Bargaining Power of Buyers:
Automobiles and motorbikes industry is on growing trend and the number of manufacturers for these products is increasing as well, therefore it can be said that bargaining power of buyers is not very high because of the huge number of tire buyers in the market.
Threat of Substitute products:
No pressure on substitute product as there are no alternative products for tires as a main part of any type of vehicles.
Threat of new entrants:
Barrier to entry is high as this industry requires large capital base and modern production lines as well as high technology.
With this barrier, foreign competitors may have possibility to enter, however it would take time for them to survey the market and have proven high-quality product in order to conquer the tire market in Vietnam.
Competitive Rivalry
Vinachem is currently the largest tire manufacturer in Vietnam, it has stakes in 3 main domestic market players of tire industry including CSM, SRC and DRC, only SRC can produce tires for airplanes.
Foreign competitor of this industry is Kumho which can produce radial tire while 50% of radial tires are currently imported, this Company is the biggest competitors for all domestic tire manufacturers.
In the coming time when the plan to produce 600,000 tires per year of DRC is completed, together with the implementation of CSM’s radial tire, it would create fierce competition going forward.
3.3 SWOT Analysis
IV ANALYSIS OF FINANCIAL STATEMENT
4.1 Analysis of balance sheet
The balance sheet of the Danang Rubber JSC states its financial position at the end of an operating period-a fiscal year. The balance sheet represents the Company’s assets, liabilities, owner’s equity, and their relationship to each other.
Table 1 compares the balance sheets of the Company for 2009 and 2008. In the balance sheet, each account is listed as a percentage of total assets. The dollar amount of total assets the balance sheets represent is listed at the bottom of the table.
4.1.1 Current Assets
Looking first at current assets, cash and cash equivalents as a percent of total assets increased by 428%. In 2008, cash was only accounted for 2% of total asset, but it reached 10% in 2009 . By the end of December 2009, the Company had a cash balance of VND77,969 million, up by 428% compared to the beginning of the year.
4.1.2 Investments and Other Assets
About 1 percent of Company’s total assets in 2008 was invested in the Bank to earn deposit’s interest . However, the Company’s short-term investment has reduced from VND9,000 million in 2008 to zero in 2009 as the Company has withdraw its deposits from Bank to repay the current portion of long-term loan. DRC main focus on its core business activities, therefore DRC doesn’t have any long-term investments or hold any real estate investment. Therefore, there is no risk in its financial investment activities.
4.1.3 Account Receivables:
Account receivables as a percent of total assets decreased from 20% in 2008 to 16% in 2009, however the total amount of account receivable increased by 4% from in 2009.
4.1.4 Inventory:
Inventories are accounted for more than 40% of total asset, it is significantly high, and its inventory level in 2009 even higher than in 2008 by 20%. This is mostly rubber bought to cover their input material needs. Due to storage constraints, the company usually purchases rubber six months ahead only.
4.1.5 Non-current assets:
Fixed Asset as a percent of total assets tended to be between 29 percent and 30percent of total assets. Net fixed asset increased by 30% from 2008 to 2009 mainly due to the increasing of machinery for expanding of operation.
4.1.6 Current liabilities:
The short-term loan balance, used for working capital needs declined considerably from 44% of total assets in FY 2008 to 12% of total assets in 2009. In value term, its short-term loan reduced from VND271.8 billion as of 1st of January, FY 2009 to VND 93.19 billion at the end of December 2009 or a reduction of 66%. And this loan amount carries a cheap interest rate of 4-5% thanks to the stimulus package. Most of the loan balance held as of the end of last year was paid up and new loans were taken out in February 2010 so the company could enjoy the subsidized loan program.
4.1.7 Long-term liabilities:
Long term loans came to VND42.57 billion, reduced by 55% compared to VND94.52 billion as of the beginning of the year. As a percent of total assets it generally decreased from 15% of total asset in 2008 to 5% in 2009. DRC has quite low debt level.
In early August 2010, DRC has signed loan contracts for two loans; US$81.1 million and VND244 billion at interest rate of 4.5% and 12.5% respectively. This will increase the debt to equity ratio to 2.89 times which is very high. DRC intends to issue share in FY2011 to support its radial project but the details are not available now. Anyway, to keep a balance of 3:7 equity/debt for the radial project, DRC will need to raise at least VND900 billion, not a small amount, given their current total shareholders’ equity of VND649 billion.
4.1.8 Resources:
The Capital of the Company is mainly from its owner’s capital investment. Owner’s capital investment of the Company in 2006 was 28%, 2007 was 36%, but it reached 71% in 2009. The increasing of owner’s equity in 2009 is due to the increase of net profit as result of good performance. In comparison with 2008, the Investment & development funds increased by 19 times, financial reserve funds increased 1.4 times and retained earnings increased 7 times. As a result of increasing of owner’s equity, debt reduced gradually (from 200 to 2009, debts decreased 62%).
In the near future, the company plans to build another plant to manufacture radial tires for the automobile sectors with a capacity of 600,000 tires per annum. Currently the construction of the new plant is about to kick off. DRC will need around VND2,000 billion for this projects. The company plans to finance its new radial project by 30% from share issuance and 70% from borrowings to be disbursed gradually based on progress of the project. At the first stage of financing, they intend to raise more capital by issuing additional issues to existing shareholders at the end of 2010.
Table 1: Balance sheet and change in accounts, 2008 to 2009
Table 2: Quarterly balance sheet, 2009 and 2010
4.2 The analysis of Income Statement
4.2.1 Annual Income Statement:
The income statement displays the net results of the Company’s operations. Because most managers’ performance is judged by net income, owners and investors attach great importance to the income statement. In the following sections, the underlying values of the income statement are studied. Table 3 presents an income statement for the Company as percentage of net sales and the change between 2008 and 2009. Table 4 presents quarterly income statement from 2009 to second quarter of 2010. Appendix tables 2 shows common size income statements for five years from 2006 to 2009.
In the analysis of income statements, net sales were set at 100 percent to find out the proportion that a single item represented in a total group.
Table 3: Income Statement and change in accounts, 2008 to 2009
4.2.1.1 Net revenue:
The first item of the income statement analyzed in this report was net revenue/sales. It was determined by subtracting sales discounts and returns and allowances from gross sales. The net sales for the Company in 2009 was VND1,815 billion, up VND 524 billion or 41% percent from 2008. Net sales by the Company are presented in Chart 1.
Chart 1: Revenue by year
Chart 2: Revenue growth
4.2.1.2 Cost of Goods sold:
Cost of goods sold (COGS) was the amount the Company paid for the products it sold. Net sales less COGS represented the gross profit on sales. The company was saving 17% y/y in COGS. This was due to the y/y halving in the natural rubber price. The rubber price in 2009 was fluctuating between VND25-28 million per ton and it was reported at around VND52 million per ton for the same period in 2008. In tire production, input materials accounted for around 70% of COGS and natural rubber contributed 80% of input materials. Thus, the improvement in COGS was mainly caused by the sharp decrease in natural rubber prices. The fall in crude fall prices y/y and reducing demand from Chinese buyers are still the main drivers. As a result, gross profit margins looked much better, standing at 29% compared to 12% in the year of 2008.
4.2.1.4 Financial Income:
Financial income was mainly generated via bank deposits, the decrease of financial income was due to the withdrawal of term deposit for repayment of debt.
4.2.1.5 Financial expense:
Financial expense decrease from 5% of net sales in 2008 to 3% in 2009. This was due to a decrease in liabilities and lower interest rates due to the subsidized loans. This was achieved thanks to the higher available cash due to payments from buyers.
4.2.1.6 Selling expense:
Selling expense includes commission paid to distributors, sale agents who pay in advance or achieve high sale volumes. It normally accounts for around 3% of net sales. For FY2009, selling expense came to VND45 billion, up 34% on the same period in 2008. In addition to the impact of higher sales, the company has also tried to boost sales by increasing the commission for distributors who pay straight away so that they get some more available cash to pay up 2008’s loans and get the new subsidized loan. This boosted their selling expenses. General and administration expense jumped to VND39.7 billion (+100%) from VND19.8 billion in FY2008.
4.2.1.7 Net Profit
Net profit is the term used here for profits on the income statements. Net income as a cent of net sales increased from 4% in 2008 to 22% in 2009.
The company still enjoys tax exemption. Thus, net profit was reported at VND394.5 billion or an increase of 659% y/y. Similarly, net margin increased significantly from 4% for FY2008 to 22% in FY2009
4.2.2 Quarterly Income Statement FY2010 and FY 2009
Table 4: Quarterly Income Statement
DRC’s first half of 2010 (1H-2010) financial results reveal a 12% year-on-year increase in revenue but net profit dropped 43%. The main reason behind the sharp fluctuation of profit is the movement of material price, particularly rubber, which has increased 96% from 6/2009 to 6/2010. Although DRC has increased its selling price around 15% in 1H-2010, the price adjustment cannot catch up with the rise in material price, thus pressing gross profit margin down to 9% from an average 27.8% in 1H-2009.
In the 1H-2010, DRC generated VND970 billion in net revenues, up 11.7% y/y and fulfilling 46.2% of its target. Although net revenues increased, net profit dropped sharply by 43.8% y/y to reach VND98 billion but still fulfilled 73% of the target. As a result 1H-2010 net profit margin was down significantly from 20.1% in the 1H-2009 to 10.1%. Even so the company had projected net margin this year at just 6.4%. Volume sales were almost flat at about 5.5 million tires and tubes of all kinds, up just 0.4% y/y. In FY2009, There are several reasons for this. Firstly the company has scaled back on promotion programs & sales discounts and didn’t open any new distribution centers. Then auto sales in the 1-H were quite sluggish (while DRC relies on replacement tire sales as the tire industry does not publish statistics and we use auto sales as a rough proxy for forward sales). And most importantly their automobile and truck tire plant, which account for nearly 81% of sales, is operating at full capacity already. The designed capacity is 500,000 tires per year and in FY2010 DRC has targeted sales of about 780,000 tires this year, or 156% of capacity by running double shifts. Even so this represents a volume increase of just 1% y/y. Volume sales growth has reached its limit until the new factory comes on stream.
In the 1H-2010, sales of automobile (mostly truck tires) accounted for about 80.7% of total sales. Of which heavy-truck tires account for 48% of total sales while light-truck tires account for 20% of total revenues. DRC has not provided us with a sales breakdown in terms of growth but we suspect that sales of large and small truck tires slowed down y/y. Currently DRC and other tire companies in Vietnam manufacture mostly so called bias ply tire. Tires are not simply fabricated from rubber as they would be far too flexible and weak. Within the rubber are a series of plies of cord that act as reinforcement. All common tires are made of layers of rubber and cords of polyester, steel, and/or other textile materials. In the case of bias ply tires this fabric is built up on a flat steel drum, with the cords at an angle of about +60 and -60 degrees from the direction of travel, so they crises-cross each other. Almost all of DRC’s current output is bias ply.
However DRC also manufacture some radial ply tires, but these are made small lots just for some special customers. This radial ply design avoids having the plies rub against each other as the tire flexes, reducing the rolling friction of the tire. This allows vehicles with radial tires to achieve better fuel economy than vehicles with bias-ply tires. Radial tires cost more than comparable bias-ply tires, but the extended tire life and fuel savings makes using radials the more cost-effective choice. On the other hand, bias ply is still used for tractors and trailers. And as Vietnam becomes a car economy with a net- work of highways, radial ply tires are expected to gradually supersede the current bias ply. Which is why DRC is currently building its first radial ply factory scheduled to come into operation at the end of FY2011. Then truck tubes contributed 6.2% of revenues, bicycle tires & tubes accounted for 7.6%, motorbike tires & tubes for 4.8%, and the rest was mainly from technical rubber.
In the 1H-2010 DRC saw both natural rubber prices (accounting for 60% of raw materials) and synthetic rubber prices (40% of raw materials) rising 18% YTD and 33% y/y. And the VAT charged for heavy truck tires and tubes, which accounts for 61% of DRC total revenues and 60% of DRC total COGS, has doubled from 5% last year to 10% this year. We estimate this VAT pushed up COGS by approximately 8%. And this combination boosted COGS by 25.4% y/y to VND785 billion.
Although DRC has increased average selling prices by 10% YTD, this modest increase could not offset the input cost surge, especially as we saw almost no volume increase in the 1-H. So, gross margins were down from 27.8% in the 1H-2009 to 19% in the 1H-2010. As a result gross profit was down 23.7% y/y and came to VND184 billion. Segmental gross profit margins were as follows in the 1-H although without comparatives we can’t say that much at this point.
Table 1. Growth break down for 1H-2010
Revenue growth: 12%
Price increase: 15%
Adjusted price increase (*) 8%-10%%
Volume growth: 2% - 4%
(*) adjusted for full effect of price increase over 1H2010
It appears that sale volume just increases slightly at 2%-4%, which seems concerning. This could be just a seasonal effect as the first half is not a high season of the year. Or it could be attributed to the exceptional increase of revenue in Q2-2009 as a result from the stimulus package, which drove 1H2009 revenue to a higher level than normal. On the other hand, however, it could also indicate that the company is facing difficulty increasing its sale. Nevertheless, compared with its local peers, DRC’s performance is still stronger as other tire manufacturers post even slower growth figures though the price increases are relatively the same among these players.
Chart 5. Sale and earnings growth in 1H-2010 (VND Billion)
Chart 6. Margin is shrinking as rubber price soars
4,000
40.0%
3,500
35.0%
3,000
30.0%
2,500
25.0%
2,000
20.0%
1,500
15.0%
1,000
10.0%
500
5.0%
-
Q1-2009 Q2-2009 Q3-2009 Q4-2009 Q1-2010 Q2-2010
0.0%
SVR 3L (USD/ton) Gross margin
Source: DRC, Vietnam Rubber Association
Table 5. Cost break down for 1H-2010 & 1H-2009
Cost breakdown
DRC tried hard to save on Seling, General and Admin expenses in 1-H 2010 and this accounted for just 3.6% of revenues, down from 4.7% in the 1H-2009. We assume that the company had to cut down some of its promotion programs or discount rates and implement cost- saving policies in their offices. In 1H-2010 DRC did not open any new distribution centres, keeping the total of distributions centres at 150. Much of the net- work is still based in the Central region though DRC is gradually expanding their market in the North.
Financial Income and Expense:
Financial income came mostly from exchange rate gains and deposit interests, which were VND3.4 billion in the 1-H FY2010, up 19.3% y/y. Meanwhile, 1-H FY2010 financial expense was down 23% y/y amounting to VND23 billion and was mostly com- posed of exchange rate losses, interest expenses, and discount costs. Interest expense was VND4.6 billion, only half of that in the 1-H FY2009. We understand that the company decreased its borrowings and instead used cash to finance their working capital. Their short-term and long-term borrowing balance as of 30th June 2010 was reduced 55% and 44% y/y respectively. Sales discount costs also declined by 51% y/y, showing DRC drastically scaled back some payment discount rates. Although interest expense and discount costs dropped significantly, overall financial expense only decreased by 22% y/y. This is because 69% of financial expense was accounted for by exchange rate losses which increased 4.2% y/y.
In addition, we note that this year DRC no longer enjoys tax exemption but has to pay a CIT rate of 25%. As a result, the surge of input costs and higher CIT rate depressed net margin in the 1-H FY2010 to 10.1% compared to 20.1% last year .
4.2.3 Forcasted Income Statement FY2010
For the full year FY2010, DRC targets revenues of VND2,100 billion and pretax profit of VND180 billion, up 15.7% y/y and down 54.4% y/y respectively. Their projection assumes average volume growth 4%, in which truck tires grow 1% y/y, bicycle tires grow 6% y/y and motorbike tires grow by 26% y/y. However, in the 1-H 2010 this scenario hasn’t panned out as expected. The bicycle tire market is nearly saturated while growth in motorbikes is being restrained by the government with the Ministry of Transportation stated that they would limit new motorbike sales to 7% y/y in FY2010. Meanwhile, truck sales that is expected to post a growth rate of 13% this year and that play the key role in DRC’s revenues, anyway at the time being DRC seems unlikely to enhance its capacity. DRC sales are not affected by any discernible seasonal pattern so the 1-H 2010 pattern is likely to continue for the rest of the year. However, due to its market leadership position, it is believed that DRC will try to increase average selling prices further and focus on improving margins. Therefore the forecasted revenues for FY2010 will be VND2,036 billion, up 12.2% y/y; slightly more conservative than initial plan of the company. Nevertheless, the forecasted pretax profit is VND234 billion, down 40.7% y/y and net profit is VND176 billion, down 55.4% y/y.
4.3 The analysis of Cash-flow
Net cash flows from operating activities in 2009 section reveals a cash flow of $329,417, increased 258% y/y. This indicates that the company is in good financial condition, since in a successful company, the majority of cash flow should come from day-to-day operations.
Net cash flows from investing activities section reveals a negative cash flow of $74,534. This is also a good indication of the company’s strength since it indicates that the company is on track with its expansion program and that profits are being reinvested in the business to spur its growth.
The net cash flows from financing activities section reveal a negative cash flow from financing.
V Financial Ratio Analvsis
Looking beyond levels of assets, liabilities, owner’s equities, sales, and expenses, Company managers and boards of directors need comparative measures to evaluate their Company’s financial performance.
Standard ratios were used in this report, including financial ratio analysis that allow performance comparisons between years and different Companies. No single financial indicator will provide enough information to determine a Company’s financial health.
It is important to look at a group of financial ratios over a period of time, evaluate other Companies with similar sales and functions, and/or compare performance with other Companies in the same geographical area.
5.1 Liquidity Ratios
Liquidity ratios, such as current and quick, measure the Company’s ability to meet short-term obligations. They focus on the Company’s ability to remain solvent. The current ratio is current assets divided by current liabilities. However, this ratio does not consider the degree of liquidity of each of the components of current assets. In other words, if the current assets of a Company were mainly cash, they would be much more liquid than if comprised of mainly inventory.
5.1.1 Current ratio
Current ratio indicates whether a company has enough short term assets to cover its short term debt.
If the current ratio is less than 1, current liabilities exceed current assets and the Company’s liquidity is threatened. Improvements in this ratio can be achieved by selling additional capital stock, borrowing additional long-term debt, or disposing of unproductive fixed assets and retaining proceeds. Current liabilities may also be reduced by retaining a greater portion of allocated savings (reducing the cash portion).
A high current ratio is a favorable condition financially because it indicates the ability to pay current liabilities from the conversion of current assets into cash. Operationally, this same high ratio tends to increase operating freedom and reduce the probability of bill-paying difficulty from writedowns of accounts receivable or inventory.
Current ratio below 1 indicates negative working capital. While curent ratio over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient, In 2009, DRC’s current ratio of higher than 2 indicates that DRC does not use it assets effectively.
Chart # Current and Quick Ratio
Chart # shows the current and quick ratios for DRC over four years from 2006 to 2009. The current ratio was relatively constant for 3 years before it took a slight upturn in 2009. The increasing of current ratio in FY2009 is due to total current assets increased by 27 percent while total current liabilities decreased 40 percent. However, the increasing of current ratio can imply that a company doesn’t use its assets efficiently.
5.1.2 Quick ratio:
Quick ratio is current assets minus inventories, divided by current liabilities. Inventories-the least liquid of all current assets, are excluded. .
Quick ratio is a stringent test that indicates if a Company has enough short-term assets (without selling inventory) to cover its immediate liabilities. It is similar but a more strenuous version of the current ratio, indicating whether liabilities could be paid without selling inventory. Financially, a high quick ratio allows little dependence on the salability of inventory to meet current obligations.
Chart # shows the quick ratios of DRC incomparision with the Industry over three years from 2007 to 2009.
Quick ratio is used to determine risk that is not detected by the current ratio. DRC seems not to be allright in this area. Their quick ratio of less than 1 means that they don’t have enough liquid assets to cover a unexpected drawdown of liabilities (people wanting their money now). Companies with ratios of less than 1 can not pay their current liabilities and should be looked at with extreme care.
Even DRC has high current ratio, buts its quick ratio is low (less than 1), indicates that the Company have a lot of inventory. Furthermore as the quick ratio is much lower than the current ratio it means that current assets are highly dependent on inventory.
It is also indicated that the quick ratio of DRC are much lower than the Industry average, so can conclude that DRC’s liquidity situation is weak.
Chart # Quick Ratio DRC vs Industry
Source: http://www.infinancials.com
5.2 Activity Ratios
Activity ratios measure how well Company use assets. A low ratio could mean that the Company was overcapitalized or carrying too much inventory. A high ratio could be deceptive. A Company with fully depreciated older assets could have an artificially high ratio even though those assets were no longer operating efficiently.
5.2.1 Accounts Receivable Turnover (Debtors’ turnover) ratio
In the same way that stock control is a vital aspect of working capital management, so too is debtors' control. Many businesses need to sell their goods on credit, otherwise they might find it difficult to survive if their competitors provide such credit facilities; this could mean losing customers to the opposition. Nevertheless, since we do provide credit, we must do so as optimally as possible.
Credit control is very important. For the Danang Rubber JSC, the total amount owing by debtors was VND125,948 million at the end of 31 December 2009, which as a percentage of total assets, is 16%. That's a lot of money in absolute terms and relatively, and it's 4% more than it was the year before.
So, DRC has given an additional VND5,084 million worth of credit to their customers over the year. What we need to know, though, is whether they are controlling these debtors. We can do that by looking at their debtors' turnover ratios for the four years.
Table # Account Receivable Turnover
By maintaining accounts receivable, Company are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A high accounts receivable turnover ratio indicates a tight credit policy.
A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the Company.
Table # shows the Account Receivable of DRC over four years from 2007 to 2010 and incomparision with Industry average. The declining accounts receivable turnover ratio indicates that DRC has problem in collecting its account receivable and DRC should re-asses its credit policies.
5.2.2 Days in Sales Receivables (Day sales outstanding – DSO)
This indicates the average number of days it takes a company to collect unpaid invoices. A high ratio indicates that the company is having problems getting paid for services or products.
Table # DSO
In FY 2009 and FY 2008, DRC seem to be doing their job quite well, on average it takes 25 days or 34 days for customers to clear their invoices. This is quite reasonable since most companies clear pay all of their bills on a monthly basis. However, the DRC gave too generous credit policy to customers by letting them owed more than two months.
5.2.3 Inventory Turnover
The inventory-turnover ratio gives a general view on the inventories of a company. The inventory turnover is calculated by dividing the annual sales of the company by its inventory. A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse.
DRC’s inventory has gone up almost 20% since from 2008 to 2009, this could mean nothing or something. There could be something fundamentally wrong, perhaps sales are slowing. A change of 20% is quite substantial and should be a cause for concern if sales are slowing. But if we look more closely at DRC's sales it shows that product sales have increased almost 41% from 2008 to 2009. In other words the higher inventory could simply be a factor of higher demand.
Table # below shows the Inventory Turnover from FY2007 to FY2009 and incompare with the Industry. The value of the inventory-turnover ratio in FY2010 is lower than the Industry average, it indicates that the management team of DRC doesn't do its job properly in managing inventories.
Table # Inventoy Turnover
5.2.4 Days Inventory Outstanding (DIO)
The days in inventory ratio which is also called Days Inventory Outstanding (DIO) is an important financial ratio that gives an idea of how long a product sits on the shelf before it is sold. If this ratio is high, there may not be sufficient demand for the item and it may need to get pulled in order to make room for a better selling item. If the ratio is too low, then the inventory level should be increased in order to have enogh inventory on hand.
Table # below shows the DIO of DRC and its Industry over three years fom 2007 to 2009. It is indicated that DRC has very high DIO incompision with the Industry. This is one of area for improvement of DRC’s management team.
5.2.5 Payable Turnover
The ratio is increasing in 2009, which means that the company is paying of suppliers at a faster rate and faster than the other companies operating in the same industry.
5.2.6 Total-asset-turnover ratio:
Total-asset-turnover ratio was found by dividing net sales by total Company’s assets. Total asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.
Chart# Total asset turnover
Chart # shows the total asset turnover ratio of DRC over four years from 2006 to 2009. This ratio has increased slightly from 1.87 in 2006 to 2.59 in 2009. A high ratio exerts a favorable financial influence through the reduction of financial leverage and/or increased return on equity. A high ratio operationally tends to reduce interest costs.
5.2.7 Fixed asset turnover:
Fixed-asset-turnover ratio represents net sales divided by net property, plant, and equipment (PPE). This ratio is similar to the total asset turnover ratio and shows how well the Company is using its fixed assets. This ratio by itself might not give a complete picture of the Company’s financial health. A Company with fully depreciated assets would have an artificially high ratio. A Company that invested heavily in PPE for future expansion will have a temporarily low ratio.
Table # Fixed Asset Turnover
Table # shows Fixed Asset Turnover of DRC over four years from FY2006 to FY2009, after a low in FY2006 of 5.35, this ratio has remained relatively level for FY2007-FY2008. In 2009, the ratio was 8.8 and increased slightly from 2008 because sales increased 41 percent while investment in fixed assets increased 30 percent. The measure for this ratio may or may not show favorable or unfavorable conditions. It simply reflects Company conditions. An abnormally high ratio usually indicates very old, nearly depreciated fixed assets or the leasing of property and equipment.
A high ratio financially exerts a favorable influence by increasing asset use, reducing financial leverage, and/or increasing return on equity. A high ratio, operationally, tends to reduce depreciation and interest costs. It may also increase costs related to operating leases, personnel and travel or delivery expenses. This ratio may be improved by restricting further investments in fixed assets; redesigning production, or office facilities to increase the sales generating potential of existing space and equipment; and/or selling idle machinery and parts, unused vehicles, and unnecessary equipment.
In FY2009, fixed asset turnover of 8.8 is lower than the Industry average of 9.66 indicates that DRC uses its fixed asset less efficient than the Industry.
5.3 CAPITAL STRUCTURE AND SOLVENCY RATIOS ANALYSIS (Leverage Ratios)
Leverage ratios look at the long-term solvency of the Company. They help to analyze the use of debt and the ability to meet obligations in times of crisis.
5.3.1 Debt-to-asset ratio
Debt-to-asset ratio is defined as total debt divided by total assets. Elements of this ratio include long-term debt plus short-term debt and total assets. Long-term debt increased at the same rate as total assets, which may indicate some short-term obligations were being carried and converted to long-term debt. With inventories increasing in the short term, quick financing is needed, usually through the use of short-term debt.
Table # Debt-to-asset Ratio
Table # above show Debt-to-asset Ratio of DRC and the Industry over three years from 2008 to 2009, DRC maintained a higher debt-to-asset than the Industry in the last two years, however in 2009 due to the good result of its Operation, the Company has paid a major part of its debts and resulted in a lower debt-to-asset ratio.
5.3.2 Debt-to-equity ratio
Debt-to-equity ratio is calculated by dividing long-term debt by member equity. This ratio shows the financial flexibility and the long-term capital structure of the Company. High ratios indicate inadequate borrowing power of the Company. A low ratio is more favorable and financially impacts the Company through independence on outside sources of funds relative to owners’ equity. A low ratio may also have an unfavorable impact indicating low return on equity. Operationally, a low ratio tends to reduce interest cost. Improvement may be gained by reducing long-term debt by disposing of unproductive assets and using proceeds to liquidate debt, or accelerating payments on long-term loans. Other ways include increasing local equity by generating higher levels of local savings, slowing down equity retirement programs, selling additional capital stock, or retaining a greater portion of allocated savings.
Table # Debt-to-Equity Ratio
Table # above shows DRC’s debt to equity over four years from 2006 to 2009, DRC maintained quite high debt balances in the last three years, however the Company has reduced its debt by using profit for repayment of debt.
5.3.3 Times-interest-earned ratio:
Times-interest-earned ratio is the number of times interest expense is covered by earnings. It is calculated by dividing earnings before interest and taxes by interest expense. A ratio of one or more indicates the ability of current earnings to pay current interest expenses. This ratio may be improved by collecting old receivables, improving inventory turnover, disposing of assets and reducing debt with proceeds, or reducing debt with working capital. Financially, a high ratio impacts the return on equity and tends to increase it. Over time operationally, a high ratio will reduce interest cost.
Table # below shows the Intestest cover ratio of DRC over four years from 2006 to 2009, it is indicated from the table that the Company’s expense has reduced significantly in FY2009 as result of the increasing of net profit as well as the decreasing of debt.
Table # Times-interest-earned ratio
5.3.4 Profitability Ratios
Profitability ratios, such as gross profit margin, indicate the efficiency of the Company’s operations.
5.3.4.1 Gross profit margin:
Gross profit margin is found by subtracting the cost of goods sold from, net sales and then dividing this amount (gross margin) by net sales. The gross profit margin is an important operating ratio. A small change in the gross margin has a tremendous impact on local savings. It indicates the Company’s pricing policy and cost of goods offered for sale.
For DRC, gross profit margin increased from 12% in 2008 to 29% in 2009 or 232%. The gross margin or gross margin percentage is a very important operating ratio.
Thanks to the drop of rubber price, DRC saw their margin jumped significantly in 2009 to almost 29% from an average of 12% in the previously 3 years. Going forward, although the record high 29% is not sustainable, we think that DRC will likely be able to keep their profit margin at a higher level than historical average as it should be able to increase selling price provided that rubber price just picks up moderately with the gradual recovery rate of global economy.
The gross margin is not an exact estimate of the company's pricing strategy but it does give a good indication of financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future. In general, a company's gross profit margin should be stable. It should not fluctuate much from one period to another. However, DRC’s gross margin fluctuated significantly, it indicates that the Company’s pricing policy is not consistent.
Chart #: Gross Margin
Chart #: Quarterly Gross Margin
Source:
5.3.4.2 Net profit margin:
The profit margin tells how much profit a company makes for every $1 it generates in revenue or sales. Profit margins vary by industry, but all else being equal, the higher a company's profit margin compared to its competitors, the better.
For DRC, even the Company has high revenue growth rate but its net profit margin is lower than the Industry, it indicates that the Company has problem in managing its cost and problem in pricing policy.
However, DRC has improved its net profit margin significantly in FY 2009 by reaching from 4% in FY 2008 to 21.7% in 2009. DRC’s net profit margin of 21.7% means that for each dollar of sales that DRC generates it is contributing 21.7 cents to its bottom line (net income). This ties in with gross profit margin, DRC has a problem with its pricing strategy which is evident in both ratios.
Chart # Net Profit Margin
5.4 RETURN ON INVESTMENT RATIOS ANALYSIS
5.4.1 Return on assets:
Return on total assets measures the rate of return on total investment. It is calculated by dividing net income by total assets and usually calculated before interest and taxes. This ratio is a measure of performance. It is not sensitive to the leverage position of the Company. Although some assets were financed through debt, the ratio measures return to both shareholders and lenders. Operationally, a high ratio tends to reduce interest cost and financially indicates a comparatively high rate of return on assets employed.
For DRC, w e can see that the company’s total assets in 1H-2010 had increased up 8%, but the return on assets significantly decreased -38% comparing to 2009. It means that the company’s management on assets in 2010 is inefficiency
Table # ROA
5.4.2 Return on Equity (ROE)
Return on allocated equity is net income divided by allocated equity. It was determined by subtracting unallocated equity from total member equities. It represents shareholders’ investment in the Company and is an important measure of profitability.
Companies that generate high return relative to their shareholder's equity are companies that pay their shareholders off handsomely, creating substantial assets for each dollar invested. These businesses are more than likely self-funding companies that require no additional debt or equity investments.
Financially, a high ratio is favorable and tends to decrease financial leverage. However, a high ratio may also be a symptom of low investment adequacy. Operationally, a high ratio tends to reduce interest cost over time but may occur when both total debt and interest costs are on the high side.
For DRC, the company’s total equity in Q1&Q2/2010 (1H-2010) had increased up 16%, but ROE significantly decreased -55% comparing to 2009. It is also indicated that the efficiency is declined in term of using capital.
Table # ROE
5.4.3 Earning per share (EPS)
EPS tells how much profit was generated on a per share basis. By itself, EPS doesn't really tell us a whole lot. But if we compare it to the EPS from a previous quarter or year it indicates the rate of growth a companies earnings are growing (on a per share basis). DRC's EPS have increased almost 654% from FY 2008 to FY 2009, an excellent growth rate. However, it has been significantly decreased in 1H-2010 due to the decreasing of net profit as we already analysed above.
Table # EPS
5.4.4 Price/Earning (P/E)
The P/E ratio tells us the market value of a share over the earnings from holding this share. P/E ratio is calculated by deviding the the market value per share by earnings per share.
Table # P/E
DRC’s P/E value is higher than the average P/E ratio of the Automobiles & Part industry. It means that the investors are strong confidence in the outlook and earnings growth of DRC.
5.4.5 Dupont analysis:
Table # Dupont analyzing
It is indicated from the table about that the change of ROE from year to year are mainly due to the changes of DRC’s net profit margin.
VI Final Recommendation:
As indicated in the executive summary of this report, after analysing the financial position of the Company, we identified several weakness of the Company’s financial situation that the management of the Company should take into consideration for improvement.
An area of concern in the financial statements of DRC was the large buildup in inventories and subsequent increases in account receivables. Inventories increased 20 percent; account receivable climbed 4 percent from FY2008 to FY2009. In addition, the Company ‘s liquidity stituation is also weak. The Company’s quick ratio is much lower than its current ratios, it means that current assets are highly dependent on inventory.
Inventories represent stocks of ready made goods or raw materials that are needed to be kept in order to be able to meet the orders of customers. The Company’s management represents a significant challenge to managers since keeping the right level of inventories is a key to an efficient management of resources. Thus, most manufacturers have to deal with warehouses in which to put their productions and materials.
Activity ratios-total-asset-turnover ratio fell from 2.6 in 2009 to 1.2 in 1H-2010 because the increase of total sales less than the increase of total assets with much of the increase in inventories.
DRC should improve the inventory turnover by reducing the inventory level in oder to have a lower investment in stocks meaning that the money they used to have tied up in the stock room is now free to spend somewhere else.
In the same way that stock control is a vital aspect of working capital management, so too is debtors' control. DRC should improve its control over debtors by shorten its days sales outstandng. It is true that the Company need to sell their goods on credit, otherwise they might find it difficult to survive if their competitors provide such credit facilities; this could mean losing customers to the opposition. Nevertheless, since DRC does provide credit, the Company must do so as optimally as possible.
In addition, the Company liquidity situation is also not good. The fact that the differences between the current and acid test ratios are too large tells us that DRC stocks are large. Additionally, the acid test ratio is less than one over three years period from FY2007 to FY2009, meaning that the Company has a weak liquidity position. DRC should improve its liquidity situation by better management of its inventory level.
Morever, profitability ratios-return on total assets ratio fell from 50.1% in FY2009 to 11.86% in 1H-2010 because total assets increased more than net income. The company’s total assets in 1H-2010 had increased up 8%, but the return on assets significantly decreased -38% comparing to 2009. It means that the company’s management on assets is inefficiency. We therefore recommend that the Company’s management should effectively utilize the company’s assets to reach the higher manufacturing capability and proficiency.
Currenty, the Company’s mainly capital is from its owner’s equity, the debt level is very minimal. In the future, we would like to suggest that the Company should draft certain long-term business plans for future investment and exercise the financial leverages to boost up the efficiency of shareholders’ equity.
Finally, even the Company has very high revenue growth rate but its net profit margin in low, and even lower than the Industry average. It is indicated that the Company has problem in its pricing policy and problem with cost control. We therefore suggest that the Company should review its price policy so that the selling price should be increased in line with the increase of raw material price. The Company also need to control its cost in order to maximise its net margin.
VII Reference
VIII APENDICES
Common-size balance sheet
Common-size quarterly Balance sheet
Annual Income Statement
Quarterly Income Statement
Cashflow Statement
7. DISCLAIMER
This report has been prepared by Group 6 of FIN 501 Delaware State University with reference to some reports issued by Ho Chi Minh city Securities Corporation, Mekong Housing Bank Securities Company and Viet Capital and some other sources as listed in Reference part.
The information herein is believed by us to be reliable and is based on public sources believed to be reliable. With the exception of information, we make no representation about the accuracy of such information. Opinions, estimates and projection expressed in this report represent the current views of the author at the date of publication only.
We have no obligation to update, amend or in any way modify this report or otherwise notify a reader thereof in the event that any of the subject matter or opinion, projection or estimate contained within it changes or becomes inaccurate.
The information herein was obtained from various sources as abovementioned and we do not guarantee its accuracy or completeness.
Neither the information nor any opinion expressed in this report constitutes an offer, nor an invitation to make an offer, to buy or to sell any securities or any option, futures or other derivative instruments in any jurisdiction. Nor should it be construed as an advertisement for any financial instruments.
This research report is prepared for general circulation for general information only. It does not have regard to the specific investment objectives, financial situation or particular needs of any person who may receive or read this report.
Group 6 - FIN 501 - DESU MBA
