BANKING ACADEMY OF VIETNAM FACULTY OF FOREIGN LANGUAGES GRADUATION THESIS Impact of Capital Structure on Financial Performance of Vietnam Maritime Corporation Student: Vương Văn Phương Student ID: 23A7510111 Class: K23ATCC Supervisor: Mr. Ngô Tùng Anh Hanoi, April 2024 ACKNOWLEDGEMENTS I would like to express my gratitude to my thesis advisor, Mr. Ngo Tung Anh, for his guidance, support, and encouragement throughout the research process. I am also grateful to the teachers at the Faculty of Foreign Languages for their valuable feedback and suggestions, which helped to improve this work.
Furthermore, I would like to thank all the people who have given me their unwavering support during this challenging journey. ii DECLARATION I hereby declare that this is solely the product of my own research, and it has not been submitted or accepted at any education institutions. Sources were cited and referenced in accordance with the regulations. The research findings in the thesis are guaranteed to be truthful.
Hanoi, April 2024 Phuong Vuong Van Phuong iii ABSTRACT Capital is one of the most vital components in business operations. Capital enables a company to operate so it can obtain business goals. The thesis research how the capital composition of VIMC influences the company’s financial performance. It investigates the relationships between capital structure metrics and financial performance indicators using comparative analysis, namely horizontal and vertical analytic methodologies.
This thesis will evaluate the importance of capital composition to the financial performance of a company, VIMC in this case. During an eventful course of time when the global economy witnessed a number of fluctuations requiring VIMC to reevaluate its plan, and create a more efficient capital structure plan to maximize the output. The findings of the research might have implications for financial managers and investors since it gives insights into how VIMC’s capital structure decisions might increase its performance and shareholder value. Plus, presenting recommendations aiding in improving financial performance under the impact of capital structure.
iv TABLE OF CONTENT Contents ACKNOWLEDGEMENT. iv TABLE OF CONTENT. v LIST OF ABBREVIATIONS. vii LIST OF TABLES.
viii LIST OF FIGURES. ix CHAPTER I: INTRODUCTION .2 Determinants of Capital structure .4 Determinants of financial performance (Investopedia, n.5 Capital Structure and Financial Performance (Investopedia, n.6 Overview of Vietnam Maritime Industry .7 Vietnam Maritime Corporation (VIMC) .3 Scope and limitation of the research. 9 CHAPTER 2: LITERATURE REVIEW. 10 Modigliani and Miller theories.
11 Trade-off Theory. 12 Pecking Order Theory. 13 Market Timing Theory .4 The Gaps for this Study. 16 CHAPTER 3: RESEARCH METHODOLOGY.
21 CHAPTER 4: FINDINGS AND DISCUSSIONS .1 Long-term Solvency Ratio .2 Short-term Solvency Ratios .3 Asset Management Ratio .5 Financial Leverage Ratio .4 The Impact of Capital Structure on ROE .5 Overall Assessment of VIMC’s Financial Situation. 54 CHAPTER 5: RECOMMENDATIONS AND CONCLUSION .1 Prospects of the Maritime Industry.2 Recommendations for VIMC .3 Recommendations for Governance. 64 vi LIST OF ABBREVIATIONS DFL – Degree of Financial Leverage EBIT – Earning before tax EPS – Earning per share ROA – Return on Assets ROE – Return on Equity VIMC – Vietnam Maritime Corporation vii LIST OF TABLES Table 4.1: VIMC’s consolidated income statements from 2021-2023 (measurement unit: VND) .5: Changes in VIMC’s Assets .6: VIMC’s Equity and Liabilities from 2021-2023 (measurement unit: VND) .7: Changes in VIMC’s Capital .8: VIMC’s Capital Structure (measurement unit: VND) .9: Gemadept’s Long-term Solvency Ratio .10: VIMC’s Short-term Solvency Ratios .11: VIMC’s Asset Management Ratios .12: Gemadept’s Asset Management Ratio .13: VIMC’s Profitability Ratio .14: Gemadept’s Profitability Ratio .15: Elements affecting ROE (measurement unit: %). 49 viii LIST OF FIGURES FIGURE 2.1: ILLUSTRATION OF PECKING ORDER THEORY .1: VIMC’S LONG-TERM SOLVENCY RATIO.
47 ix CHAPTER I: INTRODUCTION 1. Introduction In order to operate and bring about economic efficiency, a business requires capital and management. However, a prolonged problem throughout history is how to structure a business capital optimally. This involves decisions regarding finding out how much of owners’ equity should be distributed, the degree of borrowing money from financial institutions such as banks, and considering whether to raise money by issuing stocks or bonds.
The maritime industry is an indispensable part of the global supply chain, and it is especially important for a country with a long coastal line like Vietnam. Compared to other transport models, sea transportation allows a very large amount of goods to be shipped across vast distances quickly. In the maritime industry, where enterprises engage in activities such as sea transportation, port operations, and logistics management, the optimized allocation of capital plays an important role. Such tasks require considerable upfront investments in vessels, infrastructures, technologies, and personnel.
Strategic decisions about capital have a direct influence on the businesses’ ability to compete in the market. The maritime business is capital-intensive; consequently, decisions around capital structure are the key to success. The capital organizing process demands meticulous analysis and well thought out planning. By focusing on VIMC (where the author is doing his internship), one of the leading players in sea transportation and maritime operations in Vietnam, the research aims to analyzing how capital structure affects its financial performance.1 Capital Structure Capital structure represents a combination of debt and equity used by a firm to finance its operations and expansion.
According to Khan and Jain (1997), capital 1 structure is made up of debt and equity securities, serving as the permanent financing of a firm. It consists of long-term debt, preference share capital, and shareholder’s funds. Pandey (2000) capital structure refers to a blend of diverse long-term funding sources and equity, such as reserves and surpluses of an enterprise. While equity includes retained earnings and stocks, debt accounts for both short-term and long-term sources from the issuing of bonds and working capital.
Overreliance on debt can heighten risks, resulting in increasing borrowing costs and negatively impacting performance. In contrast, having a higher equity proportion might reduce risks, while potentially lowering earnings and hindering investments in profitable projects. In the 1950s, Franco Modigliani and Merton Miller laid the groundwork for understanding the relationship between a company’s capital structure and its financial performance through the Modigliani and Miller theorem. They addressed whether the financial health of a firm is dependent or independent of its financial structure under conditions.
Yet, new business environment introduced complexities such as taxes, agency problems, a variety of costs involved among others, which challenged the conventional idea of capital structure. “Capital is the amount of money in advance for the formation of intangible and tangible assets to serve the business activities that take place regularly and continuously with the purpose of generating profits. A change in capital structure of a business can influence either positively or negatively to the benefit of shareholders. The change is inevitable since different times require different approaches, so managers must always carefully consider to make the best decisions.2 Determinants of Capital Structure To understand how companies fund their operations, it is vital to examine the determinants of their capital structure decisions.
Businesses often use a combination of short-term and long-term debt to finance their activities. However, it is not uncommon 2 for firms to rotate short-term capital to substitute for long-term financing. Thus, determining the capital structure of a business should depend on the objectives of the analysis (Rajan and Zingales, 1995). There are several ratios applied to capital structure as follows: - The debt ratio (total debt to total assets): The debt ratio is a financial metric that measures a company’s financial leverage and its ability to meet financial obligations.
The debt ratio is calculated by dividing a company’s total debt by its total assets. The formula is as follows: = (Total debt is computed by adding a company’s short-term and long-term liabilities, or debt, and other fixed payment obligations). The debt ratio is a simple and easy to understand ratio. It is an important metric used by investors, analysts, etc.
to evaluate a company’s health. A higher debt ratio usually suggests the company is taking on too much debt and has difficulties meeting its obligations. In contrast, a lower debt ratio may indicate that a business is having a strong financial position and is less risky for investors to put their money in. - The debt-to-equity ratio: The debt-to-equity ratio measures the extent to which a company utilizes debt rather than its own resources to finance its operations.
Instead of using total assets as the denominator like the debt ratio, the debt-to- equity ratio uses total equity. − − = The debt-to-equity ratio may vary by industry, so it is best to compare directly among similar competitors. A higher debt-to-equity ratio suggests that the company is taking advantage of debt financing. But when the debt-to-equity ratio gets too high, the company may not be able to service its debt.
3 - The equity ratio: The equity ratio is a financial indicator that determines the amount of leverage used by a company. It explains how effectively a company funds its assets without using debts. The formula is simple: = The greater the equity ratio is, the more the business’ activities are funded by the shareholders’ contributed capital. On the contrary, a low equity ratio shows that businesses are financed more through loans.
Although the above indicators are quite commonly used in capital structure analysis, they all revolve around the ratio between liabilities and equity in the total assets of a business.3 Financial performance Financial performance is a measure of how effectively a firm can utilize its assets from its business to generate income. The term is also used to assess a company’s financial health over a specific timeframe. Truong Ba Thanh argued that financial performance is an in-depth economic category, reflecting the exploitation of resources levels and the cost of those resources in the operations process to achieve business goals. His idea was to emphasize that efficient financial performance always goes with maximizing the input capacity.
There are multiple ways of evaluating financial performance, but all measures should be taken into aggregation., revenue, operating income, cash flows can be used. In addition, analysts or investors may wish to delve further into financial statements and seek out margin growth rates and identify signs of any declining debt. In 1957, Farell’s research paper titled “The Measurement of Productive Efficiency” introduced the concept of productive efficiency. Productive efficiency refers to the optimal use of resources to produce goods and services.
When analyzing productive proficiency, it is necessary to rely on both absolute measures and relative 4 measures. Absolute measures are straightforward numerical values and are calculated by subtracting costs from revenues. These measures provide a clear picture of the company’s performance in isolation but are not adjusted to compare to any other values of other businesses. On the other hand, relative measures are ratio between input and output, involving comparing the performance of a firm to that of others and industry averages.4 Determinants of financial performance (Investopedia, n.) There are many determinants of financial performance according to different research.
In the thesis, the author will use the following determinants: - Return on Assets (ROA): Return on assets indicates how efficiently a company utilizes its total assets to generate profits. It is an important indicator in any financial reports. ROA is calculated by dividing a company’s net income by its total assets. The formula is expressed as follows: = The ROA provides investors and analysts with insights into how effective the company is in converting its investments into net income.
The higher the ROA, the better because it signifies the company earns greater returns from investments. - Return on Equity (ROE): Return on Equity is a financial ratio that measures a company’s profitability in relation to its shareholder’s equity. It shows how much profit a company generates from its shareholders’ money invested in it. ROE is measured by dividing a company’s net income by its total equity.
= This is the most important index for shareholders as it measures the profitability per dollar of the stocks.