1 Table of Contents ABBREVIATION COGS: Cost of Goods Sold SG&A: Selling, General & Administrative R&D: Research & Development EBITDA: Earnings before Interest, Taxes, Depreciation & Amortization D&A: Depreciation & Amortization EBIT: Earnings before Interest & Taxes EPS: Earnings per Share CFS: Cash flow statement ROA: Return on assets ROE: Return on common Equity BEP: Basic Earning Power DSO: Days Sales outstanding TIE: Times-Interest-Earn P/E: Price/ Earnings LIST OF TABLES LIST OF FIGURES CHAPTER 1: INTRODUCTION 1.1 Rationale In recent years, Vietnam has constantly collaborated with many countries all over the world and has achieved strong growth in all aspects such as economy, politics, culture, etc In the situation of globalization, enterprises are treated equally and "Strong wins, weak loses" is the inevitable law of this dog-eat-dog world It is not only opportunities but also full of challenges The harsh rejection requires Vietnamese enterprises to carefully considered in each step, each element affects its competitiveness and Financial is the most important issue As we already know, finance decides the existence, development and downfall of the business Therefore, it is necessary to understand and analyze the strengths to promote the financial and promptly detect weaknesses to overcome and complete financial situation at the enterprise And, to assess the real ability as well as the financial situation of the company, analyzing financial statements is the most method Because of the need above, I choose my thesis topic is “Financial statements analysis in Haratour company" 1.2 Research objective Analysis and evaluating the financial statements in order to find out the strengths and weaknesses of company through some aspects: • Essential financial assessment • Analysis capital structure and financial situation to ensure capital for business • Analysis the situation of solvency of the company • Business efficiency analysis • Analysis financial ratios through financial statements of the company • Analysis the efficiency of using capital • Analysis the profitability of capital From that point, proposing methods for financial management and the highest efficiency of capital 1.3 Research questions There are some main questions that should be answered in the thesis: 1.4 • Capital sources and capital structure are reasonable or not? • How is the efficiency of company’s business activities? • How is the solvency of the company? • What are the strengths and weaknesses of corporate finance? Scope of research • Space: In this thesis, I focus on research and analysis of the financial situation of Hanoi Railway Tourist Corporation (Haratour) • Contents: Financial statements of Haratour company • Time periods: The financial situation is one of the most important indicators to evaluate the operations of the business Correctly and fully evaluating requires long process of research in all aspects of the company business But, because of the limited time practice at HARATOUR so I can only reflect the general financial situation of the company through the financial reports from 2010 to 2012 1.5 Research contributions Finance is one of the most important issues of a company and like the company's lifeblood In order to assess the financial situation and the possibility of a company's business, the most quick and accurate way is analyzing the financial statements Many recent studies also research on this issue, but only at the macro level and not sticking with the actual business In addition, conclusions in the previous studies are just for reference and be difficult to apply in practice for specific business In this study, I go into the actual situation analysis of one company to make specific findings as well as providing orientation to other businesses in the same industry In addition, this thesis also searches knowledge about financial statements analysis from a variety of sources and restructures them To which help the reader obtain general knowledge and deeper views on this issue 1.6 Structure of the research I divided the thesis into main sections: • Chapter 1: Give introductions about the thesis • Chapter 2: Give some general financial knowledge (financial statements, financial statement analysis, financial ratios, etc) to the readers • Chapter 3: Introduce HARATOUR and analyze their financial statements • Chapter 4: After analyzing financial statements, in this part, I release some discussions and key findings about financial situation of the company • Chapter 5: Recommendations for the company and conclusion CHAPTER 2: THEORETICAL FRAMEWORK OF FINANCIAL STATEMENTS ANALYSIS 2.1 The concept of financial statement analysis Financial statement analysis is the process of understanding the risk and profitability of a firm (business, sub-business or project) through analysis of reported financial information, by using different accounting tools and techniques The process of financial statement analysis is intended to help investors and analysts to deeply understand a firm’s profitability and risk and to use that information to forecast future profitability and risk From that point, ultimately value the firm and make intelligent investment decisions This process lies at the heart of the role of accounting, financial reporting, capital markets, investment, portfolio management and corporate management in the world economy When conducted with care and integrity, thorough and thoughtful financial statement analysis is a fascinating and potentially rewarding activity that can create tremendous value for society However, as the recent financial crises in our capital markets reveal, when financial statement analysis and valuation is conducted carelessly and without integrity, it can create enormous loss of value in our capital markets and trigger deep recession in even the most powerful economies in the world 2.2 2.2.1 Introduce financial statements Balance sheet The balance sheet is a “snapshot” of a firm’s position at a specific point in time It reports the company’s resources (assets) and how those resources were funded (liabilities and shareholders’ equity) on a particular date (end of quarter or fiscal year) Figure below show the layout of a typical balance sheet The left side of the statement shows the assets that the company owns, while the right side shows the firm’s liabilities and stockholders’ equity, which are claims against the firm’s asset Figure 1: A Typical Balance Sheet Current Assets Cash and equivalents Accounts receivable inventory Long-term (Fixed) Assets Net plant and equipment Other long-term assets Current Liabilities Accrued wages and taxes Accounts payable Notes payable Long – term debt Stockholders’ equity Common stock + Retained earning must equal Total assets – Total liabilities Total Assets Total Liabilities and Equity 2.2.2 Income statement Income statement is a report summarizing a firm’s revenues, expenses and profits during a reporting period, generally a quarter or a year It facilitates the analysis of a company’s growth prospects, cost structure, and profitability Readers can use the income statement to identify the components and sources of profit The table below shows major components of a typical income statement Table 1: Major components of a typical income statement Net Revenues Total dollar payment for goods and services that are credited to an income statement over a particular time Cost of Goods Sold (COGS) period COGS represents a company’s direct cost of manufacture (for manufacturers) or procurement (for merchandisers) of Gross Profit Selling, General & a good or service that sells to generate revenue Revenue – Cost of Goods Sold Operating costs not directly associated with the Administrative production or procurement of the product or service that (SG&A) the company sells to generate revenue Payroll, wages, commissions, meal and travel expenses, stationery, advertising, and marketing expenses fall under this line Research & Development item A company’s activities that are directed at developing new (R&D) Earnings before Interest, products or procedures Gross Profit – SG&A – R&D EBITDA is a popular Taxes, Depreciation & measure of a company’s financial performance Amortization (EBITDA) Depreciation & The allocation of cost over a fixed asset’s useful life in Amortization (D&A) order to match the timing of the cost of the asset to its Other Operating Expenses/ expected revenue generation Any operating expenses not allocated to COGS, SG&A, Income Earnings before Interest & R&D, D&A EBITDA – D&A Taxes (EBIT) Interest Expense Interest expense is the amount the company has to pay on debt owed This could be to bondholders or to banks Interest expense subtracted from EBIT equals earnings Interest Income before taxes (EBT) A company’s income from its cash holding and Unusual or Infrequent investments (stocks, bonds, and savings accounts) Gain (loss) on sale of assets, disposal of a business Income / Expenses segment, impairment charge, write-offs, restructuring Income Tax Expense costs The tax liability a company reports on the income Net income statement EBIT – Net Interest Expense – Other Non-operating Basic Earnings per Share Income – Taxes Net income / Basic Weighted Average Shares Outstanding (EPS) Diluted EPS Net income / Diluted Weighted Average Shares Outstanding 2.2.3 Statement of cash flow Statement of cash flow is a report that shows how things that affect the balance sheet and income statement affect the firm’s cash flow Unlike the income statement, whose primary purpose is to present a company’s operating performance, the major purpose of the cash flow statement is to present the movement of cash 10 The cash flow statement (CFS) has become increasingly important for the purpose of financial analysis because the income statement and balance sheet can be manipulated through the use of different accounting methods and assumptions, while a company’s uses and sources of cash are objectively recorded when cash is paid and received, respectively Cash inflows/ outflows are segregated into three major categories in the CFS: • Cash Flow from Operating Activities o Tracks cash generated in the course of a company’s day-to-day operations o These cash flows typically track the cash impact of changes in current assets and current liabilities • Cash Flow from Investing Activities o Tracks additions and reductions to fixed assets and monetary investments during the year o These cash flows typically track the impact of changes in long-term assets • Cash Flow from Financing Activities o Tracks changes in the company’s sources of debt and equity financing o These cash flows typically track the impact of changes in debt and shareholder’s equity 56 CHAPTER 4: DISCUSSION AND KEY FINDINGS 4.1 Financial structure Overall, in both 2011 and 2012, the company has changed the financial structure significantly The reduced size and financial restructuring in 2011 has brought certain efficiency and making the financial situation flourishes Specifically: 4.1.1 • Assets structure Cash and equivalents: Relatively stable and tends to increase in the future But current cash and equivalents are relatively low which makes the liquidity risk of the company is quite high, so companies should increase the amount of money gradually to limit risks in liquidity • Short-term investments: Short-term investments accounted for a small proportion of the total assets of the company in 2010 However, these investments were not effective and had been cut almost in all subsequent years • Receivables: Fell sharply in the two years 2011 and 2012, and have a continued down trend Days sales outstanding also had been quite short compared to the industry average Although this policy will help the company to have a good control over their money, it may reduce revenue Thus, the company should have easier and more flexible collecting receivables policy • Inventories: The situation is quite satisfactory in 2011 Inventory reduced along with favorable business situation; however inventory is still high compared with consumption situation Nevertheless, in 2005, the company expanded inventory in the 57 wrong time This activity made inventory costs and borrowing costs to rise while revenues fell, leading to a series of unstable financial situation • Prepaid expenses and other current assets: although took relatively small proportion of total assets, X has continuous increased in both the number and percentage in years • Property, plant and equipment: is one of the most important assets that any company should have In 2011, the company has decided to invest more money into property, plant and equipment to enhance production and it was effective when revenue increased significantly However, due to certain difficulties in 2012, the company must sell X to rebalance its finances • Capital construction in process: is one of the high proportion assets in the asset structure of HARATOUR in 2010 However, due to the high cost of this asset, along with the financial difficulties of 2010, in the next year, the company sold all of capital construction in progress to pay down debt, withdraw cash and restructure assets • Real estate investment: had the biggest amount and the highest proportion of the total assets of HARATOUR However, due to the instability and illiquidity of real estate in this period, the company didn’t have any additional investment for this property In contrast, its value is reduced over the years due to accumulated amortization • Long-term investment and other assets: like real estate investment, the company didn’t have any additional investment to the value of these assets; and they also reduced because of accumulated depreciation 58 4.1.2 Liabilities and equity structure Liabilities of the company was relatively high with the number being over 54% of total capital, showing the ability to self-finance companies is low and the working capital of the company depends heavily on external funding However, the proportion of debt in the capital structure reduced over the years and tends to be continue, showing that the company is trying to reduce their reliance on debt In particular, since 2011, the company has decided to pay most of its long-term debt and relies heavily on short-term debt This reduces the total debt of the company and the company was not dependent on the high cost long-term debt Common equity increased over the years due to the increase of retained earnings, showing that the company had a profitable business in recent years Besides, the additional investment of stockholders also made the total equity increased significantly over the years In 2011, when the company paid almost the entire amount of long-term debt, capital structure of the company has been gradually transferred to equity This brought many benefits to the company when help them have more ability in financial self-control and reduced high cost debt 4.2 Business operation 4.2.1 Revenue HARATOUR’s revenue includes net sales, financial activities revenues and other revenues It increased in 2011 but then declined in 2012 There are many factors that impact the business performance of companies such as price policies and payment policy In the coming years, the company should have plans to improve sales to improve the position of company in the market as well as improving capital efficiency 59 4.2.2 Cost Along with the fluctuation of revenue, HARATOUR’s cost had the same trend when increased in 2011 and then declined in 2012 There are many factors effecting the change of total cost Among them, the most important factor and the direct effect of fluctuations in the cost is cost of goods sold Besides, the financial activities expenses and selling, general & administration of HARATOUR had increased in recent years and is predicted to rise in the coming years Therefore, companies should try to control that growth of financial activities expenses and selling, general & administration expenses, while continuing to reduce cost of goods sold by increasing sales prices But the company needs to consider cautiously because the issue of price is very sensitive to revenue 4.2.3 Profit HARATOUR’s profit had increased rapidly in recent years showing that the company has been in the right path However, this development was not really stable; and the decrease in 2012 was a specific evidence Along with the decrease of revenue, a quick rise of expenses was also a reason for the fall of profit Therefore, in the coming years, the company must take measures for better control costs, boost revenue and increase the gap between revenue and cost 4.2.4 Liquidity Liquidity of the company is not very satisfactory because the company depends heavily on external fund It was reflected by the figure when both of current ratio and quick ratio of HARATOUR were lower than the industry average Moreover, in 2010, the company has used short-term debt to invest in long-term assets, which 60 made imbalance in finance and put the company into a difficult situation on short-term debt payments Although the amount of current assets could covered short-term debt, the liquidity risk is relatively high Because, in general most of the current assets was inventory and receivable whose liquidity are very low 4.3 Assets management Base on the low fixed assets turnover and total assets turnover of HARATOUR (compared to the industry average) in 2010, we can conclude that the efficiency of using capital in this year were not good Although having a huge amount of assets, company wasn’t able to exploit them to make a high revenue However, in the next two years, this problem was improved with the better assets turnover, showing that the company had a more suitable control over their capital Inventory turnover wasn’t stable After rising dramatically in 2011, inventory turnover reached a bottom in the next year It shows that the management of inventory was not reasonable; there was too much inventory while the sales had a decreased trend It also brought many financial difficulties for the company because inventory is illiquidity and can’t be turn into cash in a short time The situation of receivable turnover and days sales outstanding seemed positive High receivable turnover and low days sales outstanding (compared to the industry average) indicates that their customers paid the bills on time It helped the company to have more cash for operating and have funds that could be used to reduced bank loans or some other type of costly capital However, note too that if the company uses a too harsh policy for debt collection, they should lose a huge amount of customer and profit as well 61 4.4 Debt management Debt management situations in HARATOUR were the opposite pictures between the years In 2010, the proportion of debt in total assets was much higher than the industry average but the interest charges were low In contrast, in 2011, the company paid most of their long-term debt leading to the fall of total debt However, interest charges in this year increased significantly making the Times-Interest-Earned ratio fell so quickly The situation in 2012 was even worse when total debt increased but revenue reduced a significant amount All of them proved the fact that a company had a weak ability in debt management Although they restructured their debt, they still had many trouble with it 4.5 Profitability HARATOUR had a quite good profitability situation High operating margin showed that they earn a high amount of income (before interest and taxes) per each dollar of sales Similarly, high profit margin indicated that they actually had high earning per each dollar of sales Moreover, they also has higher-than-average ROA and ROE ratio It means that the company had managed well their assets and money of stockholders; from that point, bring high amount of income per each dollar of assets or of stockholders’ money 62 CHAPTER 5: RECOMMENDATION AND CONCLUSION 5.1 Recommendations From the analysis in previous section, I have some recommendations for HARATOUR to have better control in their financial issues and enhance profit Adjusting financial structure 5.1.1 • - Assets Increase cash and equivalents assets in order to enhance liquidity and reduce risks - Increase the proportion of accounts receivable by loosening the policy of debt collecting; from that point increase sales revenue and boost consumption - Reduce the proportion of inventories to the lowest possible level in order to accelerate the pace of inventory turnover - Using the fixed-assets for the most reasonable way in order to maximize longterm benefits - Should not invest in too much types of assets, which causes financial imbalances and difficult to manage • - Liabilities and equity Reducing the proportion of liabilities to save interest costs and minimize financial risk 63 - Instead of using the high-cost debt, find other long-term debt sources with lower cost to reduce financing costs - Pay debt on time to the sellers or bank to avoid additional fee - Keeping more retain earnings for the long-term investment - Should use equity or long-term debt for investment in fixed assets Avoid financial unbalance and burden caused by short-term debt payments Enhancing business efficiency 5.1.2 • - Increase revenue Search and classify customers; apply more flexible receivable policy depending on the reputation of each client Combining discount policy applied in payment to encourage customers to pay on time - Enhancing the search for customers Using advertising, marketing and promotion to introduce the image as well as the quality of products of the company to customers - Using sales promotion such as discount for a high value deal - Make good after-sales services such as free transport for traditional customers to consolidate relationships with customers - Implementing flexible pricing policy for each customer For new customers, selling price should be lower in order to make a good impression - Training staffs with specialized knowledge, product knowledge, ability to advise clients and ability to analyze and research market 64 • - Reduce cost The company should have a team of market research to capture timely market situation, compare the prices of goods companies are trading with prices of competitors to determine the suitable selling price Thus, the rate of cost of goods sold decreased to the lowest level and turnover at the highest possible level - Limit the proportion of debt to reduce the financial cost in business operations Building specific business plan for each year to establish specific sales goal and determine appropriate amount of inventory Avoid the issue of excess inventory that leads to high inventory costs and increase interest charges 5.2 Conclusion Hanoi in particular and the North Vietnam in general is undergoing rapid development Besides, the life of the people is increasing and the demand for travel is well on a high So the investment of HARATOUR companies in this area is justified Thanks to the experience of a long period of operation, the company has been growing and becoming one of the leading travel companies in North Vietnam Moreover, the company has many contributions by creating jobs and increasing living standards for many workers, contributing to the State Budget, contributing to the economic development of Hanoi Through the entire process of research and implement this thesis, I found myself that tourism industry even has more development potential However, companies often encounter difficulties in funding, there is not much equity, so companies have to borrow from the bank leading to more and more interest This situation has bad effects on the efficiency of using capital and profit of company Moreover, the expanding in 65 business in the present time of the company is very difficult due to low effective financial management and high liquidity risk And, the company also be difficulty in attracting capital from outside investors 66 REFERENCE John J.Wild, K R Subramanyam, and Robert F Halsey, 2006, Financial statements analysis Rhoda Brown, Mark Whittington, (2007) "Financial statement analysis and accounting policy choice: What history can teach us", Journal of Applied Accounting Research, Vol Iss: 3, pp.1 - 47 Eugene F Brigham, Joel F Houston, 2004, Fundamentals of financial management, 10th edition I M Pandey, and Ramesh Bhat, 2012, Cases in financial management N Ramachandran, and Ram Kumar Kakani, 2000, How to read a profit and loss statement N Ramachandran, and Ram Kumar Kakani, 2005, How to analyze financial statements http://www.cophieu68.com/category_finance.php?year=2010&search=T %C3%ACm+Ki%E1%BA%BFm http://www.cophieu68.com/category_finance.php?year=2011&search=T %C3%ACm+Ki%E1%BA%BFm http://www.cophieu68.com/category_finance.php?year=2012&search=T %C3%ACm+Ki%E1%BA%BFm 67 APPENDIX A Balance sheet of HARATOUR (2010 – 2012) Unit: VND Assets Current assets: Cash and equivalent Short-term investments Accounts receivable Inventories Prepaid expenses and other current assets Total current assets Long-term assets: Property, plant and equipment Capital construction in process Investment real estate Long-term investment Other assets Total long-term assets Total assets Liabilities and Equity Current liabilities: Payable to seller Deferred revenue Taxes and payable to state budget Payable to employees Accruals Intercompany payable Other short-term payable Welfare and reward fund Total current liabilities Other long-term payable Provisions fund for severance allowances 68 Unrealized turnover Total liabilities Common equity Paid-in capital Foreign exchange differences Investment & development funds Financial reserve funds Other funds Undistributed earnings Total common equity Total liabilities and equity APPENDIX B 69 Income statement of HARATOUR (2010 – 2012) Unit: VND Net sales Cost of goods sold Gross profit Financial activities revenues Other revenue Financial activities expenses Selling, General & administration expenses Earnings before taxes (EBT) Taxes Net income 2010 157,116,522,0 96 136,139,257,7 43 20,977,264,3 53 255,782,2 02 515,772,1 62 128,288,2 04 18,047,726,6 75 3,572,803,8 38 892,180,9 60 2,680,622,8 78 APPENDIX C 2011 182,592,716,4 90 156,256,413,5 05 26,336,302,9 85 108,637,5 23 195,508,8 81 652,017,6 99 20,907,639,4 72 5,080,792,2 18 1,268,923,0 55 3,811,869,1 63 2012 170,040,349,2 45 140,725,077,5 75 29,315,271,6 70 68,958,4 30 17,727,2 73 610,725,0 79 24,604,632,2 65 4,186,600,0 29 1,046,650,0 07 3,139,950,0 22 70 Financial ratios of HARATOUR (2010 – 2012) 2010 Liquidity HARATOUR 2011 Industry average HARATOUR 2012 Industry average HARATOUR Industry average Current 1.35 2.05 1.05 1.82 1.23 1.95 Quick 0.96 1.83 0.81 1.69 0.83 1.72 13.35% 13.00% 14.42% 13.30% 17.24% 14.60% Profit margin 1.71% 1.50% 2.09% 1.70% 1.85% 1.70% Operating margin 1.86% 1.70% 2.97% 2.00% 2.77% 2.00% ROA 5.17% 6.00% 9.05% 9.00% 7.30% 7.00% ROE 17.00% 15.00% 19.93% 13.00% 15.87% 14.50% BEP 5.65% 8.60% 12.89% 10.20% 10.95% 10.30% 65.66% 50% 49.06% 55% 69.36% 50% 23.5 12.9 28.1 5.4 3.03 20 10 10 11 30 00 40 3.2 19.83 22.13% 17.33 13.40% 21.06 25 10.20 3.95 69.61% 22.84 Profitability Gross profit margin Payout Asset Management ratios Inventory turnover Receivable turnover Days Sales outstanding Fixed assets turnover Total assets turnover Debt management ratios Total debt to total assets TIE 9.08 4.34 24 00 12 34 28 00 20 3.8 52.50% 54.60% 53.00% 54.03% 55% 7.60 8.33 8.01 7.71 8.00 36.09 16.31 22.38 ... • Inventories After dropping in 2011, inventories increased again in 2012, both in quantity and quality 33 Inventory in 2010 is 6.7 billion, accounting for 12.88% of total assets In 2011, inventories... capital for business • Analysis the situation of solvency of the company • Business efficiency analysis • Analysis financial ratios through financial statements of the company • Analysis the efficiency... Chapter 3: Introduce HARATOUR and analyze their financial statements • Chapter 4: After analyzing financial statements, in this part, I release some discussions and key findings about financial