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Running head: Novaland

GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS Student name:

Nguyễn Thị Lâm Anh

Student ID number:

31151021295

Student name:

Nguyễn Đức Hoàng

Student ID number:

31151023131

Student name:

Mai Thị Kim Hằng

Student ID number:

3115102393

Student name:

Vương Tuấn Lâm

Student ID number:

31151020479

Student name:

Trần Huỳnh Hoàn Khôi

Student ID number:

31151021521

Student name:

Phạm Quang Nhật

Student ID number:

31151021198

Student name:

Đặng Hà Anh Thư

Student ID number:

31141022981

UNIT AND TUTORIAL DETAILS Unit name:

Financial Accounting

Unit number: ACC301

Tutorial/Lecture: Lecturer or Tutor name:

Class day and time: Huỳnh Thị Ngọc Anh

ASSIGNMENT DETAILS Title:

COMPANY FINANCIAL ANALYSIS

Length:

2000 words

Due date:

2 Dec 2018

Date submitted:

2 Dec 2018

DECLARATION I hold a copy of this assignment if the original is lost or damaged. I hereby certify that no part of this assignment or product has been copied from any other student’s work or from any other source except where due acknowledgement is made in the assignment. I hereby certify that no part of this assignment or product has been submitted by me in another (previous or current) assessment, except where appropriately referenced, and with prior permission from the Lecturer / Tutor / Unit Coordinator for this unit. No part of the assignment/product has been written/ produced for me by any other person except where collaboration has been authorised by the Lecturer / Tutor /Unit Coordinator concerned. I am aware that this work may be reproduced and submitted to plagiarism detection software programs for the purpose of detecting possible plagiarism (which may retain a copy on its database for future plagiarism checking). Student’s signature: Student’s signature:

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Running head: Novaland

Student’s signature: Student’s signature: Student’s signature: Note: An examiner or lecturer / tutor has the right to not mark this assignment if the above declaration has not been signed.

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Running head: Novaland

NOVALAND Nguyen Thi Lam Anh Nguyen Duc Hoang Mai Thi Kim Hang Vuong Tuan Lam Tran Huynh Hoan Khoi Nhat Pham Quang Dang Ha Anh Thu Financial Accounting Huynh Thi Ngoc Anh International School of Business 01/12/2018

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Running head: Novaland

TABLE OF CONTENT

I.

A.

QUESTION Describe the differing perspectives of investors and lenders when using published financial statements for assessing performance, identify FOUR key by EACH group (eight measures in total)

B.

Clearly explain the significance of each ratio or measure for an assessment carried out by the relevant group. The role of each ratio in explaining the picture of investors/lenders view why we choose that ratio (the significance).

C.

Calculate each of the ratios for a selected company in Vietnam (All calculations must be clearly shown in the appendix)

D.

Based on the ratios you have identified and calculated, and other relevant information, assess the performance of the company from the perspective of both investors and lenders. 1. Investor: Roe, Earnings per share, Price-earnings ratio, Payout ratio 2. Creditor: Debt to equity, Gross profit margin, Current ratio, Interest Coverage ratio

E. Explain the limitations of the ratio analysis above. II.

APPENDIX

1. APPENDIX QUESTION D -

Roe

-

Earnings per share

-

Price-earnings ratio

-

Payout ratio

-

Debt to equity

-

Gross profit margin

-

Current ratio

-

Interest coverage ratio

2. APPENDIX QUESTION E -

Profitability

-

Efficiency

3. APPENDIX FOR KEY FINANCIAL RATIO III.

REFFERENCE

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Running head: Novaland

QUESTION A Relying on financial statements helps both investors and creditors to gain general insight into company financial health and the risk of operation. With financial statements, they can receive accurate and comparable information.

However, the way creditors and investors utilizing the

financial statements is different due to the variety in perspective and needs of information. A creditor is a person or an entity who gives other entities permission to borrow money with intention to receiving repayment in the future. Investor is a person or an entity providing funds or capital in order to gain the appreciation of the investment in the future. The interest of both creditors and investors can conflict to each other. For example, as an investors, they can desire to maximize the equity value rather than both value of firms and debts. This is called “agency conflict of debt”. (Casino S., Clatworthy M., Osma B. G., Gassen J.,Imam S. & Jeanjean, 2015) For the creditors, financial statements are important during the time provision borrowings and subsequent renegotiation and supporting in generating appropriate covenant. Firstly, creditors can use financial information to predict the financial distress relating to existing debts in balance sheet and company performance in income statement. Secondly, they can use to evaluate the credit rating of company. In term of credit ratings, they can consider information about liquidity, cash flow, leverage and overall solvency. Also, they need to evaluate the cash conversion cycles to gauge the risk of defaulting due to the situation of cash outflows exceeding the resources. (Casino S., Clatworthy M., Osma B. G., Gassen J.,Imam S. & Jeanjean, 2015) For the investors, they utilizes financial statements to gain understanding about forecasting. Accounting information is based on past performance which can facilitate predicting future cash flow, earnings and stock returns and assessing the risk of investing through the past data. So, investors will find information relating to performance in both income statement and cash flow statement and dividend payment. (Casino S., Clatworthy M., Osma B. G., Gassen J.,Imam S. & Jeanjean, 2015) Our group decides to use ROE (Gross profit margin), P/E, Cash conversion cycle, Dividend yield or Dividend payout ratio for analyzing investors perspectives and use D/E, Interest coverage, Gross profit margin, Current or Quick ratio for analyzing creditors viewpoints.

QUESTION B 5

Running head: Novaland INVESTOR Return on Equity (ROE): ROE reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. Generally, for ROE, the higher the better. The ROE will reflect the performance of investing activity inside the company using equity, increasing ROE is a company that knows how to reinvest their earnings, in contrast whenever a company is retaining those earnings but their return on equity (ROE) is really small that is not a good sign for investors, it is symbolic of management that does not know how to reinvest their capital in successful assets, they also should be paying out all their money and dividends because they don't know how to reinvest it themselves. Price to Earning (P/E): P/E ratio is the current market price of the stock over the earnings per share (EPS). Investors may consider the potential growths of the company with a really high P/E ratio, they might be asking question how quick the growth as a result that speculators are driving up the price of the business because they expect the earnings to be significantly higher next year if they see a business with a very low P/E ratio, they might try to understand the future risks or lack of sales growth therefore they can account for any potential troubles into the future. Dividend Payout ratio (DPR): the dividend payout ratio measure how much profit a company return back to shareholders as dividends. Company with low payout ratio can either need to retain more of their earnings to reinvest in and grow their businesses. However when the dividend payout ratio increase quickly, it means that the company is paying out more money to investors than retaining for future investment. This should be taken as a sign that dividend payments will likely to slow down in the future. The change in dividend policy can question the investors in making the appropriate investment decision. EPS (Earning per Share): is the company’s distributable profit which is divided by each share outstanding (common share). Profit alone can be limited in expressing how much enhancement in benefit the shareholders can receive from the company performance. While taking into account all the effects of issuance of new shares can give the clearer picture of profitability of a company which is significant for investors. The higher EPS, the more it can indicate that the earning power of the company has improved vice versa.

CREDITOR

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Running head: Novaland Debt / Equity ratio: DE ratio is the ratio indicating well the financial status of a company. If DE ratio is high, It means that they use much debt to finance for their operating; it may lead to the unstable income when they have to pay many interest expense incurred. With lenders, they use D/E ratio as the measurement of creditability to evaluate the capability of firms whether they can pay off the debt when it comes due or not.

Current ratio: Current ratio is a measurement of liquidity indicating whether a company is working well or not to pay their short-term or long-term obligations on due. Lenders consider current ratio of a company to have an overview of financial status of the firm. Current ratio can be a protection for the creditors to guarantee the borrower have capability to make the interest payment.

Interest Coverage Ratio Interest coverage ratio determines the ability of company to pay interest on their debt. High ICR (3 or above) means that the company have good financial health that creditors expects. This ratio of 2 or above is considered as minimum acceptable amount. A declining figure is a signal of instability that firm is vulnerable to volatile interest rate and affect the lenders’ decision of investing or disinvesting.

Gross Profit Margin Ratio Gross profit margin ratio is one of the profitability ratios which measures the income of the business during a define period of time. If this ratio is high, the firm is utilizing well enough their cost and have enough solid cash. Creditors are not uncommon to use gross profit ratio to assess the financial health of a company. If gross profit margin ratio is lower than “maintenance covenant”, the company will not meet the debt obligations and lenders are able to demand redemption of their bond.

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Running head: Novaland

QUESTION C

ROE P/E

2014 5.43% 1,

2015 10.08% -

2016 20.56% 21.27% 1,

2017 17.69% 19.07% 1,

Cash Conversion cycle (days) EPS (VND) Payout Ratio

417 781.29 -

848 1,374 47%

149 3,396 3%

115 3,210 1%

4.77

3.36

2.64

2.71

16.96% 1.44 0.62

20.08% 1.36 0.82

21.51% 2.02 0.97

28.00% 1.83 0.63

Investor

Lenders D/E Interest Coverage Gross profit margin Current Ratio Quick Ratio

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Running head: Novaland

QUESTION D INVESTOR

ROE

ROE 2017 got 17.69%, which means that shareholders saw a 117.69% return on their investment. In other words, for every dollar of common shareholder’s equity, $1.17 will be earned. From 2014-2017, NVL ROE grew rapidly from 4.15% to 17.69% (increase 3.26 times), which showed that NVL is showing a profitable picture to investors. In fact, the period of 2014-2015 witnessed a booming in growing speed of real estate industry, making most of the real estate companies earn extremely higher profit than previous years, resulting in higher ROE.

This spectacular comeback is the result of proving their real ability and quality in products during the recession period in 2013. In details, the 2013 has made the real estate industry a super risky investment, freezing all the projects, but NVL chose to continue the Sunrise City, which opened the very first type of residential area and put their first feet on this model. Moreover, by strongly enhancing Merging and Acquisitions in 2014, with most of the projects located in main areas, NVL officially became the leader in real estate industry. Revenue and Cash flow Discrepancy:

The nature of Revenue of real estate industry- Unearned revenue also needs to be considered. Had it been recorded as revenue during the financial year, ROE should be higher (Appendix)

EARNINGs PER SHARE 9

Running head: Novaland

2014

2015

2016

2017

433

1,260

2,815

3,207

Earnings per share

From 2014 – 2017, Novaland’s EPS showed a positive trend of growing. To be specific, in 2017, the EPS of NVL was 3,207, which means that if NVL allocated all of its income to shareholder, each share would receive VND 3,207. This, compared to 2016, increased 14%. This was a result of its sustainable performance during the year as Novaland continued to do business in a stable way, ensuring the commitment of the project progress with customers, gradually completing the plan.. In fact, NVL’s income increased 24% to VND 2,061,643 million in 2017, greatly from the handover of projects including Lucky Dragon Residence, Orchard Garden, Lakeview City, Gardengate Residence, Kingston Residence, and Lucky Palace. (Novaland, 2017). Especially, Lakeview City was a typical project to be launched in 2016. With about 60% of 1,000 apartments and villas sold for $ 400,000 per unit, this project accounted for a significant proportion of revenue in 2017. (novaland,n.d) Although the EPS of NVL was still lower than the real estate Industry average, this could be understandable as being the leader in this industry, NVL has to split its earning amongst many more shares of stock compared to the remaining companies. Industry EPS

2012

2013

2014

2015

2016

-18%

168%

33%

-37%

33%

PRICE - EARNINGS RATIO

PRICE – EARNINGS RATIO

2016

2017

21.35

20.30

NVL’s P/E in 2017 was 20.30, slightly decreased from 21.35 in 2016. Compared to the industry average which is 20-25 times earnings (Investopedia, n.d), this 2017 P/E of NVL was acceptable. Apparently, this reduction was due to its well performance in 2017. Moreover, the price per share of NVL in 2017 increased 8% compared to 2016. This came from the great expectation of investors of of revenue growth in 2018. Indeed, after stabilizing 10

Running head: Novaland the legal status of the old projects, the company would quickly deploy new projects, because the land fund was quite large. In 2018, Novaland was expected open 4 new projects, including Phase 2 of the Victoria Village project (1,209 apartments), Water Bay (4,613 apartments), F projects (2,165 apartments), Harbor City (3,995 apartments). Another factor was the issuance of preferred stocks and convertible bonds to increase authorized capital boosted share prices (zing.vn, 2018). With good business results as well as PE was at a reasonable level compared to industry average, investors can believe in the worthwhile investment in Novaland.

PAYOUT RATIO

NVL tend to cut down dividends paid out from 2016 (from 47% to 3%), which is a signal that they want to retain funds for investing in upcoming projects to expand the company. (There are other options for paid out dividends, see Appendix) NVL main focus during 2015-2017 is construction, which was completed by many potential projects with huge quantity. Therefore, a substantial amount of capital is required by paying less dividends to investors and using funds to run those projects. Moreover, with the knowledge and skill of management, those projects came out with profitable results, making NVL stock price increased and ROE also increased. The period of their construction may take about 3-4 years, some are still being launched in 2018 & 2019, therefore the payout dividend ratio in 2016-2017 was low to fund for those upcoming projects. (Appendix

CREDITOR

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Running head: Novaland DEBT TO EQUITY RATIO

In case of Novaland, their D/E from 2014-2017 increased from 1.33 to 1.6 (increase by 21%). For example, in 2017 their D/E ratio is 1.6, which means that for every dollar in asset, 0.61 cent is financed by debt and 0.39 cent is financed by money of shareholders. However, NVL’s D/E ratio is not as high as industry’s D/E, which is an indicator that NVL is not relying on debt as much as industry average. And base on this, we can assume that in creditor’s view, lending to NVL is less risky. (Appendix) We also need to consider the nature to understand why the D/E ratio for this industry is higher (Appendix).

INTEREST COVERAGE RATIO Interest coverage ratio

2014 1.80

2015 2.11

2016 0.9

2017 1.93

The interest coverage ratio is a long-term solvency ratio used to determine how well a company has its interests obligations covered. It is measured by dividing earning before interest and taxes (EBIT) to interest expense. The lower the entity’s interest coverage ratio is, the more debt burden it has to suffer. In general, 1.5 is considered a bare minimum acceptable ratio for the entity. The company with interest coverage ratio below this tipping point, its capacity to meet interest expense may be questionable, which would increase the company’s risk for default. As a result, creditors will more likely to refuse to lend the company more money. Moreover, an interest coverage ratio below 1 indicates that the company is unable to satisfy its interest payment obligation as its poor financial health. As a result, even if the issue only lasts for a single month, the company risks falling in to bankcruptcy (Investopedia, n.d).

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Running head: Novaland The interest coverage ratio of NVL in 2016 was alarmingly low, which was just 0.9 – really far from the tipping point and even lower than 1. In fact, in 2016, the short-term debt of the company was VND5, 596 billion with borrowing cost ranging from 11% to 13% per annum while the long-term debt reached VND11.469 billion. As a result, Novaland had to incur the interest expense up to VND 863 billion, which was 2.5 times higher than in 2015. This can be explained because Novaland needed a large capital to supplement financial resources in the simultaneous development of more than 40 projects, M & A activities, increase of land funds for a sustainable development strategy. In 2017, thanks to the significant earnings from projects, circumstance was much better as the interest coverage ratio reached 1.93, increased 114% compared to 2016 and much higher than the acceptable level. From the perspective of creditors, it is still quite risky to lend the company more money as its high debt. However, this could be compensated by the company’s wel...