Tài liệu How accouting ratios affecting an investor’s decision, some cases of construction companies

HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME CASES OF CONSTRUCTION COMPANIES BY NGUYEN THI KIM THOA E0600117 BARCHELOR OF BUSINESS (ACCOUNTING) HONS HELP UNIVERITY COLLEGE 28 MARCH 2011 i DECLARATION OF ORIGINALITY AND WORD COUNT I hereby declare that this graduation project is based on my original work except for quotations and citations which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other course/degree at Help University College or other institutions. The word count is 11828 words. NGUYEN THI KIM THOA 28th March 2011 1 ACKNOWLEDGEMENT This project may not be efficient without the helping, support and encouragement of many people. I wish to send this opportunity to thank all people who have helped me during the time of conducting this project. First of all, I would like to express my deep gratitude to my supervisor Dr. Le Van Lien, International School, Vietnam National University Hanoi who has kindly helped and supported me in doing this research process. I also would like to express my thank to Ms. Sumathi , Help University College, who initiated the project and give so much instruction and support to this thesis. Additionally, I would like to thank all investors of 2 companies are Thanh Cuong Co., Ltd and Construction, Bridges and Roads No 17 JSC who participated in this survey in order to conduct this project. I also would like to extend my special thanks to managers, accountants, my friends, and other people who have help me to carry out the survey. I want to thank them for all their support, interest and valuable hints. Last but not least, I would like to express my deep appreciation to my family who provided and supported me much in commentary which is very important for completing this project, made for me any chances to conduct this subject in any spare time. NGUYEN THI KIM THOA 2 HOW ACCOUTING RATIOS AFFECTING AN INVESTOR’S DECISION, SOME CASES OF CONSTRUCTION COMPANIES By NGUYEN THI KIM THOA March 2011 Supervisor: Dr. Le Van Lien ABSTRACT Accounting ratios are values of the relationships between 2 related accounts that appear in the financial statements such as: income statement, balance sheet, cash flows statement, and changes in equity. They present a company condition in the previous time, and predict by how the company will operate in the future. This research works to evaluate the values of accounting ratios to make investment decisions. By conducting of standard financial statements, calculating of accounting ratios and comparing these ratios in variety of companies are a burning issue and crucial mission to investors. As Vietnam is a developing and urbanizing country, it is a benefit condition for construction industry to grow. This project aims to discover definitions of accounting or financing ratios also the calculations of these accounting, and then it shows how of accounting ratios affect on investor’s decision making. The results of the study provide evidence to measure ratios and lastly it show out some recommendations and suggestions in applying accounting ratios in investment decisions to investors. 3 TABLE OF CONTENTS DECLARATION OF ORGINALITY AND WORD COUNT .......................................... 1 ACKNOWLEDGEMENT ................................................................................................. 2 ABSTRACT………………………………………………………………………………3 TABLE OF CONTENTS ................................................................................................... 4 LIST OF FIGURES ........................................................................................................... 7 LIST OF TABLES ............................................................................................................. 8 LIST OF ABBREVIATIONS ............................................................................................ 9 CHAPTER 1: INTRODUCTION .................................................................................... 11 1.1 Research background ....................................................................................... 11 1.2 Problem statement ............................................................................................ 12 1.3 Objective and scope of the research.................................................................. 14 1.3.1 Objective .......................................................................................................... 14 1.3.2 Scope ................................................................................................................ 14 1.4 Research method ....................................................................................................... 14 1.5 Struture of research…………………………………………………………..………15 CHAPTER 2: LITERATURE REVIEW ......................................................................... 17 2.1 Financial statements – the important accounting information sources for investors to calculate accounting ratios. .............................................................................................. 18 2.1.1 Balance sheet ................................................................................................. 19 2.1.2 Income statement .......................................................................................... 20 2.1.3 Cash flow statement ...................................................................................... 20 2.1.4 Statement of changes in equity. ...................................................................... 21 2.2. Value-relevance Literature: definitions of accounting ratios……………………….21 2.2.1. Liquidity ratios .................................................................................................. 22 2.2.1.1 Current ratio ................................................................................................. 22 2.2.1.2. Quick ratio .................................................................................................. 23 4 2.2.2.Profitability ratios ........................................................................................... 23 2.2.2.1 Gross profit magin. ................................................................................. 24 2.2.2.2 Net operating profit magin. ..................................................................... 24 2.2.2.3 Return on asset ratio................................................................................ 25 2.2.3 Activity ratio. ................................................................................................... 25 2.2.3.1 Inventory turnover ratio. ......................................................................... 26 2.2.3.2 Account receivable turnover ratio. .......................................................... 26 2.2.3.3 total asset turnover ratio. ......................................................................... 26 2.2.4 Debt ratio. ....................................................................................................... 27 2.2.4.1 Debt ratio. ................................................................................................ 27 2.2.4.2 Debt to equity ratio. .................................................................................. 28 2.3 Disclosure of SWOT model analysis in using of accounting ratios. ....................... 28 2.4 The importance and impacts of accounting ratios on making investment decision process............................................................................................................................ ..30 2.5 Disadvantges of using accounting ratios to mesure efficiency of the company ........ 31 2.5.1. Impact of inflation……………………………………..………………………….31 2.5.2: Window Dressing…………………………..…………………………………31 2.5.3. Product Line diversification…..………………………………………………31 2.5.4. Differences in Accounting Policies……………………………...……………32 CHAPTER 3: RESEARCH AND METHODLOGY ...................................................... 33 3.1 Aims of project…………………………………………………………………..34 3.2 Research Methodology…………………………………………………………..35 3.3 Data sources, which includes…………………………………………………...36 3.3.1. Primary data………………………………………………………………...36 3.3.2. Secondary data………………………………………………………………36 3.4 Limitation………………………………………………………………………..37 CHAPTER 4: CASE STUDY ANALYSIS ................................................................. …39 5 4.1 Introduction of 2 example companies……………………………………………….39 4.1.1 Thanh Cuong Limited Company……………………………………………...……39 4.1.2 Introduction of Construction, Bridges and Roads No 17 Joint Stock Company……………………………………………………………………………………………40 4.1.3 The management strutures of Thanh Cuong Co.,Ltd and XDCD 17 JSC…..…..41 4.2 Presentation and explanation of the 2 companies’ development and financial statements………………………………………………………………………………...43 4.3. The facilities and developments of these 2 example companies……………………44 4.3.1.: Thanh Cuong Co., Ltd…………………………………...……………………44 4.3.2. Construction, bridges and roads No 17, Joint Stock Company………………44 4.4. The using of accounting method in conducting financial statements of these 2 companies………………………………………………………………………………..45 4.5 Missions of these 2 companies in the future…………………..……………………45 4.6. Calculations of these 2 companies’ ratios………………………………………...…45 4.7 The attitude of investors to 2 example companies in investment………………….…..56 CHAPTER 5: CONCLUSION AND RECOMMENDATION ....................................... 58 5.1 Findings………………………………………………………………………………………..58 5.2 Conclusion………………………………………………………………………...…59 5.3 Recommendation for computing the accounting ratio of Thanh Cuong Co., Ltd , XDCD 17 JSC………………………………………………………………………………….,,,.60 REFERENCES…………………….. ………………………………………………,,,...61 APPENDIXES…………………………………………………………………………..64 APPENDIX A: ……………………………………………………………………….66 APPENDIX 1.A Translation of the above data in the picture 1.A into English………..69 APPENDIX 2.A Translation of the above data in the picture 2.A into English............74 APPENDIX B…………………………………………………………………………...76 6 APPENDIX 1.B Translation of the above data in the picture 1.B into English…77 APPENDIX 2.B Translation of the above data in the picture 2.B into English…81 APPENDIX 3.B Translation of the above data in the picture 3.B into English… 85 7 LIST OF FIGURES, DIAGRAM, AND IMAGES Figure 1 Financial statement ......................................................................................................... 19 Figure 2 SWOT analysis model. .................................................................................................. 29 Figure 3 Structure of management team in both example company. ........................................... 41 Diagram 1 Investment decisions of 10 investors in these 2 example companies. ....................... 57 Image 1 ......................................................................................................................................... 64 Image 2 . ....................................................................................................................................... 65 Picture 1.A The balance sheet of Thanh Cuong Co., Ltd as at 31 December, 2009 (data in Vietnamese language. ............................................................................................................... 66 Picture 2.A Income statement of Thanh Cuong Co., Ltd for the year ended 31st Decenber 2009( the data in Vietnamese language ) ...................................................................................... 72 Picture 1.B The data about fianance of Construction, Bridges and Roads No 17, JSC (in Vietnamese language). .................................................................................................................. 76 Picture 2.B The balance sheet of XDCD 17 as at 31 December, 2009 (data in Vietnamese language). .................................................................................................................. 79 Picture 3.B Income statement of XDCD 17 for the year ended 31st Decenber 2009( the data in Vietnamese language) ...................................................................................................... 84 8 LIST OF TABLES Table 1 .......................................................................................................................................... 46 Table 2. ........................................................................................................................................ 47 Table 3. ......................................................................................................................................... 48 Table 4. ........................................................................................................................................ 49 Table 5 .......................................................................................................................................... 50 Table 6. ........................................................................................................................................ 51 Table 7. ......................................................................................................................................... 52 Table 8 .......................................................................................................................................... 53 Table .9 ......................................................................................................................................... 54 Table 10 ........................................................................................................................................ 55 9 LIST OF ABBREVIATIONS FDI Foreign direct investment. SOE Statement of Changes in owners’ equity (SOE) EAT Earnings after taxes XDCD 17 JSC Construction, Bridges and Roads No 17 Joint Stock Company C.R Current ratio QR Quick Ratio GPMR Gross profit margin ratio NOPR Net operating profit ROAR Return on asset ratio ITR Inventory ratio ARTR Account receivable turnover ratio TATR Total assets turnover ratio D.R Debt ratio DTER Debt to equity ratio 10 CHAPTER 1: INTRODUCTION Chapter 1 draws up whole image of the information relate to this project that helps users easy to follow. It also shows for reader to know about the significant relationship between financial ratios and investors’ decisions. The introduction of this thesis will cover all related issues that are listed by some following parts. 1.1 Research background. After event of joining the World Trade Organization (WTO) in 2007, Vietnam has become increasingly opened and attractive economy. It attracts more both foreign and domestic investors from all industries, especially construction fields. To this industry, Vietnam’s economy becomes emerging market. 2 years since joining WTO, the biggest advantage to the Real Estate and Construction Industry is FDI that has been rapidly increasing. In the context of Vietnam that had been being in process of pushing up modernize, because domestic capital resource had limited, rapidly increasing of FDI in Real Estate and Construction Industry has had significant role in urbanizing and upgrading Infrastructure. Today, many foreign investors and domestic investors are attracted by this industry because of its revenues and profits. But the biggest problem to these investors is almost reflected by the question: how to make the best decisions in investment in order to maximize benefit and profit in this industry? One the best solution is applying accounting ratios analysis to make decisions in the construction industry. An accounting ratio or financial ratio is a relative magnitude of two mathematical values that are chosen and got from financial statements of an organization. Accounting or financial ratios may be used by company’s owners, managers, shareholders, investors, and a business’ creditors. In the context of stocks market, financial ratios are used to 11 compare the efficiency and weaknesses among the variety of firms. If stocks in an organization are listed and traded in a financial market, the stock’s price in the market will be used in certain financial or accounting ratios. In general, many areas of an organization are reflected by accounting ratios, these results of ratios are inherent parts of the financial statement analysis. A business’s performance is affected so much by these key factors; it can interpret financial information and position of the company. Moreover, these ratios also help investors know more about how the business is performing. As a result, it is easier for investors to make best decisions whether investing in or not in the company. In accounting, there are 3 methods of comparison ratios that are: comparisons of accounting ratios between businesses, between different financial time periods of an entity, and between a significant firms and its industry average in which the firms belongs to. Hence, if investors make decisions without accounting ratios analysis, it is very risky to invest in a new project. Useful financial ratios can be refer as special and efficient tools to many professional investors, managers, researchers, accountants on many approaches of investment; it can help users having information to estimate potential, efficient business as well as its risk in the future to make economic decisions. 1.2 Problem statements. Accounting ratios calculations and attitude of investors in investment decisions making are the crucial aims of this project. It will show the advantages and disadvantage of using 12 accounting ratios analysis to an organization, as well as their function on the decision of investors, users of financial statements, etc. To know how accounting ratios affecting an investor’s decision, let examine the role of accounting ratios to investor’s making decisions and establishing best strategies in doing business. Accounting ratios or financial ratios firstly provide information of a company about its: assets ( both current and noncurrent assets), liabilities (both long term and short term loan), owner’s equity, revenues or sales, income, expenses, profits or losses, cash flows, ability to pay debt, etc. Accounting ratios are known as a type of original information that is provided to investors in construction industry. Using accounting ratios is known as an indication to know how a business is performing. In doing business, especially in supplying construction materials firms, accounting or financial ratios are mostly important and effective tools in financial analysis of the market that help financial analysts know voltage market, investors implement plans and make better decisions, managers and sellers apply suitable sale strategies that improve profitability, liquidity, financial structure, leverage, etc. In general, accounting ratios reflect mostly a business performance in previous time, but they can predict, and show out lead indications of latent bad points to investors in the future. For example, applying S.W.O.T analysis in consideration of comparative ratios analysis between 2 companies in supplying construction materials industry that are Thanh Cuong .co, Ltd, and XDCD 17 , JSC will help investors figure out quantity of these 2 companies. From it, investors can evaluate 13 financial position of these companies. Moreover, they can understand the risks they may be facing in the future when investing in business. Therefore, accounting ratios are reliable information and mathematic figures where users and investors can lay their belief in making investment decision. 1.3 Objectives and Scope of the Research: 1.3.1 Objectives:  Consider whether accounting ratios analysis affects the investor’s decision or not?  The result of the use of accounting ratios analysis by investors in business.  Suggest some solutions to improve accounting ratios analysis that investors take into this research to make investment decisions. 1.3.2 Scope:  Place involves to conduct this project ( 2 companies in construction industry )  Thanh Cuong Co., Ltd.  Construction, bridges, and roads, Joint Stock Company 1.4  Object of the project: Investors  Time period to do this project: From 28th October 2010 to 16 March 2011. Research method. 14 Researches methods are used in this thesis are based on the practical research and investigation.  The author operates the survey of 10 investors (lenders) of the 2 companies: Thanh Cuong co., Ltd, and Construction, bridges, and roads, Joint Stock Company. The surveys from different areas of accounting ratios that contain the information and evidence could help the investors of the 2 companies to make the best decision in investment. This research follows qualitative method and literature method in which the data is collected from different areas of accounting ratios of examples companies. By analyzing of accounting ratios and publishing they to investors in these 2 companies, the investors could know the frequency of the accounting or financial ratios’ usage to have right decisions in doing business not only in these firms but also having a new look on investments in the construction industry. 1.5 Structure of the research. There are five chapters that are as follow:  Chapter 1: Introduction  Chapter 2: Literature review  Chapter 3: Research and methodology  Chapter 4: Case study analysis  Chapter 5: Conclusion and recommendation 15 Each chapter in the research has linked to another remain chapters in order to express the main point of view that the researcher want to present. The first chapter and the third chapter will conduct the background of problem to start up the main points of this project. The second chapter will face up with the theories, definitions, and formulas of financial statements, accounting ratios, SWOT analysis model, strong points, and weak points of accounting ratios. Chapter 4 will tell about some real and example cases that are played as a role of applying literatures and formulas in calculations of accounting ratios that appear in chapter 2. And the last chapter will consist of the findings, conclusion, and recommendation after examining some example cases linked to the theories and definitions. 16 CHAPTER 2: LITERATURE REVIEW This chapter will present some definitions of accounting ratios. By understanding financial ratios or accounting ratios can help the investors know what kind and how much of accounting ratios level they need to make efficient decisions in investment. After that, SWOT model will be applied to evaluate advantages and disadvantages of using accounting ratios. 17 2.1 Financial statements – the important accounting information sources for investors to calculate accounting ratios. To investors, one of important things in decision making process is existence of quality information. Significant number of this information comes from accounting information systems and from financial statements. For almost companies, financial statements provide realistic and objective picture of realistic business condition. In an organization, if financial statements are understandable, in which accuracy is ensured. Financial statements are always created and interpreted as a basis of comparisons. Financial statements as a main function of decision making, it is understandable that different users must know how to “read” those statements. “Reading” contents of financial statements provide whole number of different instruments and analyses procedures for understanding business. After that, the process of accounting ratios analysis will be conducted that is based on the basis of the financial statements and financial information in order to evaluate of the business’ wealth. Economic and political backgrounds around the world are not the same among governments; this leads to that the national accounting standards are different among countries. Decision No. 15/2006 20th March 2006 of the Minister of Finance of Vietnam dictated financial reporting system of business containing both annual financial statements and interim financial statements. To construction industry, the Decision No.48/2006 14th September 2006 of the Minister of Finance of Vietnam has prescribed in recent years. Under Vietnam Accounting Standards, the most significant financial 18 statements that should take into account when examining the entire entity quality are: balance sheet, income statement or profit and loss account, cash flow statement, and changes in owner’s equity statement. These financial statements will be illustrated by the following figure: FINANCIAL STATEMENTS BALANCE INCOME CASH FLOWS CHANGE IN SHEET STATEMENTS STATEMENTS OWNERS Figure 1: Financial statements 2.1.1 The balance sheet. The balance sheet of a company is one of the extremely essential and fundamental financial statements that is conducted annually or financial time period to present the company’s financial position. This statement consists of basic elements are: assets, liabilities, and owner equity. This structure is very important that reflects the correlation and interdependence of assets, liabilities and capital. By reading and understanding this financial statement, users including investors can examine and measure the future scenes 19