CHAPTER II:

FINANCIAL STRUCTURE
ANALYSIS

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 Financial structure & analysis purpose

• Financial structure: asset structure, capital structure

(capital-source structure), the relationship between
asset and capital

• Analysis purpose:
o Evaluate the recent enterprise’s financial structure

o Determine the factors that influence to financial

structure  reasonable financial structure

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 Financial structure & analysis purpose

• Investment The balance

policy between assets and • Funding policy
• Management resources
• Interest rates
operations
• Profit distribution
• Accounting policy
policy
• Types of ownership

Asset structure Source of fund

structure

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 ASSET STRUCTURE ANALYSIS

• Asset structure refer to the proportion of various types

of asset held by a firm as shown in the balance sheet.
• The purpose is to find out the particular characteristics
of the asset structure of a company and of many
companies with each other
→ estimate the ability of equity rotation, finding the bad
signs in the company’s asset management.
• The indicators depend on the analyst’s purpose and the

characteristics of each type of business.

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 ASSET STRUCTURE ANALYSIS
• The general indicator:
Net value of asset i
Proportion of asset i = Total assets * 100%

PROPORTION OF CURRENT-ASSET PROPORTION OF NON-CURRENT ASSET

Proportion of account receivable - long-

Proportion of cash & cash equivalents
term
Proportion of short-term financial
Proportion of fixed assets
investment
Proportion of account receivable - short-
Proportion of investment property
term
Proportion of inventories Proportion of long-term work in progress
Proportion of other current assets Proportion of financial investment
Proportion of other non-current assets
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 ASSET STRUCTURE ANALYSIS

• Proportion of account receivable - short-term:

Net value of account

Proportion of account receivable - short-term
receivable - short-term = * 100%
Total assets

• Notes:
o Distribution methods: direct selling, wholesale …
o Credit terms: total credit amount, maximum time
allowed for repayment…
o Customer’s liquidity
o Debt management
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 ASSET STRUCTURE ANALYSIS

• Proportion of inventories:

Proportion of Net value of inventories

inventories = Total assets * 100%

• Notes:
o Characteristics of inventories, characteristics of
business
o Inventory reserve policy
o Seasonality in business
o Business life cycle stages
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 ASSET STRUCTURE ANALYSIS

• Proportion of fixed assets:

Proportion of fixed Net value of fixed assets

assets = Total assets * 100%

• Notes:
o Industry characteristics
o Business life cycle stages
o Investment policy
o Depreciation method
o Limitation of historical cost accounting
o The necessary of decomposing approach
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 RESOURCE STRUCTURE ANALYSIS

• Financial autonomy
o debt ratio
o self-fund ratio
J2.1, J2.2
• Fund stability
o short-term resources/temporary resources ratio
o long-term resource ratio

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 Example: (unit: million VND)

Company A and company B have the same business

characteristics and performance. However, these
companies have different financial structure. Company
A is financed by 100% owner’s equity and company B
is financed by 100% loan. Two companies have the
same value of assets (1,000), earnings before interest
and tax (100). The interest expense of company B is the
same as dividend payment of company A (20).
Determine the amount of retained earnings after tax and
cost of capital for each company.

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 Ví dụ: (đvt: triệu đồng)

Co EBIT Earning Earning retained

before tax after tax earnings after
tax and cost of
capital
A 100 100 78 78 – 20 = 58

B 100 100 – 20 = 80 62,4 62,4

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 ANALYSIS OF FINANCIAL AUTONOMY

• Autonomy is the condition of being self-governing or

independent.
• The financial autonomy refers to the ability of owner’s
equity to fund for the business operation

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 ANALYSIS OF FINANCIAL AUTONOMY

Total liabilities
Debt ratio = Total resources (assets)
* 100%

Total owner’s equity

Self-fund ratio = * 100%
Total resources (assets)

Total liabilities
Debt/equity ratio = * 100%
Total owner’s equity

the ratio is also known as risk, gearing or leverage J2.3

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 ANALYSIS OF FUNDING STABILITY

CURRENT LIABILITIES Temporary

(SHORT-TERM LIABILITIES) resources
ASSETS
-NON-CURRENT LIABILITIES
Long-term
(LONG-TERM LIABILITIES)
resources
- OWNER’S EQUITY

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 ANALYSIS OF FUNDING STABILITY
- Short-term resources/temporary resources: used
temporarily in one business operating cycle or one year
- Long-term resources: used for a time frame
exceeding in one business operating cycle or one year

Short-term Total value of short-term resources

resources ratio = Total resources
* 100%

Long-term Total value of long -term resources

resources ratio = Total resources
* 100%

Owner’s equity/long- Total owner’s equity

term resources ratio = * 100%
Long-term resources
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 FINANCIAL BALANCE ANALYSIS

• Financial balance refers to the relationship between

assets and source of funds in the company.
• The relationship involves the length of time in using
resources and converting assets into cash

 To figure out the “red flags” in enterprise’s financial

structure

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 LONG-TERM FINANCIAL BALANCE

• Working capital = current assets

• Long-term financial balance is presented by
the indicator: Net working capital (NWC)

Net working capital = Current assets - Current liabilities

Long-term Non -current

Net working capital = -
resources assets

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 SCENARIO 1: NEGATIVE VALUE OF NWC

LONG-TERM
LONG-TERM RESOURCES
ASSETS

LONG-TERM RESOURCES
SHORT-TERM LONG-TERM ASSETS < 1
SHORT-TERM RESOURCES
ASSETS

NWC = Long-term resources - Non -current assets <0

J2.4
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 SCENARIO 2: NWC = 0

LONG-TERM LONG-TERM
ASSETS RESOURCES

LONG-TERM RESOURCES
SHORT-TERM
SHORT-TERM LONG-TERM ASSETS = 1
ASSETS
RESOURCES

NWC = Long-term resources - Non -current assets =0

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 SCENARIO 1: POSITIVE VALUE OF NWC

LONG-TERM LONG-TERM
ASSETS RESOURCES
LONG-TERM RESOURCES
LONG-TERM ASSETS > 1

SHORT-TERM
ASSETS SHORT-TERM
RESOURCES

NWC = Long-term resources - Non -current assets >0

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 LONG-TERM FINANCIAL BALANCE

• Be aware of the trend over the period of time of NWC

• Common scenario:
o NWC has positive value and increased over the year
o NWC has negative value and decreased over the year
o NWC has stable value
• Factors improve the value of NWC:
o The increase of owners’ equity
o The increase of long-term liabilities
o The decrease of long-term assets

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 SHORT-TERM FINANCIAL BALANCE

• Working capital requirement: The amount of finance a

business needed to carry out this day to day trading
activity.
• Net working capital requirement varies from industry to
industry depending on the amount of time the business
takes to pay suppliers, the amount of inventory held, and
the time it takes to collect cash from customers.

Net working Short-term account Short-term liabilities

capital = Inventories + receivables & other - (excluding interest
requirement current assets bearing liabilities)

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 SHORT-TERM FINANCIAL BALANCE

• Short -term financial balance is presented by the

indicator: Net fund
• Net fund indicates whether the remaining NWC is able to
finance for the net working capital requirement in the
short term.

net working Net working capital

Net fund =
capital - requirement

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 SHORT-TERM FINANCIAL BALANCE

Short-term
Cash & cash Short-term
Net fund = + financial -
equivalents borrowing
investments
(Short-term borrowing = interest bearing short term liability)

• The value of Net fund < 0: the company has to borrow

money in the short-term to meet the needs of funding →
the financial imbalance in the short-term.
• The value of Net fund >= 0: the net working capital
meets the capital needs in the short term. The excess can
be used to invest in the high liquid securities in order to
increase the efficiency of employed capital.
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 COST OF CAPITAL

• The cost of fund used for financing a business

• Depends on the mode of financing used. it refers to
the cost of equity if the business is financed solely
through equity or to the cost of debt if it is financed
solely through debt.
• Many companies use a combination of debt and equity to
finance their businesses → their overall cost of capital is
derived from a weighted average of all capital sources,
widely known as the weight average cost of capital
(WACC)

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 COST OF CAPITAL

E D
WACC = Ke * + Kd (1-t) *
(E+D) (E+D)

Ke: cost of equity

E: market value of the firm's equity
D: market value of the firm's debt
Kd: cost of debt
t: corporate income tax rate
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 EXAMPLE

Year N Year N+1

Interest expense 5.250 7.350
Average working capital 25.000 31.500
Average total assets 750.000 1.000.000
Debt ratio 55% 60%

Determine the WACC of the company; known that the

cost of debt is 12% and cost of equity is 15%? What is
the minimum value of WACC if the debt/owner’s equity
ratio <=4. The corporate income tax rate is 25%

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