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Bachelor of Business Administration Thesis Bachelor of Finance and Banking Thesis

Liquidity Analysis the case of Thanh Phong Company

Group members: Trinh Thi Thu Thuy Trinh Thi Ngoc Anh Ngo Thi Lan

Nguyen Quang Minh Nguyen Trung Hieu

(FB00098) (FB00354) (FB00437) (FB00344) (FB00007)

Supervisor: To Thi Thu Huong, MSc.

Hanoi, December 2014

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Contents

Chapter 1: Introduction ...1

1.1. Topic background ...1

1.2. Study questions ...1

1.3. Theoretical basis of the study ...1

1.4. Methods and data overview ...2

1.5. Scope and limitation ...2

1.6. Study structure ...3

Chapter 2: Literature review ...4

2.1. Definition of liquidity ...4

2.2. Importance of liquidity to the firm ...5

2.3. Liquid assets of the firm ...6

2.4. Current obligation of the firm ...8

2.5. Ratios measure liquidity of the firm ... 13

2.6. Factors effect liquidity of the firm ... 19

Chapter 3: Finding ... 25

3.1. Company background and economy context ... 25

3.3.1. Company background ... 25

3.1.2. Economy context ... 25

3.2. Business performance and financial highlight ... 26

3.2.1. Operating cash flow ... 27

3.2.2. Financing cash flow ... 29

3.2.3. Investing cash flow ... 29

3.3. Analysis liquidity Ratios of the firm ... 29

3.3.1. Current ratio ... 30

3.3.2. Quick ratio ... 30

3.3.3. Cash ratio ... 30

3.3.4. Debt/ Equity ratio ... 31

3.3.5. Inventory turnover ... 31

3.3.6. Receivables turnover ... 31

3.3.7. Payable turnover... 31

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3.3.9. Days of inventory outstanding ... 32

3.3.10. Days of payable outstanding ... 32

3.3.11. Cash conversion cycle (CCC) ... 32

Through the analysis of the liquidity ratios, it shows that the company has problems as following: 32 3.4. Analysis Liquid assets of the firm ... 33

3.4.1. Cash ... 33

3.4.2. Accounts receivable ... 33

3.4.3. Inventories ... 34

3.4.4. Taxes and the state receivables. ... 35

3.5. Analysis current obligation of the firm ... 36

3.5.1. Note payable... 37

3.5.2. Account payables ... 38

3.5.3. Salaries payable ... 39

3.5.4. Income Taxes payable ... 39

3.5.5. Required level of the payable ... 40

3.6. The causes impact to liquidity of Thanh Phong ... 42

3.6.1. Sale credit and sale policy ... 42

3.6.2. Inventory holding strategy ... 43

3.6.3. Payment policies of the company... 44

3.6.4. Economy context ... 45

3.7. Solutions to improve liquidity of the firm ... 48

3.7.1. Improve account Receivables... 48

3.7.2. Manage accounts payable ... 49

3.7.3. Overcoming the deficit ... 49

Chapter 4: Recommend and conclusions ... 51

4.1. Recommend ... 51

4.1.1. Determination of reasonable cash reserves ... 51

4.1.2. Preservation of working capital... 51

4.1.3. Preservation of fixed capital ... 52

4.1.4. Recommendation... 52

4.2. Conclusion ... 52

5. Reference: ... 54

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Chapter 1: Introduction 1.1. Topic background

This paper gives an analysis of the financial situation of Thanh Phong Company, focusing on liquidity and giving some solutions to improve liquidity of company.

Financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific company, the financial analyst will often focus“on the income statement, balance sheet, and cash flow statement”. In addition, one key area of financial analysis involves extrapolating the company's past performance into an estimate of the company's future performance.

We hope our research will help the firm realize the importance of financial analysis, liquidity especially with the development of company. It will help firm know their strengths and weaknesses to make a good decision for help their company.

This research gives a clear view on financial situation of the company, financial liquidity especially. Financial statement has strong influence on the decision of owners. If you have a good financial analysis, you will have a clear view on company situation and have fast and instant decision with situation. It will let good result and earn more profit. On the other hand, this work also presents some solutions for better liquidity, helps businesses to operate better.

1.2. Study questions

The main concern of this report is to analyze company financial situation and liquidity, helping them to solve problems, hence we focus on questions: “What are the problems in financial situation and liquidity at Thanh Phong PTE?” and “What is the liquidity strategy for Thanh Phong PTE?”

1.3. Theoretical basis of the study

Group 32 has follow this topic because this is a practical and advanced application topic, bringing major benefits to the enterprise. This is a research project which has been authenticated by experts to have great effect in the financial sector. The analysis and

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administration and development. However, as a common sense, business neither publicizes the details and 100% accuracy about the financial situation of their company, nor really cares to improve the company's liquidity. We will help firms to raise their liquidity balance and improve market segment.

1.4. Methods and data overview

Research methodology of this subject is based on actual data from the financial statements to perform calculations and analysis of indicators, from which to make comments on the current financial situation company's strengths and weaknesses in the financial management system of the company, especially on the issue of liquidity.

Based on analysis of data and calculation of indices, we will make the assessment of the financial situation of the company. Which “is suitable for using” inductive method?

After having calculated and analyzed the index, we will continue to compare them with average index of industry to make conclusions about the financial situation of the company.

After that, we will suggest some solutions to improve liquidity and financial strengths of the business.

1.5. Scope and limitation

Based on theories and formulas from basic materials such as: (Robert Parrino and David Kidwell, 2012, Fundamentals of Corporate Finance, 2nd edition, John Wiley), (KR Subramanyam & John J.Wild, 2009, Financial statement analysis, 10th ed, Mc GrawHill) and (Mark Saunders, Philip Lewis, and Adrian Thornhill, 2012, Research Methods for Business Students) and available materials of Thanh Phong PTE.

Because this is the first time doing research on financial analysis, and with the limited financial objectives, therefore we have a number of disadvantages as follows:

Firstly, because of all the research completely in the short-term (4 months), so this study will have certain flaws.

Secondly, shortages and inaccurate data can cause errors and negatively affect the outcome.

On the other hand, information and data cannot be exact completely. It will bad affect to research result.

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“This research is based on other studies of other source on the world, may found problems if set into Vietnam. This study was carried out by amateur student, so it should errors are inevitable.”

1.6. Study structure

Our study will follow these steps:

Chapter 1 - The overall view of the topic, the topic’s background, present the research question that need to be answered.

Chapter 2 – Literature review: ”About research methods, data collection method, and limitation will be clarified. This chapter answers for the question: how was the data collected and generated”.

Chapter 3 - Analyses and findings: Introduction of the investigated research context, systematic presentation of data before analysis (tables, graph …) and analysis.

Chapter 4 - Conclusion and recommendations: Answer to the research questions, meet research objectives, relevance of findings to practical applications, recommendations for identified problems in chapter 3

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Chapter 2: Literature review 2.1. Definition of liquidity

Liquidity is the term used to describe how easy it is to convert assets to cash.“The word liquidity was used by the financial accounting standard Board (FASB)”“the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until liabilities has been paid”.

According to Muraw Bahadur, “Analysis of liquidity provides the measure of the ability of the enterprise to meet its obligation. It is not sufficient that the final accounts show a profit and the balance sheet a rosy picture of financial health of the enterprise. All this will look meaning less, unless the cash available to meet obligations as and when they mature. The analysis of liquidity should therefore, be taken into consideration, the size of the components of current assets which can be readily converted into cash to meet maturing liability. The size, character and sequence of maturity of liabilities are also of significant importance & deserve due attention”.”The term liquid assets are used to describe money and assets that are readily convertible into money”“Liquidity has two dimensions viz. time and risk.”

“The concept of liquidity within a business is the understanding of financial management as it is the basic criteria to test the short-term financial position of the business”. In the context of corporate business finance, liquidity refers to how long assets can be converted to cash. It is the ability to convert assets into cash.“Short-term liquidity of a company is its ability to meet short-term obligations”, the obligations can only be met by converting its assets into cash.

Again, the conversion is affected by cash inflows’ timing and cash outflows’ timing. The flows at last depend on the ability to generate profits from sales of business. The sales again is the function of effective use of working capital. So that, liquidity is linked to managing working capital. Actually, liquidity is inseparably related to the operating cycle of a firm.

“The word liquidity suggests a kind of measurement or qualification of meeting obligations. In a reasonable business, the finance's sources should be supplemented by its own cash generation. The quantum of conversion of current assets into cash or in other words, near liquid asset may have to be supplemented by outside borrowing to make sufficient liquid fund

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available to meet current obligations. The current obligations will also include the repayment of borrowing”.

“Finally, the term ‘liquidity’ means conversion of assets into cash during the normal course of business and to have regular flow of cash to meet outside current liabilities (generally within a year) as and when due and payable and also to ensure money for day-to-day business operations. So that, the flow of current assets should circulate within a year, so that timely payment is made to outsiders for interest, dividends etc. If the major part of current asset is blocked in inventories and credit sales, not any ready cash will not be available to pay current debt but also there is a risk of shortage in the total current asset available because of possible fall in the value of inventories, possible losses in account of bad debts”.

2.2. Importance of liquidity to the firm

The importance of liquidity can be realized from the repercussions of the claimants when a business fails to meets its obligations. Lack of liquidity prevents a business from taking advantage discounts or profitable opportunities.

Shortage of liquidity will limit opportunities and the constraints within which the management is to work. When a firm faces with serious liquidity problem, it may be forced to sell its investments at lower prices. In a severe situation, liquidity crisis may lead to insolvency and bankruptcy. For a shareholder, lack of liquidity can foretell loss of ownership control because such a lack usually leads to lower profitability. In the case of sole proprietorship business, lack of liquidity endangers personal assets of owners.

For a creditor, lack of liquidity may lead to delays in collecting interest and principal. It may even lead to loss of principal amount.

For a customer, lack of liquidity of a selling firm means early payment of their dues. Due to lack of liquidity, important customer and supplier relationships may be damaged. Liquidity is of great importance to analysis.

“A firm has a strong liquidity of it is able:

• To meet the claims of short-term creditors.

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• To maintain sufficient working capital for efficient normal operations.

• To meet current interest and dividend requirements.

• To maintain a favorable credit rating. The efficient management of working capital requires constant attention to process of rapid conversion of receivable and inventory into cash.”

-> “Finally to meet the claims of short-term creditors and to maintain sufficient working capital for efficient normal operations are most important.”

2.3. Liquid assets of the firm

There are three flowing characteristics of liquid assets:

- Liquid assets can be converted into cash quickly.

- Liquid assets’ prices are relatively stable when they are sold on the open market.

- Liquid assets can be bought easily with minimal risks, recovered investments.

However, there are many different categories of liquid assets 2.3.1. Cash

“Money, or cash, is the most liquid asset. It can be used immediately to perform economic actions like settlement, circulation, saving”. If a business has a large amount of cash, it can raise capital to cover budget immediately or reinvest. Cash is an essential resource of a business, it helps a business run effectively.

2.3.2. Cash equivalent

“Cash equivalent is assets which can be easily converted into cash, such as stocks, short-term government bonds or treasury bonds, securities and commercial paper markets. Cash equivalent is distinguished from other investments through their short-lived; they mature within 3 months, while short-term investments are 12 months or less, and long-term investments are maturing beyond 12 months.”

2.3.3. Accounts receivable

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Accounts receivable is an asset of the company based on all loans, transactions or any other unpaid monetary obligations that the debtor or the customer has not paid for the company. The accounts receivable of the accounting company records and reflects on the balance sheet, including all company bad debts.

Accounts receivable is recognized as assets of the company because they reflect the amount will be paid in the future. The long-term receivables (due only after a relatively long period of time) will be recognized as long-term assets on the balance sheet accounting. Most short-term receivables are considered as part of the current assets of the company.

In accounting, if the debts are paid within a period of less than one year (or in a business cycle) classified is a current asset. If more than one year or one operating cycle is not a current asset. Receivables are divided into more detail in the balance sheet as trade receivables (trade) and noncommercial (nontrade).

Trade receivables arise from the supply of goods-services of company for customers in the normal course of business. Trade receivables may be accounts receivable (accounts receivables) or cash receivable (notes receivables). Non-trade receivables arise from different types of transactions listed above and also the buyer's promissory notes. For example, advances to employees; refunds as reimbursement, indemnity insurance, and deposits; and accounts receivable financing as interest, dividends, etc...

2.3.4. Inventories

“Inventories are assets held for sale during production - ordinary course of business; are in the process of production - unfinished business; raw materials, materials, tools and instruments for use in the production process - the business or service provider.”

Inventories account for a large portion of the business assets ratio of firms, because inventory turnover is one of the basic sources of revenue and create additional revenue for the business later. It is the property ready for sale or will be brought to its release. Particularly, a large proportion of inventory is much less concern for investors, due to the long existence, buried capital, additional expenses incurred by it in other words, if the inventory survives so long it

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liquidation costs or improved products become obsoleted and damaged liquidation. However, lack of inventory reserve is a business risk because they may lose the revenue potential sales or market share if prices rise while not every business for sale.

Business activities in the manufacturing sector, trade generally maintain inventory at a certain level of strategic reserves of his commodity, to ensure raw materials for production, ensure the flow of goods in information. For instance, a simple businesses signed a supply contract goods shall naturally have large inventory in stock for performance of the contract, to ensure safety in the supply of products. Therefore, no business except catching scarcity or rising prices of products and goods which they are controlling shareholder to hold and will launch the product in the time of need. Meanwhile, inventories become a waiting payment profit.

2.4. Current obligation of the firm

The same with owner’s equity, short-term debt (current liabilities) can be viewed as another face of the current property or a source of the company assets. Amounts received from the customers for goods, services will be sold in the future or expenses incurred but not yet paid also be counted as current liabilities. However, it is not meant to encompass amount cash not yet “incurred”. For instance, the salary payable for employees next year is not a current liability of this year because it has yet to be “incurred”. It will be included in short-term debt by next year. “The operating cycle is the length of time it takes to turn cash back into cash”

(Larry M.Walther, 2009). That is, a business use the money (property mortgage) to buy machineries, goods, hire employees, services, after that, they use all of them to make the final services or good to sell to customer and collect the receivable. The time period it takes to do all of this is operating cycle. For most businesses, the operating cycle is less than one year or equal one year, however, most manufacturing firms always need to buy the materials and bring materials to product quality goods to meet the needs of the customers. This could cause the operating cycle of the firm to go over more than 1 year. “Then, current liabilities might

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include obligations due in more than one year” (According to Principle Accounting).

“Liabilities arising from transactions and past events, such as the purchase of goods not paid, the service outstanding, debt, commodities warranty, commitment to contractual obligations, employee pay, taxes payable, and other payables”. Liabilities determine the current obligations of the business enterprise on a property, taking a committed or incurred liability.

The payment of the current obligations can be done in several ways, such as:

 To pay by cash;

 Pay with other assets;

 Service Provider;

 To replace this obligation by other obligations;

2.4.1. Account payable

When a company orders (transactions directly or by phone) and receives goods (or services) before paying for goods (services) provider, we say that the company is buying commodity accounts or credits. The suppliers of goods (services) on credit it also known as a creditor.

Base on “Essentials of Account payable “(Mary S.Schaeffer), Accounts payable are debts incurred during production and business activities that businesses have to pay, to pay to creditors in a certain period and is considered the capital of the business, its figure on the financial statements of any company which is for the company’s unpaid bills, relate to the purchase of goods and services. This is money owned by the company to suppliers and other creditors. As a liability account, Account payable will generally have the balance of credit.

Therefore, when a supplier invoice is received, account payable will be recorded and another account to be debited (double-entry accounting). When the company pay for supplier with cash (or bank), an account payable will be debited and the cash (or bank) will be recorded.

Thus, the credit balance in Trade payable (Account payable) and the amount of recorded supplier invoices that have not yet been paid must be equal (Harold Averkamp). When company have much more debt, they will be difficult to continue borrowing, such business activities of firm was delayed. The increase in funds appropriated from the supplier or buyer of advance will reduce the cost pressures and borrowings from banks. But just as for inventory

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sign of ability to pay, payment of debts of the business. If the business using too many capital of providers that would losing this funding, because providers will not sell goods for business anymore, so the reputation of the business will be affected not good. However, the rise time of payment of debts, pay increase, decrease the operating cycle, it can pay well if the business was a business reputation and the supplier of the company that allows customers deferred payment, was collected every bond auction should be able to take the initiative in payment to the seller, the enterprise business expansion.... Conversely, reducing the time of payment of the debt, reducing pay, increasing operating cycle can be not good sign because businesses are not reputable, the supplier does not allow to business debt, so now accessories depending on the input source, scarce inputs required to pay immediately bought the goods and such enterprises are not active in business, because business is not good to sell to shrink...

2.4.2. Salary payable

In the opinion of Marxist Philosophy: Salaries are the monetary express in cash of labor’s value.

According to the concept of modern economic, Salaries are the price of labor that is determined by relationship between supply and demand in the labor market.

“Salaries payable is a liability account that contains the amounts of any salaries owed to employees, which have not yet been paid to them” (Edward J.Manley, Controller, Brooks Instrument). The worker is paid at the end of this year. The salaries payable is usually paid in one year or less than one year. Wages are defined properly, are stimulating factor to make production more, it stimulates the workers strive work more; improve their skills, technical improvements to enhance productivity labor. Salaries are basic elements to decision to increase or decrease the income of workers, decide the living standards of workers in wage employment business. Therefore, paying a fair accuracy and ensuring the rights among employees are very important for a company. On the other hand, the salary is one of the cost in enterprise with a significant proportion. The goal of business is to minimize costs and maximize profits, beside it, the firm need to pay attention to the rights of the workers.

According to the principles of accounting, “the balance in this account increase with a credit and decreases with a debit”. The salaries expense shall be divided into 2 parts when business

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have employees work in factories and produce goods or services, one of them is directly calculated on the admin cost or selling cost, another part is calculated on the cost of direct labor and are included in cost of goods sold. However, if employees produce goods for an order that will be sold in the future, the cost of goods sold of this order can’t calculate in final report this year and will be show in the balance sheet at the time goods are sold out.

2.4.3. Taxes payable

Tax is a compulsory remittance that individuals and businesses are obligated to pay to the State, are used to fund military, educational, and other federal government programs, arising on the basics of legal documents issued by the State. Tax is forms distributed to finance parts of society, non-reimbursed directly to the applicant. Therefore, at the time payment, the taxpayer is not entitled to any benefits that look like it is the responsibility and obligation for the state. Thus, tax coercive nature and principles established by law. By their political power, the state has issued taxes to create revenue for the state budget; these revenues are arranged according to the estimates that using the state budget has been approved for consumption public investment and development in order to perform the functions and duties of the state.

Thus, taxes reflect the distribution of income in society, reflecting the financial relationship between the state and other actors in society Tax is a mandatory contribution to the state by law provisions for legal person and natural persons liable to tax in order to meet the needs of state spending. The taxes payable have 3 types: Sales Taxes Payable, Income Taxes Payable and Payroll Taxes.

 Sales Taxes (value added tax): According to the provisions of the Law on value added tax, the value added tax is an indirect tax is calculated on the value added of goods and services incurred in the course of production, circulation to consumption and shall be paid into the State budget according to the level of consumption of goods and services.

When you sell good (or service) to the customer, the customer will pay you amounts of the value of the goods and the goods tax. “Sales Taxes Payable Sales taxes payable is current liabilities resulting from products and services sold to customers”. The amount of value added tax payable by (=) Value Added Tax output minus (-) value-added tax deductible input.

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 Income Taxes Payable: “Income taxes payables are liabilities resulting from companies having more revenues than expenses”. Income Taxes Payable = (Revenues- Cost)*

Taxes rate.

 Payroll Taxes: When the salary of the individuals that works in the business high, they need to payment for State amount of money based on personal income.

2.4.4. Note payables

Note payables are short-term loans formally be proved by contracts written to pay a specific amount such as bank loans, equipment procurement, and buy some credit between suppliers concerning these documents. Lenders can set time and penalties paid when the borrower does not pay the loan on time. This agreement between two parties may request firm’s collateral (building, car...) or mortgage invoice or guaranteed by a prestigious individual or an organization. Note payable related to interest expense and the duration for payment this interest expense. The interest rate can be fixed during a note are paid. When the time of a note less than one year (or operating cycle, if longer), it is often reported as current liabilities.

When a business lend money from vendor under a note payable, it “debit a cash account for the amount of cash received, and credits a note payable account to record the liability”

(according to Principle of Accounting). The terms of the vouchers usually include the principal amount, interest rate and maturity date. “Notes payable almost always require interest payments”.

2.4.5. Interest payable

All of the Notes Payable, the borrower almost always pays interest expense on money for lender. Interest will be charged to the cost of the business when the loans of businesses serving domestic and international business. In credit relationship between businesses and banks,

“interest rates reflect the price of capital” which is funded enterprises must “pay to the lender (commercial banks)”. “For businesses, the interest payable increases the cost of capital and the cost of inputs of business processes. Therefore, any fluctuations in interest rates on the market are also directly affected the efficiency of production and business, which means a direct impact on the profitability of the company and thereby adjust the operating of their economic activities”. When interest rates of commercial banks increase will push the cost of inputs and

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production costs rise, as well as profits decline competitiveness of enterprises, causing losses, bankruptcy and business activities. “Trend Bank to raise interest rates will always be associated with the trend cuts, downsizing and scope of business activities in the economy.

Conversely, when interest rates fell Bank will create conditions for enterprises to reduce costs, lower costs, improve business efficiency and competitiveness”. “When a company accumulates interest, its interest expense debit and credit interest payable. When a company makes a payment on the outstanding balance of principal and interest, it debit notes payable, interest expense and interest payable and cash credits.” (Rose Johson, Deman Media)

2.5. Ratios measure liquidity of the firm

2.5.1. Current ratio

Formula:

Current ratio measures ability of company in using short-term assets like cash, inventories, or account receivables pay short-term debts. The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company is in a negative financial situation, likely can’t pay debts at maturity. However, this isn’t that company will bankrupt because there are many ways to raise additional capital. The other side, if a ratio is too high, it is not a positive signal because this suggests that businesses are using the property ineffectively.

2.5.2. Quick ratio

Formula:

“The quick ratio is calculated by dividing liquid assets by current liabilities”:

Current ratio = Current assets / Current liabilities

Quick ratio = (Current Assets - Inventories) / Current Liabilities

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“Calculating liquid assets inventories are deducted as less liquid from all current assets (inventories are often difficult to convert to cash). All of those variables are shown on the balance sheet (statement of financial position).”

Alternative and more accurate formula for the quick ratio is the following:

“The formula's numerator consists of the most liquid assets (cash and cash equivalents) and high liquid assets (liquid securities and current receivables).”

“Quick ratio shows that if company is enough current assets to pay for short-term debts without selling inventories. Quick ratio reflects more exactly than current ratio. The company has quick ratio is under 1, it is unlikely to repay short-term debts and it must be carefully considered.”

2.5.3. Cash ratio`

Formula:

“Cash ratio shows that how much cash and cash equivalents of the business to respond to short-term liabilities. In other words, cash ratio says that on a co-current liabilities has how much cash and cash equivalents guaranteed payments.”

“The value of cash ratio depends on industry, the magnitude of the business as well as evaluation period.”

“Compared with other ratio of short-term liquidity such as current ratio, quick ratio, cash ratio is more strict requirements liquidity. Inventories and short-term receivables were excluded from formula because of nothing guarantees that two terms can be converted quickly into cash to respond to keep up the short-term debt.”

Quick ratio = (Cash and cash equivalents + Marketable securities + Accounts receivable) / Current Liabilities

Cash ratio = (cash + cash equivalents) / short-term debt

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2.5.4. Debt/Equity Ratio (DER)

Formula:

This is an indicators reflecting the financial scale of the the company is calculated by dividing total debt to equity.

Normally if DER is high means that the company often through loans to pay for their activities. This will lead to unstable income because the company often has to pay interest accrued.

2.5.5. Inventory turnover

Formula:

Or:

Inventory turnover shows ability to management inventories. Inventory turnover is the number of times the average inventory of goods circulated in the period.

Inventory turnover often compared through the years to assess management capacity inventory is good or bad in annual. This ratio is high, it shows turnover of goods in warehouse is fast and contrary and if the ratio is low, turnover inventory is low. Worth noting, inventory with bold nature of business, so it won’t be that low inventory levels are good, high inventory levels are bad.

DER= Total debts/ total assets

Inventory turnover = sales/ inventory

“Inventory turnover = Cost of goods sold / average inventory)”

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Turnover ratio as high as inventory shows enterprise selling fast and inventory accumulation is not much. This means that business will be less risky if inventory items in the financial statements have value decreased year by year.

However, this ratio is too high is not good. This means that the amount of inventory in stock are not many, if demand suddenly increases, it is very likely that business lose customers and enterprise will be disputed market share by competitors. Moreover, stockpiling material inputs for production are not enough, it can cause “production line stalled. Thus, the inventory turnover ratio should be large enough to ensure production levels and meet the customer needs.”

2.5.6. Receivables turnover:

Formula:

Receivables turnover reflects the variable speed of receivables into cash.“This ratio is an important metric to evaluate the performance of the business”.

Receivables turnover is high, “it demonstrates the speed of business debt recovery is quick, ability to convert accounts receivable into cash high. This helps businesses improve cash flow, created the initiative in financing working capital in production”.

In contrast, if this ratio is low, the amount of business will be occupied more and more, amount of cash is likely to reduce, it reduces the autonomy of business in the financing of working capital in production and business can has bank loans to finance additional working capital for this.

2.5.7. Payable turnover:

Formula:

Receivable turnover = sales / average receivables

Payable turnover = Revenues / Average total assets

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Payable turnover reflects the ability of business capital appropriation for the supplier. Payable turnover is too low can negatively affect the credit rating of the enterprise.

Receivables turnover is large (and has small payables ) shown on the payment policy of the company is quite tight, ensure liquidity but it can also result in reduced revenues because it is too rigid in transactions with customers.

If payable turnover is too small (and has large payables), it will be potential risk of liquidity.“However, it should be noted that misappropriated funds can help business reduce the cost of capital, and it represents prestige in relation to the payment of suppliers and product quality for customers.”

2.5.8. Days of sales outstanding (DSO)

Formula:

Days of sales outstanding shows the average amount of time needed for a firm to recovery of debts from clients.

If DSO increase through of years, it shows the company is poorly in managing debts.

2.5.9. Days inventory outstanding (DIO)

Formula:

This ratio shows to investors know about the time necessary that company may be liquidated all of inventories (including goods are still in the process of production). If the ratio is low, it

Days of sales outstanding = 365/ Receivables turnover

DIO= 365/ inventory turnover

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means that the company works pretty well. However, it should be noted that the average DSI index are very different between sectors.

2.5.10. Days payable outstanding (DPO)

Formula:

Days payable outstanding shows “average days that company needs to pay suppliers”. DPO expressed the relationship between company and sellers. DPO is high, it means that the company has a good relationship with suppliers and has the ability to stretches time to pay the seller.”Contrary, DPO lows means the company must pay to the seller in a short time after delivery.”

2.5.11. Cash conversion cycle (CCC)

Formula:

If this ratio is high, the amount of cash of the business is shortage for production business and other activities such as investment. Cash conversion cycle is calculated from the payment for the raw materials to the cash received in the sale.

If this ratio is low, it means that ability to manage working capital is good. Contrary, this ratio is high, it means that business has to hire more funds while waiting for customers to pay debts.

2.5.12. Interest coverage ratio

Formula:

Days payable outstanding= 365/ payable turnover

Interest Coverage = (Earnings Before Interest and Taxes) / (Interest Expense)

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“Interest coverage ratio shows the level of profitability to ensure the ability to pay interest. If the company is too weak in this regard, creditors will put pressure on the company, or even leading to the company bankrupt”. This ratio is higher; solvency interest of the business for creditors is greater.

2.6. Factors effect liquidity of the firm

2.6.1. Sale credit, sale policy

Credit sale is the sale occurs when the business sends out an invoice for the goods or services supplied, cash is received later.

That means inventory which is sold for credit not on cash the amount will be received in the future. Credit is the tool marketing to expand for sale. credit creates accounts receivable that the firm is expected to collect in the future. A firm's investment in accounts receivable depends on volume of credit sales The customers from whom receivable have to be collected in the future are called trade debtors or simply as debtors and represent the firm's claim or asset. Trade debtors form a major portion of the current assets of any company next to stock.

Trade credit is the relationship between businesses selling goods or services for delaying each other. It arises when customers are allowed to buy goods or services on credit and payment deferred till later date. Trade credits include lots of descriptive data about your business, such as start date, the skills and experience of leadership, number of employees and annual sales.

This type of information listed in the credit profile of your business, along with the scores and the proportion that is derived from the behavior in the business of your past to predict the future business. For example, the ability and willingness to pay bills on time in the past your perceived ability and whether you pay on time is very likely to happen in the future. Thus, the working capital management presumes the effective use of trade debtors (accounts receivables) to ensure increased profitability and liquidity in the firm. The issue of management of trade credit has every cause to be given reasonable attention considering the incessant liquidation of some manufacturing firms in recent times due to the effect of credit sales. Credit plays a very important role regarding the increase in sales and profits. In a competitive environment like the present one of the ways to survive or maintain the business increased profits. the credit policy is important therefore all business organization be also emphasized because it influence on cash inflow of a company from its sales activities. There

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present are flowing of cash (liquidity) and seeking to achieve adequate profitability. The credit policies of a typical organization contains the following variables: collection policy, cash discounts, credit terms and credit standards. Credit policy of the companies mentioned actions made by a business to supply, monitor, and collect money for accounts receivable. a company's credit policy is used as a tool for monitoring account receivables which is the outcome of credit sales the credit policy of an organization based on its particular business and cash flow circumstances, current economic conditions, the degree of risk involve and industry standards. With business organization to achieve its important objectives of liquidity as it allows credit to customers, concern should be given to its credit policy, it should be fully planned. Granting of credit can't suspect lead to bad debts. In following Paney (2004), there are three characteristics of the credit sale:

- Should be carefully analyzed because it relates a factor of risk - Be based on economic value. The economic value in services passes

The customers from whom receivables have to be collected in future are called trade debtors and they represent a company's claim on assets. The credit sale has many advantages and disadvantages. The first, this company can be easier to find many new customers who sometimes don’t bring enough cash for buy something all the time. In addition, company can sale more goods or services which makes the firm’s profit. In the other hand, credit sales can get the firm in a lot of trouble if customers don’t pay on time. Or customers sometimes bankruptcy and credit sale to them can be difficult to collect, and it can be bad debt which affect on the cash follow of the company. A good credit is the lifeline out of your business. It gives you the ability to obtain funding, donations for the expansion, construction costs, research and development, and the provision of staff and workers. It is contributing factors have important implications for the development of your business in the future, not to mention the cash needed for survival. Good trade credit also allows you to save money to cover the costs of your business, the ability to pay cash allows you to respond to the requirements of the demanding nature of time, without reluctant to negotiate or anything.

Because of the business organization is the most important issue to increase profits and one of the ways that the credit sale. It is a bridge is needed in marketing tool to increase sales and

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find more customers besides it also has many disadvantages, so the company, the business organization must analyzed, controlled carefully to be managed effectively and help you establish, control, improve and protect your business credit.

2.6.2. Inventory level and relationship with suppliers

Inventory is important to maintain the inventory level consistent with what the customer or the company being bought / used. Inventory level is the amount of goods of business that has in stock in current. inventory levels and the ratio of sales is closely related to each other it enables managers to better define the flow of products and production time that will help reduce costs and increase inventory companies can better manage cash flow

Inventory levels is very important, it is inventory objective for companies. Inventories require a lot from the stage manager to the costs involved. The company has always tried to balance whereby they have enough goods used in the present and in the short term but in the long term there is no excess to avoid the backlog of the company capital.

If businesses better manage inventory level, it has many benefits. The first is reducing organizational costs, costs of organizations here have a lot of expenses including the cost of premises, warehouses, yards and labor costs related to warehouse management and protection, workers work, equipment and technology to manage.

If the company has a smaller inventory, it will be easier to manage more organized. It will reduce the time to organize and take inventory. For example, when less inventory, we can receive the goods and get faster. This also contributes to simpler and more effective when companies want additional goods in warehouse.

Manage your inventory also good for the liquidity of the company better. The Company may use cash more and more capital in the business cycle. In many industries, the products have high prices, it can be very expensive if businesses have many goods in stock, it means that there is now paralyzed for a lot of capital. Instead, by maintaining inventory levels and fast medium supplemented when necessary, your company could release an amount of cash in the short term to meet other expenses and obligations short-term debt. This will help give your

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So the level of inventory is very important that the issue of company is very carefully.

- Supplier is a that provides products and services for the company. The relationship with the supplier is very important with sales, the company will secure a timely order process, more organized system and possibly better rates, enabling you to save money, improve customer experience and increase sales.

Due to the purchase is the first stage of basic business activities as a condition for the business activities of successful business development and so the relationship with the supplier of the enterprise is very important. The goal of this relationship is safe for sales, quality assurance and buying goods with the lowest cost. Ensure safety of goods sold primarily to ensure sufficient quantity and quality to avoid excess or deficiency leads to accumulation of goods or business interruption affecting the flow of goods. The company exists or not is dependent on the customer that the customer is the consumer products company by the supplier to take.

Make sure to purchase the lowest cost in order to create favorable conditions for determining the selling price of the company. In current, competing firms is fierce so businesses need to have a strategy and a good relationship with suppliers to be able to contribute positively to the completion of the most common goals of business.

Timely payments to suppliers - reputation for prompt payment is key to helping companies get better prices in negotiations with its suppliers. It also helps in improving relationships with leading vendors to better serve, and position of the company as a preferred customer to the supplier.

In the framework of policies to manage its cash, the company will aim to maximize the efficiency of the payment process.

2.6.3. Relationship with The bank (“for finance short term loan in urgent cases to buy raw material, purchase goods or pay salary”)

Relationship with the bank is very important in the liquidity.

In cooperation relationships with developers, banks and enterprises are important partners, have an important role in determining the success or failure of each other. Enterprise is the leading partner banks are concerned. The capital and banking services are indispensable

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elements to help businesses succeed. In relationship banking and corporate banking as well known and familiar with your financial situation so if your company wants to borrow at a certain point, you do not need to spend too much time wait and go through the complicated procedure of new loans. For knew very well about your company, the bank can loan you even make that point.

Relationship with the bank for finance short term loan in urgent is very important. Every business whether big or small, it always needs a capital at some point. This amount may be required for a range of activities from working capital to pay such wages for labor, buy raw material, purchase products.... or the costs necessary for future expansion of the company activities. Whether any cause or require immediate, short-term borrowings of the enterprise is extremely useful and necessary. Relations with the bank’s business are vital. During the economic downturn caused havoc economy anywhere in the world is more or less affected, the banks almost stopped penalizing short-term loans. Stringent credit checks were made and the rules and regulations have been tightened before fined. When the economy was stronger, the looser bank for this loan. With the growth of the economy, the purchasing power of customers increase, businesses want to invest capital to expand the business, the banks become more confident in providing short-term loans. So the bank is the best option for you in the form of term loans. Short-term loans taken from banks and different maturity may be short, medium and long term. The purpose of the loan and the repayment period depends on the maturity of the business. But here, we want to emphasize that the bank has given an important role for business in making capital support and enhance liquidity.

The main purpose of the short-term loan is to serve the immediate needs of businesses. Other important purpose of short-term loan is for working capital. Small businesses can sometimes run the risk of trading losses and have led to turmoil in the business. Meanwhile credit pressure, the resulting debt crisis much money. Enterprises having these problems often lead to difficult to purchase raw materials for production, wage labor and pay regular bills of the business. For the short-term needs such, the relationship with the bank to get these loans is extremely suitable.

2.6.4. The role of other Financial institutions

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Financial institutions are formed through the financial transactions such as investments, loans and deposits. All deposits to borrowers and exchange deposits must be made through financial institutions. In addition to creating relationships with banks and businesses should have other relationships with other financial institutions to borrow money better. There are many financial institutions such as Insurance Companies, investment companies. Insurance companies can manage risk and preserve assets for the company. For example, when companies run the risk of accidents while producing damage in terms of wealth and employment, then the insurance company will pay for the company to compensate the company is in trouble. An investment company may be a corporation, an individual or collective trust in the company through its carrying amount invested in his company. They can invest in diversified, professionally managed portfolio of common stock of capital with other investors. This helps enterprises more abundant funds to focus on the production or expansion.

2.6.5. Economy context

“Economic Factors: Can create favorable conditions for expanding market penetration, this sector but limited the development of other sectors. Economic factors affecting the purchasing power, changes in consumer demand and the development trend of the industry, these syeu economic factors including”:

+ Foreign Trade Activity: Trends opens coanh enjoy economic opportunities of business development, competitive conditions, the ability to use national comparative advantage in technology and capital.

+ Inflation and the ability to control inflation affects income, accumulation, consumption, stimulate or inhibit investment...

+ The change in the economic structure also affect the position and role of the development trend of the economy led to a change in the direction of business development.

+ Economic growth: Shown development trend of the economy related to the ability to expand or narrow the scope of business of each company.

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Chapter 3: Finding

3.1. Company background and economy context

3.3.1. Company background

Private enterprises manufacture and trading business Thanh Phong is a private enterpris, operating under the Registration Certificate No. 0101000754 by the Business Registration Office- Hanoi Department Of Planing Investment on 10/02/2002. The company's headquarters are located at No.

5B2, Chicken Farm Industrial Park, Co Nhue, North Tu Liem, Hanoi.

The company's business activities:

- Production, processing and mechanical items, furniture

- Installation of industrial electrical works, civil power

- The other business lines.

3.1.2. Economy context

“The economy of Vietnam is market economy, it's strongly dependent on exports crude and direct investment of foreign. The Vietnam economy is the 6th largest economy of Southeast Asia; 56th largest in the world in terms of overall scale nominal domestic product in 2013.”

In 2007, Vietnam economic grew 8.5%. “However in 2008, the economic of Vietnam grew slow down, supposedly came from amount of reasons, include the financial crisis from 2007 to 2010. Since 2007, the Vietnam economy has seen many signs of high inflation. This period was characterized as slowing growth of the Vietnam economic (only 5 to 6% compare with previous period). The year of 2008 was an ineffective year with the GDP growth rate was only 6.23%, lowest rate since 1999. In the years from 2007 to 2008, the inflation accelerated and average 10 to 20%. In 2009, the GDP growth rate of Vietnam dropped to 5.32%, in 2010 it was 6.78%, and in 2011 it was 5.89%.”

However in 2012, due to many reasons, involve a part of the Resolution 11 that tightened

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of banking and rising of inventories, real estate market and securities market decreased, especially, the real estate market of Vietnam is freeze when the loans to this sector could be $ 50 billion. A large number of enterprises were bankrupt, many businesses were distressed.

3.2. Business performance and financial highlight

Thanh Phong PTE company’s performance:

- Production, processing and mechanical items, furniture - Installation of industrial electrical works, civil power - The other business lines.

The owner capital count to 2013 is 8,055,146,523 VND Cash Flows Statement:

Tagets Year 2013 Year 2012 Year 2011

I. Cash flows from operating cashflows

1. Sales, provide services and other revenue 12,629,375,072 15,420,411,503 24,379,238,805 2. Cash paid to suppliers of goods and services (585,646,316) (881,791,918) (7,355,772,759) 3. Cash paid to employees (775,490,895) (790,498,283) (1,511,672,356) 4. Interest Payments (163,136,516) (883,992,740) (350,972,827)

5. Payment corporate income tax (41,151,434)

6. Other receipts from operating activities (16,616,380,002) 1,155,272,372 2,266,041,249 7. Other payments for operating activities (101,230,078) (29,812,396) (395,719,766) Net cash flows from operating activities (5,612,508,735) 13,989,588,538 16,989,990,912 II. Cash flows from investing activities

1. Cash paid for purchase, fixed assets and other long-term assets (18,185,455) (15,150,000) (50,193,636) 2. Proceeds from disposals of fixed assets and other long-term assets

3. Loans, purchase of debt instruments of other entities 4. Recovery of loans, sales of debt instruments of other entities 5. Payments for investments in other entities

6. Proceeds from investments in other entities

7. Proceeds from loan interest, dividends and profits are divided 1,086,049 3,161,413 5,013,807 Net cash flows from investing activities (17,099,406) (11,988,587) (45,179,829) III. Cash flows from financing activities

1. Proceeds from issuance of shares and capital contributed by owners 77,898 498,680 2. Payments for capital owners, acquisition of shares already

issued now (66,075)

3. Short-term, and long term 6,182,160,601 3,879,908,725 4,341,950,000 4. Repayment of borrowings (3,578,705,409) (15,574,367,645) (20,329,100,243) 5. Repayment of finance lease liabilities

6. Dividends and interest paid to owners (13,556,966)

Net cash flows from financing activities 2,603,533,090 (11,694,524,995) (16,000,208,529) Net cash flows in the period (3,026,075,051) 2,283,074,956 944,602,554 Cash and cash equivalents at beginning of period 3,959,567,242 1,676,492,286 731,889,732 Effect of exchange rate changes of foreign currency exchange

Cash and cash equivalents at end of period 933,492,191 3,959,567,242 1,676,492,286

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Unit: VND 3.2.1. Operating cash flow

Based on the statements of cash flows of Thanh Phong Company, in operating activities, cash flow primarily came from Sales, provide services and other revenue. Cash outflows will be paid to the provision of goods and services, employees, interest, corporate income tax and other expenses of the business.

Cash inflow analysis:

Chart of sales, provide services and other revenue of Thanh Phong company from 2011 to 2013

Focus on the first factor, there is a strongly decreased trend of cash outflows from operating activities cash flow from sales, provide services and other revenue. More specifically, in 2011, the cash inflow receipted from the sales, providing services was 24,379,238,805 VND, in 2012 was 15,420,411,503 VND (went down 58% compared to 2011). In 2013, the cash continued to decline to only 12,629,375,072 VND (about a half compared to 2011). The cause of this decline, firstly is that the Thanh Phong company has narrowed business activities, and secondly is come from the amount receivable by the customer in the future.

- 5,000,000,000 10,000,000,000 15,000,000,000 20,000,000,000 25,000,000,000 30,000,000,000

2011 2012 2013

Sales, provide services and other revenue

Sales, provide services and other revenue

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Chart of other revenues from the business operations of Thanh Phong company from 2011 to 2013

In Other revenues from the business operations factor, easily realize that the receipted fairly positive sign in 2011 and 2012. However, in 2013, this cash flow is abruptly decreased to - 16,616,380,002 VND. The reason is that Thanh Pong company transfer a loan to a branch in Thai Binh (branch operates independently) with an interest rate of 15% per year. It will be the receivable in the future, so it’s listed in other reports.

Cash inflows analysis:

The cash paid to the providers of goods and services felled sharply (7,355,772,759 VND in 2011 to 585,646,316 VND in 2013). The payments to employees also halved (from 1,511,672,759 VND 7in 2011 to 75,490,895 VND in 2013). The decline reason also because the company downsizing the operation.

The other cash outflow for operating activities depend to each year and insignificant.

However, in the collection of money used to pay interest by 2012, this cash flow suddenly increased to 883,992,740 VND, nearly 3 times compared to in 2011, and 7 times compared to 2013. That's because the company borrowed money to pay to providers, and in 2012 had to pay for the loan interest by the end of 2011.

-20,000,000,000 -15,000,000,000 -10,000,000,000 -5,000,000,000 0 5,000,000,000

2011 2012 2013

Other revenues from the business operations

Other revenues from the business operations

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3.2.2. Financing cash flow Cash inflows analysis:

Cash inflows are collected from issuance of shares and capital contributed by owners, short- term and long term debt that the company borrowed. In general, the total was raised from 2011 to 2013 (4,341,950,000 VND to 6,182,160,601 VND) despite a slightly went down amount of 462,041,275 VND from 2011 to 2012.

Cash outflows analysis:

Cash outflows are cash paid for equity holders, repurchases of issued corporate, repayment of borrowings, payments of finance lease liabilities, dividends and interest paid to the owner. To concentrate in repayment of borrowing, through 3 years, the repayment of borrowing were highly decreased because of the borrowing plan of the company and in 2013, the repayment borrowing was only 3,578,705,409 VND. It’s reason why the net cash flow of 2013 was the only year that not be negative.

3.2.3. Investing cash flow

In investing activities, all of the cash flows were cash outflows and they came from purchase of material and long-term assets. However, there were discount in assets, cash outflows in 2012 and 2013 were only nearly a quarter.

3.3. Analysis liquidity Ratios of the firm

The liquidity ratio is the most obvious tools to assets the financial strengths of the company.

Table shows ratios:

Ratios measure liquidity 2011 2012 2013

Current ratio 0.652 0.728 0.732

Quick ratio 0.278 0.48 0.41

Cash ratio 0.05 0.09 0.02

Debt/Equity ratio 0.76 0.85 0.82

Inventory turnover 1.69 1.99 0.13

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Payable turnover 2.89 1.11 0.06

Days of sales outstanding(DSO) 112 202 4562

Days of inventory outstanding (DIO) 216 183 2808

Days of payable outstanding (DPO) 126 329 6083

Cash conversion cycle (CCC) 202 56 1287

3.3.1. Current ratio Average rate: 0.704

Current ratio was under 1 and VND 1 current liabilities be ensured 0.704 VND current asset, it shows that Thanh Phong Company is in the negative financial situation, have ability to unable pay debts at maturity.

However, this ratio had increased gradually from 2011 to 2013. The reason is in 2013, current asset decreased more VND 3 billion while current liabilities decreased more VND 4 billion, this figure is higher than current asset.

3.3.2. Quick ratio Average rate: 0.39

Quick ratio was under 1 and smaller than current ratio, it reflects that the company does not liquidated inventory quickly or take measures to reduce inventory, the company will be unlikely to repay short-term debts.

In 2012, inventory reduced more 480 million and it makes quick ratio in 2012 was higher than 2011. However, in 2013 inventory increased 1.6 billion and makes quick ratio in 2013 reduced slightly. This is explained in the balance sheet accounting.

3.3.3. Cash ratio Average rate: 0.53

This ratio of ThanhPhong company increased significantly (increased 0.04) from 2011 to 2012 and declined sharply (0.07) from 2012 to 2013. The important thing is this ratio was too low, it

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shows the ability pay short-term debts of the company is small because cash and cash equivalents are liquidity assets highest.

3.3.4. Debt/ Equity ratio

This ratio was high from 2011 to 2013(averaging about 80%), it means that the company often through debts to pay for activities. This will lead to a unstable income because company often have to pay interest accrued.

3.3.5. Inventory turnover

In 2011 and 2012, inventory turnover was average 1.84 times, it means that 198 days 1 cycle.

ThanhPhong is a manufacturing enterprise, it shows inventory turnover was quick in warehouse. However, in 2013, inventory turnover was 0.13 times, it means that 2807 days 1 cycle. This shows that ThanhPhong company sales slowly, inventory was more stagnant.

3.3.6. Receivables turnover

This ratio shows receivables circulated from 2011 to 2013 was 3.24 times; 1.81 times; 0.08 times respectively. This means that from 2011 to 2013 average about 107 days, 201 days, 4562 days respectively company was recovery debts. This ratio was low and decreased rapidly year by year, it demonstrates money of business was occupied more and more, cash will reduced increasingly, efficient using capital and solvency of the company was low

3.3.7. Payable turnover

Payable turnover decreased significantly from 2011 to 2013, it demonstrates enterprise was late payment and Payment was slower than the previous year. It shows that ThanhPhong company are difficult to pay debts at maturity.

3.3.8. Days of sales outstanding

Days of sales outstanding increased sharply from 2011 to 2013. Especially, in 2013 DSO was 4562 days, this number is too large, it shows the weaknesses ability to manage debts in ThanhPhong company.

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3.3.9. Days of inventory outstanding

In 2012, days of inventory outstanding decreased 33 days compared to 2011, it helped the payment situation of company was better. The cause is cost of goods sold increased about VND2.6 billion while inventory decreased more VND 480 million compared to 2011.

However, in 2013, days of inventory outstanding increased sharply (increased about 2600 days) compared to two years ago. The reason is inventory in 2013 increased more VND 1.6 billion and cost of goods sold decreased more VND 20 billion compared to two years ago.

This figure is too big, it shows ThanhPhong company is poorly performing.

3.3.10. Days of payable outstanding

Days of payable outstanding rose rapidly from 2011 to 2012. In 2012, this ratio was higher than 2011(203 days), this figure shows ThanhPhong company can stretch the time to pay for suppliers. However, in 2013 days of payable outstanding was too high 6083 days, it demonstrates that the company is difficult to pay for suppliers at maturity.

3.3.11. Cash conversion cycle (CCC)

In 2012, cash conversion reduced significantly (decreased 144 days) and this ratio was small, it shows in 2012, ThanhPhong company has the ability to manage working capital is better than 2011. However, in 2013, cash conversion cycle was too high (1287 days), this figure demonstrates ThanhPhong company is shortage about cash and company has to borrow additional capital while waiting for customers to pay debts.

Through the analysis of the liquidity ratios, it shows that the company has problems as following:

 Sale decrease over three years

 Sale credit policy is not effective

 Inventory management is not effective

 Payment policy is not effective

References

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