increase ROE of the Company by 3.94
times and 4.10 times respectively in 2014 and 2015. It can be seen that the financial leverage
help to increase ROE in the ideal level, however, the environment in 2015 went down, the
Company has to face a difficulty year, the use of financial leverage causes an increase in the
company’s financial risk. As a result of the high risk that associate the use of the use of debt
securities, the company becomes subject to more restrictions.
In addition, Julie et al (12) stated that the interest coverage measures the ability to meet
interest payment obligations with business income. Ratios close to 1 indicates company having
difficulty generating enough cash flow to pay interest on its debt. Ideally, a ratio should be over
1.5. The table 9 shows the interest coverage was above 1.5 in 2013 and 2014, however, in 2015,
that the interest coverage decreased to 0.8 indicated the ineffective leverage in 2015.
Nyamita (13) indicated finance leverage performed well in good economic environment.
However, in the bad economic times the financial leverage has shown negative relationship to
profitability. As can be seen, even the economic environment fluctuated in the period from 2013
to 2015, the equity and debt finance ration of Minh Phu did not change flexibly with the change
of economic status. It indicates the passive action of the Company with the economic
environment.
25

CHAPTER 3: DESIGN SOLUTIONS AND SUGGESTIONS
3.1. Possible solution to improve efficiency in asset turnover and use effective finance
leverage
To enhance the circumstance, the enterprise should improve efficiency in asset and
liability turnover management, and financial activities and using effective finance leverage.
Rao (14) indicated that the effective management receivables will increase the current
assets of company which lead to increase in the working capital of the company and increase the
profitability.
Joyce (15) stated that there are three factors impacting the management account
receivables. Debt policy, business processes and customer expectations. They are all associated
factors to management of accounts receivable turnover.
Ayers et al (16) found that to avoiding potential problems when selling accounts
receivable, the Company need to consider and take steps on review the customer, credit term to
avoid serious problems that can arise from participation in an accounts receivable financing
program.
Goel et al. (17) claimed that financial leverage showed the relationship between
borrowed funds and owner’s funds in the capital structure of a firm. It includes debt, common
equity and preferred equity that are used to finance the firm’s total assets, operations and
financial growth. The core issue of an effective capital structure is the choice of the percentage
between the debt and the equity in which earnings before interest and taxes (EBIT) is higher than
interest rate and the enterprises could take advantage of the leverage.
Jensen (18) concludes in his research that the leverage decision is fundamentally an
exercise in balancing the costs and benefits at different levels of debt.
26

Vătavua (19) researched on many Romanian manufacturing companies and got the final
finding that the most profitable manufacturing companies were those maintaining a high
proportion of equity in their capital mix, avoiding borrowed funds. The researcher also stated
that shareholders’ equity has a positive impact on performance indicators, while total debt and
short-term debt have negative relationships with ROA and ROE.
Lime (20) indicated two strategies companies commonly use to reduce their debt to
capital ratio: increasing sales revenues and profitability and more effective management of
inventory.
profitability. The Company should consider the economic environment to use the effective level
of finance leverage.
Therefore, the possible solutions for this problem are stated in the chart below:
27

Revise credit
collections
Improve account
Increase
collections
receivable turnover
efficiency Increase sales
revenues and
Offer the reward profitability
POSSIBLE on efficient
payments
SOLUTIONS Manage inventory
Reduce financing
effectively
the debt and
Improve the increase equity
Issue new shares
efficiency of
finance leverage Use finance
leverage in
appropriate time
Increase capital
by retain earning
Figure 5. Possible solutions of Minh Phu’s case
3.2 Suitable solutions to improve efficiency in asset turnover and use effective finance
leverage in Company’s circumstance
Solution Analysis
1. Revise credit collections Possible.
In 2015, the Company extended credit term
for some key clients which lead to the
increase of account receivable turnover day.
2. Increase collect efficiency Possible.
Currently, the control payment term over the
Company’s customer is not tight and not
close-checked.
3. Offer the reward on efficiency payment Reject.
In 2015, the priority task of the Company is
reduce cost to improve the profitability.
28

4. Increase sales revenues and profitability Reject.
The decrement of revenue in 2015 was
common problems of all companies in the
same industry.
5. Manage inventory effectively Possible.
The balance inventory of the Company in
2015 was significant while the selling
activities faced the difficulty.
6. Issuing new share Reject.
The Company’s share is reach the budget. In
addition, the cost of issuing new share is high.
7. Increase capital by retain earning. Reject.
The Company’s performance is went down.
In 2015, the Company did not create the
income, even made loss.
8. Use finance leverage in appropriate time Possible.
The Company is passive against the change of
economic. Even the economic change over
the time, the debt ratio of the Company keeps
stable from 2013 to 2015.
Table 10. Analysis the possible solutions of Minh Phu
3.2.1. Revise credit collections
As the increase in receivable from customers of the Company will lead to the risk of
uncollected receivable if customers are no longer available solvency, the Company should
strictly control credit term over its customers. In 2015, due to the difficulty economic of aquatic
industry. The Company extended the credit term for key customers, the account receivable
turnover decreased from 13 to 10 in 2015. Therefore, the Company should selection potential
customers with good credit rating and reliability to ensure the recovery of capital for the
Company. The economic contract should be clearly state the terms of payment of customers. The
29

company should consider the term of payment and payment discount limit before signing the
contract.
3.2.2. Increase collect efficiency
Monitoring account receivables is essential for the Company to control, classify and
evaluate the status of customer’s debt in order to have timely and proper solution for each kind
of debt. Currently, Minh Phu has not monitor the aging report in proper way. Receivables which
are current overdue should be closely monitored and inform to the customers for collection
purposes. In addition, the Company should have proper policies and method to collect overdue
debts. Moreover, it is also necessary to analyse the reason that lead those receivables to be
overdue, so that extend the credit terms or suggest rational collection methods.
3.2.3. Manage inventory effectively
Inventory can take up a very sizable amount of a company's working capital. Maintaining
unnecessarily high levels of inventory beyond what is required to fill customer orders in a timely
fashion is a waste of cash flow. In 2015, although the aquatic economic face the difficulty, the
Company maintain the inventory in a significant high level amounting to VDN4,353 billion, only
decreased by 3% compared with the inventory in 2014. In addition, the day in inventory increase
from 95 days in 2014 to 140 days in 2015. That high level in inventory while the selling
activities faced difficulties indicated the overinvestment of the Company. Therefore, the
Company should always maintain proper level of inventories and stable supply sources. High
remain level of inventories will increase holding cost, decrease profit. Minh Phu must reasonably
calculates and evaluates its level of inventories not only to reduce storage cost and related
expenses but also have sufficient source of material supply for manufacturing.
30

3.2.4. Using finance leverage in appropriate time
profitability. In reality, the company’s debt ratio in 2014 is high at 0.74 at the beginning of the
year and 0.75 at the end of year; this indicates the high level of financial leverage. Using
financial leverage at high level contains significant financial risk, then the company should
balance the use of debts and equity, it will help the company be able to self-control its financial
capability. The company should establish a specific financial department, which takes over
financial analysing and orienting for the company. At present, personnel in the financial
accounting department is put in charge of financial analysing which is inefficient. Thereby, the
company should consider separating financial department and accounting department to enhance
performance in workings.
31

CHAPTER 4: ACTION PLAN
The action plan for the proposed solution above can be completed in a year starting in 1st
January
2016 to 31st
December 2016 as follow:
32

Solution Task Detail Start date End date Duration
Selection potential customers 1 January 2016 28 February 2016 2 months
Improve Revise credit collections Review credit term in economic 28 February 2016 30 April 2016 2 months
account contracts
receivable Monitor account receivable by aging 1 January 2016 31 March 2016 3 months
turnover
Increase collect efficiency
report and review the collection
Set up policies and method to collect 31 March 2016 30 May 2016 2 months
overdue debts
Improve
Manage inventory effectively
Reassess the customer demand to 30 April 2016 31 December 8 months
the maintain proper level of inventories 2016
efficiency
Using finance leverage in
Set up the financial department 28 February 2016 31 March 2016 1 months
of finance
appropriate time
Completing analysing, managing 31 March 2016 31 December 9 months
leverage corporate finance activities 2016
Table 11. Minh Phu Seafood Joint Stock Company Action Plan
33

Figure 6. Minh Phu Seafood Joint Stock Company Action Plan
The action plan can be divided into two main period:
- From 1 January 2016 till 30 May 2016
- From the beginning of June 2016 till the end of the year
Of which, in the first period, Minh Phu may simultaneously selection potential
customers, review credit term in economic contracts, monitor account receivable by aging report
and review the collection, set up policies and method to collect overdue debts and set up the
financial department.These are all activities that can be done almost right away.
In the second period, Minh Phu may carry out the remaining activities including reassess
the customer demand to maintain proper level of inventories and completing analysing,
managing corporate finance activities. As these activities made up a long time to complete and it
incurred daily based on the customer demand, customer order and any change of economic
environment. The business should also have either a monthly or a quarterly meeting schedule or
both assessing the performance of these activities, ascertain of the target, adjusting with changes,
and possibly edition of the list of activities. After all, some activities listed in the first period
should be done at all times instead of a brief period. Nonetheless, on 31st
December 2016, Minh
Phu may also conduct an assessment period for all activities.
34

Reference
1. Kostini N, Marliasari F. The Impact of Working Capital Management toward Profitability on
Food and Beverage Companies Listed in Indonesia Stock Exchange. Review of Integrative
Business and Economics Research 2017; 6(2):350-358.
2. Collier HW, McGowan,Carl B.,,Jr, Muhammad J. Evaluating the impact of a rapidly changing
economic environment on bank financial performance using the dupont system of financial
analysis. Asia Pacific Journal of Finance and Banking Research 2010 Feb 10;4(4):25-35.
3. Isberg SC. Financial analysis with the DuPont ratio: A useful compass. Credit & Financial
Management Review 1998 Second; 4(2):11.
4. Kieu Minh Nguyen. Financial management and profitability of small and medium enterprises.
Australia: Southern Cross University; 2011: 144.
5. Vietnam Association of Seafood Exporters and Producers. Report of aquatic exports in
Vietnam in 2015 [[document on the Internet]. 2015 [cited 2015 December 31]. Available from:
http://vasep.com.vn/777/Bao-cao-xuat-khau-thuy-san/Bao-cao-Xuat-khau-Thuy-san-Viet-
Nam.htm
6. Steven Bragg. Accounting CPE Courses & Books: Noncurrent asset [document on the
Internet]. Accounting Tools; 2017 [cited 12 May 2017]. Available from:
https://www.accountingtools.com/articles/2017/5/12/noncurrent-asset
7. Kraus A. A state-preference model of optimal financial leverage. The Journal of Finance
1973;28(4);911-922.
8. Miller M. Debt and Taxes. The Journal of Finance 1977;261-275.
9. Perinpanathan R. Impact of Financial Leverage on Financial Performance: Special Reference
to John Keells Holdings plc in Sri Lanka. Sri Lanka: University of Jaffna; 2014; 33.
35

10. Baxter N. Leverage, Risk of Ruin and the Cost of Capital. Journal of Finance. 1967; 3956.
11. Abdallah B, Hussein S. The effect of financial structure, financial leverage, and profitability
on value of shares of industrial companies: applied study on a sample of Saudi industrial
companies. Delhi Business Review 2014;15(2):9-25.
12. Julie P, Bryn S, Irene G. A guide to useful ratios for understanding your social enterprise’s
financial performance; 2013. Available from: NetLibrary database.
13. Nyamita MO, Dorasamy N, Garbharran HL. How Debt Financing Decisions Relate With
Financial Performance Of State-Owned Corporations In Kenya. The International Business &
Economics Research Journal (Online) 2015;14(4):701-710.
14. Rao S, Gaglani H. IMPACT OF RECEIVABLES MANAGEMENT ON WORKING
CAPITAL: A STUDY ON SELECT CEMENT COMPANIES. International Journal of
Management Research and Reviews 2014 06;4(6):651-659.
15. Joyce K. Gitobu. Factors affecting the management of accounts receivables in the hotel
industry: A survey of hotels in the coastal region of Kenya. Technical University of Mombasa.
2015; 2(8): 9 -11.
16. Ayers DH, Kincaid TJ. Avoiding potential problems when selling accounts receivable.
Healthcare Financial Management 1996 05;50(5):50-5.
17. Goel U, Chadha S, Sharma AK. Operating liquidity and financial leverage: Evidences from
Indian machinery industry. Procedia-Social and Behavioral Sciences. 2015;189(1):344-50.
18. Jensen MC. Agency costs of free cash flow, corporate finance, and takeovers. The American
Economic Review. 1986;76(2):323-9.
19. Vătavu S. The impact of capital structure on financial performance in Romanian listed
companies. Procedia Economics and Finance. 2015;32(2):1314-22.
20. Lime Energy Co. Reports Capital Raise and Debt Reduction. PR Newswire 2008 Nov 18.
21. Ladewig TL, Hecht BA. Achieving excellence in the management of accounts
receivable. Healthcare Financial Management 1993 09;47(9):24-6, 28-32.
36

Appendix
Appendix 1. Balance Sheet of Minh Phu from 2013-2015
37

38

39

40

41

42

Appendix 2. Income statement of Minh Phu from 2013-2015
43

44

45

Appendix 3. Interview with Minh Phu’s employees
Question 1: Why did the performance of Minh Phu decrease noticeably and reach the
lowest in the past 3 years, even the Company made loss in 2015?
Mr. Le Van Diep, Deputy General Director: 2015 is a difficult year for the seafood industry in
the world and in Vietnam as well. In detail, the price of shrimp reach the lowest point in the past
5 years, caused by the fall of oil’s prices in the world. Currency of India, Indonesia devalued
significantly, the price of shrimp from these countries went down dramatically from 30% to
40%. Meanwhile, the price of shrimp in Vietnam was high due to the hight cost of shrimp
breeding. Quality of shrimps from Vietnam decreased resulted in the low competitive advantages
in price and quality.
Mr. Nguyen Thien Tam, Head of Supervisory Board: In 2015, there were fluctuations and
difficulties for the world's seafood industry: prices of shrimp down, oil prices down, currencies
devalued in many countries, shrimp prices in the country were high. All these factors leaded to
the company did not reach the business plan set out for 2015.
Question 2: Why did the expense of the Company increase while the revenue decreased?
Mr. Le Van Diep, Deputy General Director: The increase of expense mainly related to the
selling expense and interest expense. In which, the selling expense increased by VND34 billion,
5% and financial expense increase significant by VND183 billion, 71%. Selling expense
increased mainly contributed by the increase of warehouse rental fee, according to the policy of
the Company, we expected that the price of shrimp increase next year, we storage inventories as
high level to reserve for high demand next year. About the financial expense, we had more
transactions in foreign exchanges (long-term borrowing, short-term borrowing) which lead to the
difference change on FX rate.
Mr. Luu Minh Trung, Chief accountant: The financial expense increased significantly come
from the increase of interest expense by 30% equivalent to VND50 billion as the long-term debts
with VND 3,500 bonds issued during this year. We issued corporate bond VND 3,500 billion on
20 May 2015 for working capital to purchase more material to reach high demand they forecast
in 2015, but the seafood industry had many fluctuations that lead to the performance was not as
expectation.
46

Question 3: Why did the Company maintain the high level of inventories in 2015 even
the selling activities was not good?
Mr. Luu Minh Trung, Chief accountant: The inventories increased a lot in 2015 as we predict
the higher demand of aquatic product in the coming years as well as to prevent the shortage of
raw materials due to the epidemic diseases has not been fully controlled.
Question 4: Why did account receivable turnover decrease while account payable
turnover increase?
Mr. Le Van Diep, Deputy General Director: The average collection period in 2015 was
noticeably long in the last 3 years. We do not well manage the account receivable, the account
receivable was not controlled tightly and closely. We also do not has the detail policy or penalty
stated in trade contract for the late payment. In 2015, as the seafood industry faced difficulties,
our customer have a trouble in selling shrimp to end customer, so we extended the term payment
for our key customers to support them.
Mr. Luu Minh Trung, Chief accountant: We mainly purchase shrimp raw material from
farmer and household. For this reason, we cannot hold the payable in a long time. Even the
difficulties, we need to made payment to the farmer to continue breeding shrimp. That resulted in
the increase of payable turnover.
Question 5: Why the Company always maintain high debt ratio, even the economic
environment was bad in 2015 even it resulted in the high interest expense?
Mr. Luu Minh Trung, Chief accountant: We expected that sales in 2015 would reach to VND
23,000 billion and profit after tax would be VND1,500 billion higher than 2014's figures 53%
and 63% respectively, we issued corporate bond VND3,500 billion on 20 May 2015 for working
capital to purchase more material to reach high demand they forecast in 2015. The increase of
interest expense increase also contributed by the foreign exchange difference. We recognized the
diminution of VND against USD in 2015, we decide to change all short-term borrowing in USD
to VND to be not effected by the increase of foreign exchange rate. Until the USD borrowing
maturity and change to VND in September 2015 while the foreign exchange rate at the end of
2015 keep stable So we had to bear a higher interest rate when borrowing in VND, average to 6-
7%/year compare with borrowing in USD with interest rate 3 – 45%/year while the foreign
exchange rate quite stable after our change.
47

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