The Impact of Globalization on Vietnamese company’s financial performance: A Case Study of Lang Son Cement Company (LCC) BY TA THI PHUONG THU E0700062 Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfillment of the Requirements for the Degree of Bachelor of Business (Accounting) Hons APRIL 2011 i Declaration of Originality and Word Count DECLARATION I here by declare that this graduation project is based on my original work except for quotations and citation which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other courses/degrees at HELP University College or other institutions The word Count is 10,007 words TA THI PHUONG THU 28 March, 2011 ii Acknowledgement This project would not have been made possible without the assistance, support and encouragement of many people I wish to take this opportunity to thank all the people who have helped me during the time of completing the dissertation Firstly, I would like to express my deep gratitude to my supervisor Dr Dao Thi Thu Giang at the Foreign Trade University (FTU) of Viet Nam SHe has kindly helped me and supported me all the way through For that, I am very grateful I also would like to express my thank to Ms Sumathi at Help University College, who initiated the project and give so much instruction and support TA THI PHUONG THU iii Abstract THE IMPACT OF GLOBALIZATION ON VIETNAMESE COMPANY’S FINANCIAL PERFORMANCE: A CASE STUDY OF LANG SON CEMENT COMPANY (LCC) BY TA THI PHUONG THU March 2011 Supervisor: Dr Dao Thi Thu Giang Globalization is not new trend in the world but is still new in Vietnam Vietnam is one of the developing countries, so the impact of globalization on Vietnam‟s economy has many things to discuss The objective of the research is to assess the understanding of globalization trend and its effect on Vietnamese company‟s financial activities Besides, the research also wants to show the role of the financial analysis in its investment strategies and good financial planning of the board of management In this research, Lang Son Cement Company is taken as a typical case study that goes through my study iv TABLE OF CONTENT Declaration of Originality and Word Count……………………………………… ii DECLARATION……………………………………………………………………ii Acknowledgement………………………………………………………………… iii Abtract……………………………………………………………………………….iv TABLE CONTENT………………………………………………………………….v LIST OF FIGURES AND TABLES………………………………………………vii LIST OF ABBREVIATIONS…………………………………………………… viii CHAPTER 1: INTRODUCTION………………………………………………….1 1.1 Introduction…………………………………………………………… .2 1.2 Need for research………………………………………………………… 1.3 Elements of the research……………………………………………………3 1.4 Scope of research……………………………………………………………3 1.5 Assumptions…………………………………………………………………4 1.6 Plan of presentation…………………………………………………………4 CHAPTER 2: LITERATURE REVIEW………………………………………… 2.1 A general look at financial statement………………………………………6 2.2 The general approach applied in analysis of financial statement……… 2.3 The nature of globalization……………………………………………… 17 2.4 The impact of globalization on the financial performance of Vietnamese’s company; a typical example is LCC’s financial performance… 18 CHAPTER III: RESEARCH METHODOLOGY……………………………….20 3.1 Research objective…………………………………………………………21 3.2 Research strategy………………………………………………………… 21 3.3 Research hypothesis……………………………………………………… 21 3.4 Research methodology…………………………………………………… 26 3.5 Data sources and sampling……………………………………………… 26 3.6 Limitation of research 27 CHAPTER IV: ANALYSIS……………………………………………………….28 4.1 Results Analysis…………………………………………………………….29 4.2 Discussion………………………………………………………………… 34 v CHAPTER 5: CONCLUSION…………………………………………………….36 5.1 Implication of research…………………………………………………….36 5.2 Conclusion………………………………………………………………….36 Bibliography……………………………………………………………………… 38 Appendices………………………………………………………………………….39 vi LIST OF FIGURES AND TABLES Figure The Du Pont system of financial analysis model 26 Table : The liquidity ratio 31 Table : Asset – Management ratios 33 Table : Financial – leverage ratios 35 Table : Profitability ratios 36 vii LIST OF ABBREVIATIONS LCC Lang Son Cement Company WTO World Trade Organization BEP Breakeven point viii CHAPTER I: INTRODUCTION 1.1 Introduction 1.2 Need for Research 1.3 Elements of the Research 1.4 Scope of Research 1.5 Assumptions 1.6 Plan of Presentation 1.1 – Introduction To begin my task, I will talk about the meaning of globalization Globalization is considered as “a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world.”1 Globalization has a strong effect on the Vietnamese company‟s financial performance As you can see, companies should prepare their annual financial statements in order to measure the benefit rate after each financial year Reviewing and assessing financial information bring about an understanding of a company‟s strengths and weaknesses, how its annual plan has been carried out and what investment effect level its plan implementation results in This activity will make an impact on its investment strategies and good financial planning As can be seen, the financial statement of a company is based on financial facts but can be influenced by its management and may cause misstatements or fraud in them Therefore, the purpose of this paper is to revise and reanalyze the 2007 and 2008 financial statements of Lang Son Cement Company (LCC) in order to assess and make a comparison of financial activities between 2007 and 2008 From this analysis of financial statements, suggestions and proposals about investment, financial statements can be submitted to LCC to have an improvement of financial statement preparation http://www.globalization101.org/What_is_Globalization.html Cost – volume – profit analysis is used by managers for financial planning to estimate the firm‟s operating profits at different levels of unit sales: Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs) At this breakeven point (BEP), a company will experience no income or loss This BEP can be an initial examination that precedes more detailed CVP analysis Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis The assumptions underlying CVP analysis are: the behaviour of both costs and revenues is linear throughout the relevant range of activity (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable Changes in activity are the only factors that affect costs All units produced are sold (there is no ending finished goods inventory) When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.10 In other words, Analysis that deals with how profits and costs change with a change in volume More specifically, it looks at the effects on profits of changes in such factors as variable costs, fixed costs, selling prices, volume, and mix of products sold By studying the relationships of costs, sales, and net income, management is better able to cope with many planning decisions For example, CVP analysis attempts to answer the following questions: (1) What sales volume is required to break even? (2) What sales volume is necessary in order to earn a desired (target) profit? (3) What profit can be expected on a given sales volume? (4) How would changes in selling price, variable costs, fixed costs, and output affect profits? (5) 10 http://en.wikipedia.org/wiki/Cost-Volume-Profit_Analysis 25 How would a change in the mix of products sold affect the break-even and target volume and profit potential?11 Break – even analysis is used to estimate how many units of product must be sold in order for the firm to break even or have a zero profit In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even" A profit or a loss has not been made, although opportunity costs have been paid, and capital has received the risk-adjusted, expected return For example, if a business sells fewer than 200 tables each month, it will make a loss, if it sells more, it will be a profit With this information, the business managers will then need to see if they expect to be able to make and sell 200 tables per month EBIT = sales – variable costs – fixed costs EBIT = (price per item x quantity) – (variable costs x quantity) – fixed costs 3.4 Research methodology Research method applied in this thesis is quantitative research as the task in this thesis is to analyze the financial statement a company (LCC) 3.5 Data sources and sampling Data collection techniques: Data will be provided by LCC An ethic letter will be sent to manager of LCC in order to have an access to their financial documents A 11 http://www.answers.com/topic/cost-volume-profit-cvp-analysis 26 promise not to used data from LCC for unethical purposes will be stated in the ethic letter 3.6 Limitation of research There are some limitations in my survey Firstly, the measures of survey instrument suppose that there are changes in the financial performance of LCC over the period of two years The archival and filed data collections that are measured must be validated in future research The data on dependent and independent variables was collected by many different sources lead to reduce of the degree of accuracy Secondly, during two years, it‟s the possibility that the data of financial statement may be sometime implemented Thirdly, in experience of this research, to understand better overall impact of globalization on financial performance, future studies need to collect more timeline detailed data 27 CHAPTER IV: ANALYSIS 4.1 Results Analysis 4.2 Discussion 28 4.1 Results Analysis In this part, I will take some analysis of several ratios that I have calculated above based on the data in the Langson Cement Company‟s financial statement in 2007 and 2008 Table 1: the liquidity ratios Ratios Year 2007 Year 2008 Net working capital 4,455,565.35 VND 3,415,462.16 VND Current ratio 1.175 times 1.1209 times Quick ratio 0.4 times 0.6 times Average payment period 8.5 days 4.5 days First, current ratio is computed by dividing the current assets by the current liabilities Both assets and liabilities with maturities one year or less are considered to be current for financial statement purposes A low current ratio may indicate that a company faces difficulty in paying its bills A high value for the current ratio, however, does not necessarily imply greater liquidity It may suggest that funds are not being efficiently employed within the firm Excessive amount of inventory, account receivables, or idle cash balances could contribute to a high current ratio LCC has current ratio for 2007 and 2008 are 1.175 times and 1.1209 times respectively The balance sheet shows a decrease in LCC cash account in 2008 and both accounts receivables and inventory fallen As we can see, LCC has fast – paying accounts because of the inventory dropped Second, quick ratios are the next part in group of liquidity ratio This comparison eliminates inventories form consideration since inventories are among the least liquid of the major current asset categories because they must first be converted to sales In general, a ratio of 1.0 indicates a reasonably liquid position in that an immediate 29 liquidation of marketable securities at their current values and the collection of all accounts receivables, plus cash on hand, would be adequate to cover the firm‟s current liabilities However, as this ratio declines, the firm must increasingly rely on converting inventories to sales in order to meet current liabilities as they come due LCC has quick ratios for 2007 and 2008 are 0.4 times and 0.6 times correspondingly According to the financial statement data, LCC‟s quick ratio is well below 1.0 As we can see, this is not a major cause for concern in the retail cement – store industry The last but not least, we calculate the average daily cost of goods sold by dividing the income statement cost of goods sold amount by 365 days in a year The average payment period of LCC for 2007 and 2008 are 8.5 days and 4.5 days Table 2: Asset – management ratios Ratios Year 2007 Year 2008 Total assets turnover 0.7 times 1.28 times Fixed assets turnover 1.05 times 1.95 times Average collection period 44.5 days 26 days Inventory turnover 5.1 times times First, total – assets – turnover ratio is computed by dividing net sales by the company‟s total assets This ratio indicates how efficiently the firm is utilizing its assets to produce revenues or sales It is a measure of the dollars of sales generated by $1 of the firm‟s assets Generally, the more efficiently assets are used, the higher a firm‟s profits The size of the ratio is significantly influenced by characteristics of 30 the industry within which the firm operates LCC‟s 2007 and 2008 total – assets – turnover ratios are 0.7 times and 1.28 times respectively Second, fixed – assets – turnover ratio is computed by dividing net sales by the fixed assets and indicates the extent to which long – term assets are being used to produce sales Similar to the interpretation given to the total asset turnover, the fixed assets turnover represents the dollars of sales generated by each dollar of fixed assets The fixed – assets – turnover ratios of LCC are 1.05 times and 1.95 times respectively As we can see, LCC‟s fixed assets turnover increased from 1.05 to 1.95 between 2007 and 2008, indicating that sales increased more rapidly than fixed asset Third, average collection is calculated by taking the year – end accounts receivable divided by the average net sales per day This indicates the average number of days that sales are outstanding In other words, it reports the number of days it takes, on average, to collect credit sales The average collection period measures the days of financing that a company extends to its customers Obviously, a shorter average collection period is usually preferred to a longer one Another measure that can be used to provide this same information is the receivables turnover Finally, inventory – turnover ratio is computed by dividing the cost of goods sold by the year – end inventory Here we are seeking to determine how efficiently the amount of inventory is being managed With inventory management, it is prudent to have an adequate amount to avoid running out of products while avoiding the accumulation of too many products that may necessitate extra financing The turnover ratio indicates whether the inventory is out of line in relation to the volume of sales when compared against industry norms or when tracked over time for as specific company LCC‟s annual inventory turnover increased from 5.1 in 2007 to in 2008 31 Table 3: Financial – leverage ratios Ratios Year 2007 Year 2008 Total debt to total assets 59.3 % 54 % Equity multiplier 2.45 2.17 Interest coverage 2.16 times 0.43 time First, the total – debt – to – total – assets ratio is computed by dividing the total debt or total liabilities of the business by its total assets This ratio shows the portion of the total assets financed by all creditors and debtors Taking the relevant information from the LCC‟s balance sheet, LCC‟s total debt to total assets ratios are 59.3 % in 2007 and 54 % in 2008 Second, equity multiplier ratio is calculated by dividing total assets by the firm‟s total equity As we can see, the equity multiplier of LCC has a decrease from 2.45 to 2.17 between 2007 and 2008 Third, interest coverage is calculated by dividing the firm‟s operating income or earnings before interest and taxes (EBIT) by the annual interest expense Using data from LCC‟s 2007 and 2008 financial statements, we have interest coverage 2.16 times in 2007 and 0.43 times in 2008 The interest coverage figure indicates the extent to which the operating income or EBIT level could decline before the ability to pay interest obligations would be impeded 32 Table 4: Profitability ratios Ratios Year 2007 Year 2008 Operating profit margin 3.4 % 4.3 % Net profit margin 3.3 % 4.3 % Operating return on asset 3.1 % 4.4% Return on total assets 3.1% 4.2 % Return on equity 7.5 % 9.2% First, the operating profit margin is calculated on the firm‟s earnings before interest and taxes divided by net sales This ratio indicates the firm‟s ability to control operating expenses relative to sales LCC‟s operating profit margin for 2007 and 2008 are 3.4% and 4.3% This result indicates that LCC was able to slightly improve its operating profitability from 2007 to 2008 Second, the net profit margin, a widely used measure of a company‟s profitability, is calculated as the firm‟s net income after taxes divided by net sales In addition to considering operating expenses, this ratio also indicates the ability to earn a return after meeting interest and tax obligations LCC‟s net profit margin show a slight improvement in 2007 and 2008 as 3.3% in 2007 and 4.3% in 2008 Third, the operating return on assets is computed as the earnings before interest and taxes divided by total assets This ratio focuses on the firm‟s operating performance and ignores how the firm is financed and tax Relevant data for LCC must be taken from both the balance sheets and the income statement are 4.4% in 2007 and 3.1% in 2008 Fourth, the net return on total assets, commonly referred to as the return on total assets, is measured as the firm‟s net income divided by total assets The return on 33 total assets is measured after a firm has covered its operating expenses, interest costs, and tax obligations LCC„s return on total assets are 3.1% in 2007 and 4.2% in 2008 Finally, the return on equity measures the return that shareholders earned on their equity invested in the firm The return on equity is measured as the firm‟s net income divided by stockholder‟s equity This ratio reflects the fact that a portion of a firm‟s total assets are financed with borrowed funds LCC‟s return on equity is 7.5% in 2007 and 9.2% in 2008 4.2 Discussion By the result analysis, I can affirm that globalization play as an important role as an impact on financial statement of companies in the world in general and in Vietnamese company in particular Langson Cement Company‟s financial statement is a typical example for the impact of globalization In specifically, after analyzing the data from financial statement of LCC, I see that the business results in 2007 and 2008 of LCC are quite good The earnings after taxes and interest are 3,166,686.745 VND in 2007 and 4,348,655.605 VND in 2008 There are the growth in the profit of LCC‟s financial statement between 2007 and 2008 Besides that the operating profit margin, net profit margin, return on total asset, return on equity ,and so on also increased between 2007 and 2008 To have this growth, I think that globalization takes an important role because it makes the trade between the countries more easily and comfortably And LCC is one of many companies in many countries in the world have a positive impact of globalization 34 CHAPTER V: CONCLUSION 5.1 Implication of research 5.2 Conclusion 35 5.1 Implication of research In my study, existing quality of knowledge is enhanced base on the effectiveness of globalization in some ways and the impact of analysis of financial statement on the boards of managers when making the business decisions Firstly, globalization has an important effect on the development of the world‟s economy in general and the Vietnam‟s economy in particular The trade exchange among countries becomes more easily and comfortably Especially, the economic effectiveness that globalization bring to them is very high Second, in my research, LCC is one of many companies in Vietnam that has the high economic benefit And the analysis of financial statement of LCC is a typical example that denotes the impact of globalization trend in Vietnam And it participates on making decision of the board of management 5.2 Conclusion For all things mentioned above, I strongly think that globalization has well – built effect on the financial performance of companies in Vietnam Financial information brings about an understanding of a company‟s strengths and weaknesses All results that I have calculated and analyze above prove the impact of globalization trend on LCC in particular and in Vietnamese‟s company in general The benefit and profit of LCC have an increase between 2007 and 2008 It also shows the reasonable and right decisions of the board of management in LCC In my research, I can only show a small aspect that globalization affect to Vietnamese company‟s financial statement include Langson Cement Company However, I strongly believe that globalization has positive and effective impact that 36 helps the benefit and profit exist in the financial performance of Vietnamese company in particular and in another countries‟ company in general I hope that all of them will make the reasonable decision to develop their business and know how to seize opportunities that globalization brings to them I believe on the much more bright future of Vietnam‟s economy in particular and 37 Bibliography Tihomirovs, G (2007) Common misstatements in the financial statements of Latvian Companies: Do investors consider possible fraud in financial data they analyze? (Bachelor thesis) http://www.globalization101.org/What_is_Globalization.html http://www.benbest.com/business/finance.html http://www.benbest.com/business/newecon.html http://media.wiley.com/product_data/excerpt/03/EHEP0000/EHEP000003.pdf Resources from http://www.public.iastate.edu/~alicia/stat328/Time%20Series.pdf http://www.investopedia.com/terms/c/cross_sectional_analysis.asp http://bizfinance.about.com/od/financialratios/qt/comparative_rat.htm http://en.wikipedia.org/wiki/Globalization 10 http://www.sociology.emory.edu/globalization/issues01.html 11 http://www.globalization101.org/What_is_Globalization.html 12 http://en.wikipedia.org/wiki/Cost-Volume-Profit_Analysis 13 http://www.answers.com/topic/cost-volume-profit-cvp-analysis 14 http://cpaclass.com/fsa/ratio-01a.htm 15 http://www.rurdev.usda.gov/rbs/pub/rr154.pdf 16 http://www.creditguru.com/ratios/ratiopg1.htm 17 http://www.zeromillion.com/business/financial/financial-ratio.html 18 http://www.investopedia.com/university/ratios/ 19 http://www.finpipe.com/equity/finratan.htm 20 http://www.doi.gov/pfm/par/acct2000/analysis.pdf 38 Appendices Appendices A: Balance sheet for LCC (VND in Billion) 2007 1,601,463,994 11,029,884,253 12,327,852,537 4,927,127,555 29,886,328,339 69,368,913,712 3,199,000,000 709,552,753 73,277,466,465 103,163,794,804 Assets Cash & marketable Securities Account receivable Inventories (VND) Other current assets Total current assets Net fixed assets Long term financial investment Other long – term assets Total fixed assets Total Assets 2008 10,247,015,817 9,491,435,945 11,851,894,879 73,950,000 31,664,296,641 67,433,202,612 3,199,000,000 137,374,702 70,769,577,314 102,433,873,955 Appendices B: Income statement for LCC (VND in Billion) 2007 73,415,907,954 62,919,268,784 10,255,023,450 5,902,747,448 1,464,462,417 2,921,537,386 245,149,359 3,166,686,745 3,166,686,745 823 Revenue Cost of goods sold Gross profit Selling, general & administrative Interest expense Operating income Other income Income before taxes Net income Earnings per share 39 2008 131,910,768,806 107,009,544,692 24,730,184,094 10,296,167,459 10,296,736,049 4,175,412,692 345,795,205 4,521,207,897 4,348,655,605 841 ... initiated the project and give so much instruction and support TA THI PHUONG THU iii Abstract THE IMPACT OF GLOBALIZATION ON VIETNAMESE COMPANY? ??S FINANCIAL PERFORMANCE: A CASE STUDY OF LANG SON CEMENT. .. impact of globalization on Vietnamese? ??s financial statement in general and impact on the financial situation of Lang Son Cement Company (LCC) in particular 1.3 Elements of the research 1.3.1 Research... financial statements 2.3 The nature of globalization 2.4 The impact of globalization on the financial performance of Vietnamese? ??s company; a typical example is LCC‟s financial performance 2.1 A general