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Table 2.6: The effect of financial leverage to ROE

Table 2.6: The effect of financial leverage to ROE

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Final thesis



Academy of finance



the firm hadn’t financed debt, ROE would have been only 3,35%. It

means that 1 VND of equity only generated 0,0035 VND of net

income. In fact, the company had a mix of debt and equity with gearing

of 0,8899 and it generated ROE of 7,18%, corresponding with 3,83%

fluctuation. In fscal 2014, with the same EBIT level, if the company

hadn’t raised debt, its ROE would have been at 5,35%. Thanks to

financial laverage, this figure had an 5,62% increase to 10,97%. In

fiscal 2015, if the firm hadn’t used financial levererage, it would have

only earned 0,0237 dong from 1 dong of equity invested in. But in fact,

the company used a mix between debt and equity with the rate of

0,8371. This decision made ROE develop to 10,59% , increase in

8,22% compared to the opposite case. It shows that, if the firm invested

1VND of equity in business, it will have 0,1059 VND of net income.

Totally, when BEP >r, the company used financial leverage which

helps it amplify ROE at the same EBITcompared to in case not use

debt. But if the company makes a loss (BEP
business is not enough to pay for interest expense, the higher financial

leverage is, the more



the company makes a loss. Therefore, the



managers need to establish the capital structure and estimate business

plan.

2.2.2.2.The effects of capital structure to financial risk of Thang

Long mechanical four and construction joint stock company





The effects of capital structure to solvency of the company

Current ratio measures liquidity and shows how much of a



company’s assets will have to be converted into cash in the next year to

pay debt. The higher ratio, the more chance creditors have of being

paid.

Interest coverage ratio is a financial ratio that measures a



Tran Thi Minh Nguyet



CQ50/11.18



Final thesis



Academy of finance



company’s ability to make interest payments on its debt in a timely

manner. So capital structure of the company affects to current ratio and

interest coverage ratio



Tran Thi Minh Nguyet



CQ50/11.18



Final thesis



Academy of finance



TABLE 2.7: THE RATIOS OF THE ABILITY TO PAY FOR CREDITORS OF THE COMPANY

2014-2013

Item



1. Short term debt

2. Current assets

3. Inventory

4. Cash and equivalent

5. EBIT

6. Interest expense

6. Current ratio(2/1)

7. Quick ratio {( 2-3)/1}

8. Cash ratio (4/1)

9. Interest coverage

ratio(5/6)



2015-2014



Unit



Year 2013



Year 2014



Year 2015



Million

VND



247.775



254.751



226.556



6.976



2,82%



-28.195



-11,07%



261.830



274.866



349.227



13.036



4,98%



74.361



27,05%



127.129



108.546



72.926



-18.583



-14,62%



-35.620



-32,82%



27.269



30.187



6.686



2.918



10,70%



-23.501



-77,85%



13.457



20.139



9.519



6.682



49,65%



-10.620



-52,73%



10.642



15.201



2.840



4.559



42,84%



-12.361



-81,32%



Time



1,0567



1,0790



1,5415



0,0222



2,10%



0,4625



42,87%



Time



0,5436



0,6529



1,2196



0,1092



20,09%



0,5667



86,80%



Time



0,1101



0,1185



0,0295



0,0084



7,67%



-0,0890



-75,09%



Time



1,2645



1,3248



3,3518



0,0603



4,77%



2,0269



152,99%



Million

VND

Million

VND

Million

VND

Million

VND

Million

VND



Difference



Percent



Difference



Percent



(Source: Balance sheet and income statement of the company on 31/12/2013, 31/12/2014,31/12/2015)

Tran Thi Minh Nguyet



CQ50/11.18



Final thesis



Academy of finance



From this table, we can see the fluctuation of the ratios during

2013 to 2015. In 2014, the current ratio had a small fluctuation from

2013 with an 0,0222 increase. And in 2015,this ratio was 1,5415, it

increased of 0,4625 units with 42,87% compared to the same time in

year 2014. The decrease of 28.195 million VND in short term debt

( mostly account payable and deferred revenue) and the increase of

74.316 million VND in short term assets ( mostly receivable account)

caused this situation. Although current assets of the company

developed, its increase was almost receivable. In 2015, the firm had

trouble recovering receivable account because the operation of partners

was not good which was caused by result of economic crisis. So the

current ratio was higher than 2014 but its solvency is not improved. As

we can see, it seems that this ratio of the company is not at high level.

Dispite it is not lower than 1 but its difference compared to 1 is only

very small. In case the gearing of the company is ver high, this can

affect to the ability to pay for loans and reputation of the compay.

Quick ratio and cash ratio all are trending to decrese quite

quickly, especially cash ratio. In 2014, quick ratio reduced 0,0870 time

from 2013 because of the decrease in short term assets. In year 2015,

the cash ratio was only 0,0295. This situation was caused by the great

decrease in cash and equivalent (23.501 million VND) compared to

fiscal 2014. In this year, the company used cash to pay for payable

account from previous years which made its cash and equivalent reduce

drasticly. Morever, it didn’t get money back from receivable account so

it resulted in this situation.The company maybe not afford to pay the

loan within required period because cash is not enough. Morever, it can

result in bankruptcy of the company if this situation happens in long



Tran Thi Minh Nguyet



CQ50/11.18



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