how important of captial effecitent

1. What is capital efficiency?
In today's market economy, the need for capital for each business becomes increasingly important.
Analyzing capital efficiency plays an important role in business analysis to assess the level of
capital used by enterprises to achieve the highest results with the lowest cost. At the same time, it
provides useful information such as real financial situation for interested parties such as investors
and credit institutions to make effective investment decisions. Before starting, we should take a
quick look on the definition of "capital efficiency". It is defined as a financial ratio that shows
profitability versus the investments a company has made in itself. Simply put, capital efficiency
can be understood as a means to help measure company's liquidity, efficiency, and overall heath
because it includes cash, inventory, accounts receivable, accounts payable, etc. Therefore, it helps
to indicate that a company is able or unable to pay off its short-term liabilities and this is the reason
why analysts are sensitive to decreases in working capital.
Why capital efficiency is important?
Firstly, efficiency is especially important when it comes to managing capital. Higher capital
efficiency means the company invested less, but earned more. In other words, all the money that
was invested was put to used to generate the highest possible profit, down to the cents. An example
would be Truong Hai Corporation. It has just declared their success in buying BMW, leading to
THACO's internal stock price soaring overnight, from 95.000VND to 190.000VND. This is only
possible thanks to efficient transfer of funds between THACO's projects, mainly from the cashflow
from selling the Sala housing complex and automobiles.
Secondly, a company will face financial insolvency when its capital is insufficient to cover its
obligations, which means legal troubles are abounded, potential liquidation of assets and/or
bankruptcy. For example, we will take a look at Mai Linh Corporation. Mai Linh Corporation was
not efficient in utilizing its capital. Ever since its organization structure changed to Corporation in
2007, Mai Linh had about 60 subsidiary companies working on all sorts of fields. In addition, in
order to supplement its capital for further investments, the Corporation sourced for short-termed
loans from personal idle money with interest rates ranging from 18-25% per year. However, the
Corporation had invested in fields with slow capital turnover rate and low profitability. All of the
above factors combined led to hundreds of billions of deficit, thousands of billions of debt, great
loss of position, reputation, and market share, and forced the Corporation into refocusing on its
main business.
Thirdly, when not managed carefully, businesses may very likely out-grown themselves. This
means that their needs for working capital to fulfill expansion plans outstrip the rate that they can
generate profit in their current state, leading to an overall deficit. In the situation where a company
pays upfront for everything and diminishing their capitals instead of seeking financing solutions
to free up the cashflow, many of their businesses may prematurely fail when they may actually
turn a profit. The most efficient companies invest wisely to avoid these situations.
In summary, when comparing the performance of companies in capital-intensive sectors such as
utilities and telecoms, capital efficiency is much more useful as compared to return on equity
(ROE) because unlike return on equity (ROE) which only analyzes profitability related to a

2. company’s common equity, capital efficiency also considers debt and other liabilities as well.
Therefore, capital efficiency can provide a better indication of financial performance for
companies with significant debt. In order to better portray capital efficiency, some adjustments
may be required. Sometimes, a company may have an inordinate amount of cash on hand.
However, if such cash is not actively employed in the business, it may need to be subtracted from
the “Capital Employed” figure to get a more accurate measure of capital efficiency. For a company,
it is also worth nothing that one of the important indicators of the performance is its capital
efficiency trend over the years. In conclusion, companies with stable and rising capital efficiency
numbers tend to be more favored by investors over companies where the capital efficiency is
volatile and bounces around from one year to the next.