Production and Business Results Revenue

agriculture was surveyed. Furthermore, the hot but inefficient growth of enterprises in general and of enterprises in particular has caused the ICOR index of the whole economy to gradually increase to a high level in recent times, as mentioned in the Annual Report of Vietnamese Enterprises in 2014. 55

4.2.5. Production and business performance results Revenue

The production and business results of an enterprise are described through two criteria: revenue and profit. Revenue is a criterion to measure the scale and growth prospects of an enterprise, while profit is a criterion to measure the efficiency of the enterprise's operations. In the thesis, the enterprise's revenue is net revenue from sales and service provision. Net revenue is used for analysis because it has excluded the value of returned goods, so it accurately represents the value of revenue that the enterprise achieved during the year. Information on revenue and profit is collected from the enterprise's financial statements and is presented in detail in Table 4.6.

According to Table 4.6, the average revenue of surveyed enterprises in 2008 was 818.29 billion VND/enterprise (standard deviation was 1,161.49 billion VND) and in 2014 it was 1,697.87 billion VND, an increase of 2.1 times compared to 2008. This is because many surveyed enterprises are large in scale, so they have the advantage of maintaining revenue growth rate on the basis of traditional markets. Moreover, the export of agricultural products in the period 2008-2014 tended to increase, in 2014 alone the export value reached 30.86 billion USD with many agricultural products - food products with large export value. 56 That explains why the revenue of agricultural enterprises increased compared to 2008.

Among the 130 agricultural enterprises surveyed, three enterprises were honored at the Forbes Asia Awards, including the Central Seed Joint Stock Company (NSC), the Southern Seed Joint Stock Company (SSC) and the Trans-Pacific Joint Stock Company (PAN). 57 Enterprises

55 Asset utilization efficiency is also closely related to return on average assets (ROA ) – an indicator that will be analyzed in more detail in the following section.

56 According to http://vtc.vn, 10 agricultural, forestry and fishery products with large export turnover from over 1 billion USD to 6 billion USD include: wood and wood products (6.54 billion USD), shrimp (4 billion USD), coffee (3.62 billion USD), rice (3.04 billion USD), cashew (2 billion USD), rubber (1.8 billion USD), tra fish (1.8 billion USD), vegetables and fruits (1.47 billion USD), pepper (1.2 billion USD) and cassava (1.12 billion USD).

57 To make Forbes' list of the best companies under $1 billion, companies must meet criteria such as revenue between $5 million and $1 billion, return on equity (ROE) and pretax profit margin greater than 10%. Additionally, growth

This enterprise is in the group of 200 best enterprises with revenue under 1 billion USD in Asia. That helps to affirm the strength as well as the development potential of Vietnam's agricultural sector.

Profit

The average profit of agricultural enterprises surveyed in 2008 was 50.85 billion VND (standard deviation 26.87 billion VND) and increased to 127.42 billion VND (standard deviation 61.22 billion VND) in 2014 (2.5 times higher than in 2008). This can be considered the reason why Vietnamese agricultural enterprises are the backbone of the economy during the crisis.

Table 4.6. Production and business performance results

Criteria Year Average Median Maximum Minimum Deviation

standard

2008 818,295 418,811 8,380,563 0.309 1,161,487

2009

2010

Revenue (billion VND)

Profit (billion VND)

2011

2012

2013

2014

2008 – 2014

2008

2009

2010

2011

2012

2013

2014

2008 – 2014

Source: Agricultural Enterprise Survey Data (2008–2014)

However, there are still businesses that are operating at a loss. The business with the highest loss was 223.41 billion VND in 2008 and 892.62 billion VND in 2014. Besides the objective reasons, agricultural production and business have many potential risks, are affected by seasonality and the market has potential developments.

Positive revenue growth and positive earnings per share (EPS) in the last fiscal year and the last 3 years; debt below 75% of equity. The final condition is that the enterprise must have been listed for at least 1 year.

Unpredictable changes in both input and output, the subjective cause leading to losses of agricultural enterprises is low capital efficiency, asset turnover and capital turnover continuously decrease (Table 4.5). This is a sign of high growth rate of total assets but no improvement in revenue growth rate (Chart 4.3).

Hanoi Milk Joint Stock Company (HNM) is a typical example of risks in production. At the end of 2008, the "Melamine storm" swept into Vietnam, HNM was at the center and was most heavily affected by consumers losing confidence in the Hanoimilk brand, resulting in a decrease in revenue and mass product recalls, causing production and business costs to increase dramatically. HNM's profit in 2008 was (negative) -44,869 billion VND. Similar to HNM, Vinh Long Food Joint Stock Company (VLF) is also an example of risks in agricultural business. VLF's domestic consumption and export both decreased seriously (exported 34,432 tons, down 46% compared to 2013) due to unpredictable fluctuations and incidents in the market and capital sources. The investment in the Domyfeed Aquatic Feed Processing Factory was ineffective and had to stop operations. The above reasons caused VLF's 2014 profit to be negative at -59,588 billion VND - not a small number for a mid-sized enterprise.

The relatively high standard deviation of profits compared to the average value shows a large difference in profits among the surveyed agricultural enterprises. Furthermore, the median profit is much lower than the average profit, showing that the profits of many enterprises are relatively low but some enterprises have very high profits, leading to an increase in the average profit. The large difference in profits among enterprises is due to some enterprises taking advantage of scale and receiving support from the Government. 58 For example, Vinh Long Food Joint Stock Company (VLF) invested ineffectively in the Domyfeed Aquatic Feed Processing Factory and had to stop operations (sold to Spotlight Animal Feed Joint Stock Company at a pre-tax price of VND 56 billion and incurred a brokerage fee of 1% on the selling price). On the contrary, An Giang Seafood Import-Export Joint Stock Company (AGF) with relatively large assets and continuous growth in the period 2008-2014, thanks to the advantage of scale and support from the Government, the Company's profit in 2014 increased more than 8 times compared to 2008.

58 The Government issued Decree 75/2011/ND-CP dated August 30, 2011 and Decree 54/2014/ND-CP dated May 22, 2013 guiding enterprises in need of loans to purchase aquatic feed for export to borrow capital under the export credit mechanism.

Many businesses invest in expanding their scale but do not use their invested assets effectively, leading to a waste of investment capital and a decrease in profits. For example, the asset size of Da Nang Food Joint Stock Company (DNF) increased 3 times in the period 2008-2014, but the revenue growth rate was slower than the growth rate, reducing the efficiency of using invested assets. The Company's investments from bank loans with interest rates of 12%-14%/year caused high interest expenses (accounting for over 60% of total production and business costs) and led to ineffective business. The Company's profit in 2009 was 3.20 billion VND and decreased to 1.84 billion VND in 2012. In fact, in 2013-2014, the Company's profit was negative.

In general, many surveyed enterprises have negative profits due to high and unstable input material costs, management costs, and loan interest costs, which increase production and business costs. Some agricultural enterprises have to transact with many small-scale farmers, which increases transaction costs and costs of controlling contract execution in cases of agricultural product consumption for farmers. 59 Finally, the weak agricultural and food business environment in our country is also the cause of increased transaction costs. 60 All of the above reasons are the basis for explaining the fluctuations in production and business costs and profits of agricultural enterprises in the period 2008-2014. In other words, the profits of the surveyed agricultural enterprises depend on input material costs and management costs. In addition, the efficiency of asset use or capital use also directly affects the profits of enterprises.

The relationship between assets, labor and revenue

This section provides a preliminary assessment of the relationship between the size of assets, labor and revenue of surveyed enterprises through Chart 4.3. During the period 2008–2014, the growth rate of assets of enterprises was always higher than the growth rate of labor, proving that developing enterprises rely more on capital growth rather than labor growth. This seems to be a paradox when our country has always been considered to have an advantage in cheap labor, but in recent times

59 Source: OECD (2015), Vietnam's Agricultural Policy 2015, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264235151-en.

60 According to http://www.thesaigontimes.vn/, Vietnam's agricultural business environment is below average. Nearly 80% of agricultural enterprises want the Government to continue administrative reforms to create more favorable conditions for business development.

Agricultural enterprises do not focus on exploiting this advantage but mainly rely on capital growth, sometimes with very high interest rates.

Figure 4.3. Assets, labor and revenue

Source : Agricultural enterprise survey data (2008–2014)

Although the development is capital-oriented, the growth rate of assets is greater than the growth rate of revenue in the period 2008-2014, which means that agricultural enterprises have low capital efficiency, due to improper exploitation (for reasons as analyzed in the previous section), which negatively affects operating efficiency and revenue growth. Chart 4.3 also shows that in the period 2008-2011, when the growth rate of assets increases, the growth rate of revenue increases accordingly. On the contrary, in the period 2012-2014, when the growth rate of assets decreases, the growth rate of revenue also decreases. This fact raises the question of what is the growth rate of assets for the maximum growth rate of revenue.

4.2.6. Bank credit and ability to pay interest Bank credit

Bank credit of surveyed agricultural enterprises includes short-term and long-term loans. Long-term loans are mainly used to invest in expanding scale or financing new projects. Meanwhile, short-term loans are used when enterprises temporarily

Even when borrowing long-term to invest in new projects or expand their scale, businesses can still borrow short-term to meet cash flow needs for the project. In principle, short-term interest rates are lower than long-term interest rates, but in many cases, carrying out many short-term credit transactions causes transaction costs and increases the cost of using bank credit capital. The statistical results of the current status of bank credit borrowing of agricultural enterprises in the survey sample are presented in Table 4.7.

Table 4.7. Bank credit (billion VND)

Year Mean Median Maximum Minimum Deviation

Source : Agricultural enterprise survey data (2008–2014).

According to Table 4.7, in the period 2008–2014, the average bank credit of agricultural enterprises was 270.93 billion VND/enterprise (standard deviation 524.834 billion VND). In 2008, the average bank credit was 157.26 billion VND/enterprise (standard deviation 260.79 billion VND), with the enterprise borrowing the most up to 1,358.26 billion VND. Lam Thao Super Phosphate and Chemical Joint Stock Company (LAS) was the enterprise with the most bank loans in 2008. By 2014, the average bank credit was 379.59 billion VND/enterprise (standard deviation 775.80 billion VND), with the enterprise borrowing the most being 5,929.43 billion VND. Minh Phu Seafood Corporation (MPC) had the highest bank credit in 2014. New investment in Minh Phu Aquamekong Aquaculture Technical Services Co., Ltd. and the establishment of a new subsidiary with 100% Minh Phu capital explained why MPC's bank credit reached the highest value in 2014.

The increase in bank credit helped to expand production scale and increase revenue of the surveyed agricultural enterprises in the period 2008–2014, as analyzed above. However, the growth rate

Corporate bank loans decreased again, mainly due to the State Bank's tight monetary policy, leading to a decrease in credit growth of the entire economy during this period.

During the period 2008-2014, although many enterprises borrowed from banks with quite large amounts of money, there were also enterprises that could not access this source of credit. Safoco Foodstuff Joint Stock Company (SAF) did not use bank credit during the period 2008-2014 and VinaCafé Bien Hoa Joint Stock Company (VCF) did not borrow from banks in 2009, 2011 and 2012. In addition, over 70% of enterprises used short-term credit, for example, Ben Tre Seafood Import-Export Joint Stock Company (ABT), Can Tho Pesticide Joint Stock Company (CPC), Sao Ta Food Joint Stock Company (FMC), HAI Agricultural Chemical Joint Stock Company (HAI) - enterprises with 100% of loan capital being short-term credit.

The above facts show that although the Government has many policies to support capital for agricultural enterprises during the economic crisis, these policies are not really effective because many enterprises do not have access to bank credit to meet investment needs and supplement working capital shortages to avoid production interruptions. This can negatively impact revenue growth as well as business performance. To maintain production activities, enterprises must use commercial credit or equity capital formed from retained earnings, although this source is often not enough to meet the demand. However, to a certain extent, commercial credit has a positive impact on business performance as well as revenue growth.

The increase in bank loans helped support the production and business activities of enterprises, but the loan interest rate in the period 2008-2014 was relatively high (although it gradually decreased over time), which means that enterprises had to bear high costs of using loans. 61 At that time, if the loans were not used effectively, the cost of loans and the pressure to repay loans could adversely affect the revenue growth and operating efficiency of the enterprise.

Interest payment capacity

The interest coverage ratio is determined by dividing earnings before interest and taxes by interest payable. This ratio measures the ability of a business to

61 The average annual lending interest rates in the period 2008–2014 were 15.78%; 10.07%, 13.14%; 16.95%; 13.47%; 10.28% and 8.66%, respectively.

Does the business generate enough income to cover the interest payments? Specifically, if this ratio is greater than 1, the business is fully capable of paying the interest payments. On the contrary, if this ratio is less than 1, the business has borrowed too much compared to its capacity or is doing poorly, so the profit earned is not enough to pay the interest payments. Interest payments are an expense that businesses must cover if they do not want to fall into the risk of bankruptcy.

According to Table 4.8, the interest coverage ratio of the surveyed agricultural enterprises fluctuated over time. The average interest coverage ratio in the period 2008–2011 was lower than the average interest coverage ratio in the period 2012–2014. The average interest coverage ratio for the entire period 2008–2014 was 31.51 times, with a standard deviation of 90.85 times.

Table 4.8. Interest payment capacity 62

Year Mean Median Maximum Minimum Deviation

standard

2008

Source : Agricultural enterprise survey data (2008–2014)

During the period 2008-2011, bank loan interest rates were high, so businesses had to bear high-interest loans, about 14-18%/year (in reality, businesses had to pay much higher interest rates, sometimes up to 25% due to the underground interest rate race that the State Bank could not control). However, the business results of businesses were relatively high, with profits increasing more than 2 times during the period 2008-2014. Furthermore, although the average interest rate on the market was high, Vietnamese agricultural businesses received support from the Government through programs to attract and support businesses to invest in agriculture and rural areas. Therefore, these businesses can access loans with preferential interest rates (quite low compared to market interest rates). This

62 According to Le Hoang Vinh (2014), the interest payment capacity of non-financial enterprises listed on the Vietnamese stock market in the period 2010-2013 was 181.50 times. According to a survey by VCCI (2014), the payment capacity index of enterprises ranges from 5.3-16.2 times, depending on the type of enterprise. Different results on payment index are due to different research subjects and different scales of research subjects.

That helps explain why the interest payment capacity of Vietnamese agricultural enterprises remains quite high.

In 2008, Hoa Binh Rubber Joint Stock Company (HRC) only had to pay interest expenses of 0.028 billion VND because HRC had access to preferential capital from the Environmental Protection Fund of Ba Ria - Vung Tau province (interest rate of about 0.32%/month). Meanwhile, pre-tax and interest profit was 88.024 billion VND, so the ability to pay interest of this enterprise reached its highest value in 2008. In contrast, Bien Hoa Sugar Joint Stock Company (BHS) had to bear high interest expenses of 10% -15%/year in 2008 because it could not access preferential loans. 63 Moreover, ineffective financial investments led to losses. This was the reason why BHS lost its ability to pay interest in 2008, the interest payment ratio was (negative) -0.56 times. Similarly, high interest costs were also one of the reasons why Da Nang Food Joint Stock Company (DNF) lost its ability to pay interest in 2013-2014.

Although corporate profits increased slowly during the 2012–2014 period, the decrease in interest rates resulted in a higher average interest coverage ratio than the 2008–2011 period. Table 4.8 also shows that, even during the period of low bank interest rates, many companies had low interest coverage or even lost interest coverage, with negative interest coverage ratios. These companies faced a high risk of bankruptcy due to their inability to pay interest.

This fact shows that the interest rate of loans greatly affects the business activities of enterprises, especially enterprises that have to rely heavily on borrowed capital. In other words, it can be seen that the interest rate of loans continues to be a heavy burden for agricultural enterprises in recent times. If the loan capital is used effectively, the profits earned will ensure the ability to pay interest and vice versa. In the following chapters, the thesis will estimate the impact of bank credit on revenue growth and business performance.

4.2.7. Trade credit (accounts payable) and term of use of Trade credit

As mentioned, the thesis uses the value of trade payables to represent the amount of trade credit used by agricultural enterprises.

63 Source: BHS's 2008 financial report.

use. The statistical results for commercial credit of agricultural enterprises are presented in Table 4.9. Accordingly, the amount of commercial credit used by enterprises increased nearly 3 times in the period 2008-2014. Indeed, in 2008, agricultural enterprises received commercial credit with an average value of 51.96 billion VND/enterprise (standard deviation of 125.22 billion VND). By 2014, these enterprises received commercial credit with an average value of 141.16 billion VND/enterprise (standard deviation of 446.10 billion VND). The data show that the amount of commercial credit varies quite significantly between agricultural enterprises and over the years. Many enterprises do not use commercial credit, but there are also enterprises that buy on credit with large values ​​from suppliers. In 2008, businesses used the most commercial credit, up to 1,213.47 billion VND, and in 2014 it was 4,416.17 billion VND.

Table 4.9. Trade credit (billion VND)

Year

Source : Agricultural enterprise survey data (2008–2014).

Commercial credit increases because businesses expand their operations, requiring more input materials for production and business activities. Moreover, the input materials of these businesses are mainly agricultural products, with the characteristics of frequent changes in prices and supply. At the same time, because agricultural producers (mainly farmers) often decide to produce according to expected prices (in the future), the supply of agricultural products - a necessary input factor for many agricultural businesses - on the market is also very volatile, making it difficult for businesses to proactively source sufficient capital to meet demand. 64 Therefore, the flexible use of commercial credit (payments

64 Indeed, because agricultural production has a long lag (phase difference) between the time of production and the time of harvesting the product, the subjects (such as farmers) can only decide the output (how much to produce) based on the expected price. If the expectation is that the price of agricultural products will be high, they will produce a lot, so the supply of agricultural products will be very large (even abundant) and the price will decrease. On the contrary, if the expectation is that the price of agricultural products will be low, farmers will produce less, so the supply of agricultural products will be scarce and the price will increase.

Slow credit for partners) to maintain uninterrupted input materials with good prices and guaranteed quality is very necessary. Many businesses have taken advantage of this and achieved high revenue, due to maintaining stable and continuous production and business activities and input materials. Trade credit in these cases has a really positive impact on revenue growth and operating efficiency of agricultural enterprises.

Data from the financial report of Yen Bai Agricultural Products and Food Processing Company (CAP) proves the above argument. The main business of the Company is processing, processing and trading agricultural products and food with the main raw material being cassava. 65 The price of this raw material tends to increase rapidly (approximately 8.9%/year), while the price of finished products decreases due to a 20% decrease in China's demand for cassava and cassava-based products, stemming from the country's decrease in demand for biofuels (OECD, 2015). Recognizing the price fluctuations of input factors and finished products, CAP has maintained a reasonable trade credit policy throughout the period 2008-2014, ensuring a stable source of raw materials for production. The Company's revenue increased steadily during the period 2008-2014 and achieved an average growth rate of 17.1%/year for the entire period. Furthermore, CAP's average trade credit term during this period was about 13 days, lower than the average of all surveyed agricultural enterprises. Due to the relatively low trade credit term, CAP took advantage of the early payment advantage of trade credit, thus avoiding high costs arising from the use of trade credit. As a result, the company's profits increased steadily.

However, the use of trade credit also has negative effects, in addition to the causes mentioned in the theoretical basis section (Chapter 3). The term of trade credit is too long, increasing production costs. Moreover, enterprises cannot take advantage of discounts when paying early, which also increases input material costs. These factors can negatively impact revenue growth and operating efficiency of the surveyed agricultural enterprises. The next section will detail the term of trade credit used by the surveyed agricultural enterprises.

65 About 90% of cassava production is consumed domestically for food, animal feed, cassava flour and recently for biofuel. There are currently 6 factories producing biofuel from cassava, accounting for nearly 40% of cassava production in 2011.