Through the analysis of financial indicators, it can be seen that Thanh Dat Shipping Trading Company Limited operates effectively and has development potential. However, there are some limitations in financial potential and there are potential risks. The risk is at an average level, financial autonomy is not high, and the slow collection of credit sales causes the ability to pay debts to be low. The high debt ratio leads to the risk of weak payment ability. The company needs to have a strict collection management policy, and at the same time focus on reasonable capital regulation to reduce the risk of debt payment ability.
2.2.3. Dupont analysis equation
The essence of the Dupont method is to separate a composite ratio reflecting the profitability of a business such as return on assets (ROA), return on equity (ROE) into the numerical product of a series of ratios that have a causal relationship with each other. That allows analyzing the impact of those ratios on the composite ratio.
The Dupont method is based on controlling quite complex financial analysis indicators.
Each indicator reflects financial relationships in the form of ratios. Each financial ratio is influenced by the financial relationships of the enterprise with related parties.
Based on that, establishing the relationships of each financial ratio and influencing factors needs to follow a strict logical sequence. It is necessary to have a clearer view of the financial activities of the enterprise. The impact on the factors also needs to be done in the most effective and reasonable way.
First, we consider the interaction between return on equity (ROE) and return on assets (ROA).
ROA =
Profit after tax Total assets =
Profit after tax Revenue ×
Revenue
Total assets (1)
ROA 2017 = 12.32% × 0.918 = 11.3%
ROA 2018 = 8.5% × 1,292 = 10.9%
The ROA ratio shows the rate of return on assets which depends on two factors:
- Net income of the enterprise per unit of revenue
- How much revenue does one dollar of assets generate?
The company's asset turnover in 2018 was lower than in 2017, showing that in 2018 the company used assets less effectively than in 2017. From the above equation, we see that on average, every 100 VND of asset value put into use in 2017 generated 11.3 VND of profit after tax and by 2018 it had decreased to 10.9 VND.
There are two ways to increase the ROA index: increase the profit margin after tax/net revenue (ROS) or increase the business capital turnover:
- Increase ROS by saving costs.
- Increase business capital turnover by increasing revenue and reducing selling prices, along with increasing sales promotion activities.
Next, we look at the company's return on equity (ROE):
Profit after tax
ROE =
Equity
Return on equity reflects the profitability of equity.
If the assets of a business are financed only by equity, then the return on capital and the return on equity are equal because then Total Assets = Total Capital.
ROA =
Profit after tax =
Total assets
Profit after tax
Equity = ROE (2)
If a company uses debt to finance its assets, then we have the following relationship between ROA and ROE:
Total assets
ROE =
Equity × ROA (3)
Combining (1) & (3) we have:
×
Profit after tax
ROE = Revenue Profit after tax
×
= Revenue
×
Profit after tax
= Revenue
1
Revenue Total assets
Revenue Total assets
Revenue Total assets
× Total assets
VCSH
× Total Assets Total Assets - Liabilities
× 1
1 − Rd
ROE 2017 = 12.32% × 0.918 × 1 - 56.9% = 26.2%
1
ROE 2018 = 8.5% × 1,292 × 1 - 56.8% = 25.3%
The return on equity ratio in 2018 decreased compared to 2017 mainly due to the decrease in the profit margin on revenue in 2018 to 8.5%. We can see that on average, 100 VND of equity invested in business generated 26.2 VND of profit after tax in 2017 and 25.3 VND of profit after tax in 2018.
There are two ways to help a company increase ROE: increase ROA or increase the total assets/equity ratio:
- Increase ROA as the method mentioned above.
- Increase the total assets/equity ratio by reducing equity and increasing debt. We see that the higher the debt ratio, the higher the return on equity. However, when the debt ratio increases, the risk will also increase, so the company will have to be very careful when using debt.
With Rd = Debt / Total Assets is the debt ratio and this equation is called the extended Dupont equation which shows the dependence of return on equity on sales, total capital turnover and debt ratio.
From here we see that using debt has the effect of amplifying equity profits if the business has profits during the period, the larger the debt ratio, the higher the profits and vice versa, if the business is losing money, using debt will increase the loss.
CHAPTER III: SOME MEASURES TO IMPROVE THE FINANCIAL SITUATION AT THANH DAT SEA SHIPPING TRADING COMPANY LIMITED
3.1. General assessment of the financial situation at Thanh Dat Maritime Transport Trading Company Limited
3.1.1. Advantages
- The company's revenue has increased significantly over the years at a rate faster than the increase in cost of goods sold, which has led to a significant increase in profits. This is a good sign, demonstrating that the company's production cost management is effective.
- The Company has properly implemented the accounting regime prescribed by the Ministry of Finance, promptly revised and supplemented it according to new circulars, standards and accounting laws.
- Fulfill obligations to pay the budget and comply with financial and tax regulations of the State.
3.1.2. Disadvantages
However, besides the above advantages, the company's financial situation still has the following limitations:
- Selling expenses and business management expenses tend to increase.
- The company's solvency is still low and not guaranteed.
3.1.3. Causes leading to such financial situation
- The company's inventory increased gradually over the years: in 2016 it was 29,641 million VND, in 2017 it was 35,737 million VND and in 2018 it was 44,428 million VND, leading to capital stagnation.
- Customer receivables increased dramatically: 20,514 million VND in 2016, 21,041 million VND in 2017 and 32,145 million VND in 2018.
- Due to rapid increase in sales management costs: 21,861 million VND in 2016, 25,861 million VND in 2017 and 40,778 million VND in 2018.
3.2. Orientation to improve financial efficiency of Thanh Dat Maritime Transport Trading Company Limited
3.2.1. On development investment
Because the situation of used ships is very cheap compared to recent years (down 60% compared to the third quarter of 2018), it will be a good opportunity to invest, rejuvenate and develop the fleet. Therefore, the company plans to buy 2 more used ships.
3.1.2. On improving labor quality
In the context of the declining development of the maritime industry, the pressure on the labor force in the industry, especially the crew force, is no longer as tense as in 2017, and there may even be a surplus of labor. This is a good opportunity for the company to recruit a highly skilled workforce to serve its long-term development strategy.
3.1.3. About business activities
- Sea transport is considered the main business of the Company, so in the coming time, the Company will continue to exploit import-export and charter routes in the area where the Company has a position and at the same time expand the shipping routes.
- With the goal of both exploiting warehouses and providing freight forwarding services combined with an experienced loading and unloading workforce, we will provide a perfect forwarding service to serve customers most thoughtfully.
- Along with the transportation business, actively developed logistics services (The main function of logistics includes the management of purchasing, transportation, warehousing along with activities related to organization and planning for those activities) and multimodal transport agency (the method of transporting goods by at least two different modes of transport, on the basis of a multimodal transport contract from a point in one country to a designated point in another country for delivery) to exploit the strengths of knowledge, experience and relationships in the transportation market. Improve the quality of maritime transport services
+ Regularly maintain ships to avoid problems when the ship is performing the transportation contract (because if a problem occurs, it will slow down the ship's seagoing time, cargo handling time, leading to slow ship turnaround time, which will reduce revenue)
+ Regularly open on-site training courses to improve the skills and knowledge of officers and crew members in the maritime industry, conduct training and retraining to improve the labor efficiency of existing workers. There will be 2 training contents: advanced training in professional qualifications, and advanced training in foreign language proficiency.
+ The fleet operates according to the contract, ensuring the correct route, on-time delivery, good preservation of goods, avoiding loss and damage to the shipper.
- Strengthen the work of urging and releasing ships to increase vehicle turnover and improve revenue;
- Focus on buying fuel at foreign ports if the price is cheaper;
- Strengthen the work of preservation and maintenance, technical management, preserve the vehicles well and direct the implementation of the standard procedures in preservation and production operation, ensuring the safety of vehicles, goods, people and the environment. Improve labor discipline;
- Strengthen the management of fuel, materials and repairs;
- Strengthen safety work, prevent accidents and losses;
- Maintain and improve the technical condition of the fleet;
- Promote service business activities in the fields of transportation agency, yard and container services, improve the efficiency of service activities; continue to care for the material and spiritual life of officers, employees, crew members, implement policies and regimes for employees, create conditions for employees to complete assigned tasks well.
3.3. Some measures to improve the financial situation at Thanh Dat Maritime Transport Trading Company Limited
3.3.1. Solution 1: Improve payment capacity
3.3.1.1. Accounts receivable management
To manage receivables well, the company must have a good credit policy, this credit policy is related to the level, quality and risk of revenue. Credit policy includes factors such as: credit standards, credit period or extending credit period or increasing discount rate can increase revenue and profit, at the same time, receivables and the costs associated with these items also increase and there is a risk of bad debts arising. Therefore, when the company decides to change any factor, it is necessary to consider the profit that the company can earn with the risk of increasing irrecoverable debt that the company has to face in order to be able to come up with a suitable credit policy.
In addition, the company needs to pay attention to relationships with customers and suppliers, pay attention to analyzing the reputation and assessing the financial capacity of customers before deciding whether to sell on credit to that customer or not. The company also needs to do a good job of classifying customers so that each different customer group will enjoy different trade credit policies.
To reduce the collection, the company can apply some measures as follows: when signing a contract with a customer, the company should provide some constraints in the payment conditions or some incentives if the customer pays early. This will help the customer pay the debt to the company early and is a form of promotion to help retain customers with the company.
In addition, the company must take decisive measures in collecting receivables such as:
- When the debt is about to come due, the company should send a notice to the customer so that the customer can prepare the money to pay the debt.
- For overdue debts, the company may, depending on the actual situation of the customer, extend the debt or impose a late payment penalty according to the provisions of the contract.
- For bad debts: on the one hand, the company makes provisions for bad debts to ensure financial stability. On the other hand, the company has appropriate measures to handle these bad debts such as: extending debt or reducing debt to recover debts that are partly considered lost. The company can even use legal remedies in court.
Regular monitoring of receivables will determine their current status and accurately assess the effectiveness of financial policies:
- Determine the average collection period.
- Arrange the age of receivables: divide receivables into overdue debts and debts in payment, then arrange them based on the payment maturity of receivables, and compare the ratio of receivables to total credit.
- Determine the balance of receivables: this indicator helps businesses see the outstanding balance of each customer to have measures to recover capital, avoiding the situation of expanding the credit level.
Implement factoring policy to reduce receivables:
Basis of measures
In business activities, it is often inevitable to buy and sell on credit between businesses. Through the financial report, we see that the company's receivables are quite large, accounting for a very large proportion of the company's total assets.
This shows that the company is in a situation where customers are occupying a lot of capital, which will cause difficulties in capital turnover when necessary and there will be risks in debt collection, reducing the efficiency of the company's production and business.
Table 3.1: Short-term revenues
Unit: million VND
Target
2016 | 2017 | 2018 | |
CURRENT ASSETS | 103,733 | 151,929 | 162.011 |
III. Short-term receivables | 33,879 | 30,586 | 38,372 |
1. Accounts receivable from customers | 20,514 | 21,041 | 32,145 |
2. Prepayment to the seller | 2.014 | 1,843 | 2.301 |
3. Other receivables | 11,351 | 7,702 | 3,926 |
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(Source: Financial report 2016 - 2018)
According to Table 3.1, the largest proportion of short-term receivables is receivables from customers with a value of 32,145 million VND, of which bad receivables account for 45%, equivalent to 14,465 million VND. Due to the nature of trade and service activities and the very flexible business sector, buying and selling on credit, deferred payment and post-payment between businesses is inevitable. However, long-term and large-value receivables will cause the company's capital to stagnate, incur costs and directly affect the company's ability to pay as well as the efficiency of capital use. Therefore, the company needs to control and handle outstanding, difficult-to-collect, and slow-to-collect receivables.
Contents of the measure:
To improve the efficiency of capital management and use, the company needs to do a good job of debt collection. This will help the company collect a certain amount of money to cover the company's debts. The company should use a modern debt collection service called "Factoring". Factoring is a business in which a company with receivables will resell its customers' receivables to a company specializing in debt collection. On the debt selling company's side, after selling the receivables, it will not have to worry about debt collection and can only focus on production and business.
To decide whether to use factoring, a company must compare the risk of collecting an entire receivable in the future.