UNIVERSITY OF ECONOMICS HOCHIMINH CITY
INTERNATIONAL SHOOL OF BUSINESS
THE PROBLEM OF CAPITAL STRUCTURE THAT
AFFECTING PROFIT MARGIN: THE CASE OF
HUNG VUONG CORPORATION.
Instructor: Dr. Pham Phu Quoc
Student: Nguyen Thanh Quyen
MBA Class 5.2
Ho Chi Minh City – Year 2017

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List of Tables
Table 1: Income Statement of HVG 2014 – 2015................................................................. 11
Table 2: Capital structure of HVG over the period 2014 – 2015 ....................................... 12
Table 3: Performance of 4 biggest corporate in the fishery industry in 2015................... 15
Table 4: ROA and ROE of the 4 biggest companies in the fishery industry..................... 16
Table 5: HVG Dupont Analysis 2012 – 2015........................................................................ 17
Table 6: HVG’s debt and BEP ratio 2013 - 2015................................................................. 20
Table 7: Capital structure of 4 biggest corporates in the fishery industry in 2015 .......... 21

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List of Figures
Pig. 1: HVG’s stock price performance over the period 2013 - 2016................................. 13
Pig. 2 Revenue of the 4 biggest companies in the fishery industry..................................... 15
Pig. 3 Profit margin of the 4 biggest companies in the fishery industry............................ 15
Pig. 4: Potential causes and effect tree of the problem........................................................ 23
Pig 5. Methods of raising capital ........................................................................................... 32

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Table of Contents
Executive Summary.................................................................................................................. 5
Chapter 1: The Problem Context............................................................................................ 6
The Framework of Thesis ........................................................................................................ 8
Chapter 2: Problem Identification ........................................................................................ 10
2.1. Company’s Symptoms ....................................................................................................... 10
2.1.1 The higher increasing in the revenue, the greater rising in cost and expenses............. 10
2.1.2 The decline of HVG’s profitability and profit margin over the time ........................... 11
2.1.3 The fluctuation and reduction of HVG’s stock price ................................................... 12
2.2 Problem identification......................................................................................................... 13
2.4 Possible reasons of problem................................................................................................ 16
2.4.1 Recognition of Possible reasons................................................................................... 16
2.4.2 In-deep on-the-field interview for more understanding the causes .............................. 22
Chapter 3: Design Solutions and Suggestions...................................................................... 25
Chapter 4: Action Plan........................................................................................................... 33
References................................................................................................................................ 35
Appendix.................................................................................................................................. 38

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Executive Summary
HVG is one of the leading processors and exporters of Pangasius in Vietnam, its business
performance showed the development in the last three years. However, HVG’s business
efficiency showed the opposite trend, most of the profitable ratios such as ROE, ROA or EPS
went down steeply and was much lower in comparison with other corporates in the industry.
Additionally, its stock price has fluctuated in a wide range and decreased in recent years.
The main causes lead to the problem of low profitability could be poor management of
expenses, specialized in financial expenses. According to the data collecting from HVG’s annual
financial report and its competitors, HVG uses a very high financial leverage. The percentage of
debt in HVG’s capital structure was at the high rate and much higher than the rivals’ and the
average of the industry. An analysis Dupont model had been conducted based on financial data
and also a survey of deep interview HVG’s staffs had been conducted to confirm the main causes
which consistent with the findings of Hamid MA et al. (1) that debt ratio is negatively and
significantly related to profitability and profitable firms depend more on equity as their main
financing option. The results also confirmed that an increase in leverage position is associated
with a decrease in profitability.
The study also prefers to the possible solutions for building an effective capital structure,
improving operational efficiency by maintaining the debt percentage in the capital structure as
the level of average of the industry and restructuring the HVG’s capital structure by raising
capital instead of raising borrowing capital. HVG should prioritize using endogenous sources
(such as retained earnings) to response the demand of capital for operation, then debts and finally
equities issued which used to be mentioned the research of Quang and Wu (2). Among numbers
of methods of raising equity, undistributed earnings may be best alternative internal capital for

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borrowing capital from outside. Finally, the action plan is also suggested in the study.
Chapter 1: The Problem Context
Hung Vuong Corporation was initially established under the name of Hung Vuong Limited
Company in September, 2003 with its major function as a processing plant of Pangasius for
export. Later the company enlarged its scope and officially changed its name into Hung Vuong
Corporation in 2007. At the moment, Hung Vuong Corporation runs a closed system of
producing breed, aquaculture, processing, cold storage, and exporting. Thus, the company is able
to self - supply raw materials, helping the company to strictly control the quality and cost of
operation. In 2015, Hung Vuong’s charter capital is VND 1,892 billion with the total of
employee is over 17,000. The head office of the company is placed in Block 44, My Tho
Industrial Zone, Tien Giang Province, Vietnam and two Representative offices in Ho Chi Minh
City. One is in 144 Chau Van Liem St, Ward 11, District 5, Ho Chi Minh City, Vietnam and the
other one is in Level 7, Resco building, 94-96 Nguyen Du St, Ben Nghe Ward, District 1, Ho Chi
Minh City, Vietnam.
Hung Vuong Corporation is proud of itself after over 10 years in business. Hung Vuong is
the biggest processor and exporter of Pangasius in Vietnam. At present, Hung Vuong’s products
are available in 60 countries in the world (Appendix 1). EU and USA are the two main exported
markets, these markets account for 60% in total Hung Vuong's Export Market Share by Country
(Appendix 2). The export value of Hung Vuong Corporate has been increasing since 2004 until
now. In 2015, its total export value achieved USD 400 million in average (Appendix 3).
According to the result of operating during the period of 2012 - 2015, profit decreased
significantly and did not achieved the annual plan while the revenue showed the up-ward trend.
HVG’s gross profit margin (GOS) and other financial ratios of efficiency such as return on asset

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(ROA), return on equity (ROE), return on revenue (ROS)… also showed the down-ward trend.
In 2015, HVG’s profit after tax was VND 120 billion, down 58.86% in comparison with 2014’s
and equal 22% profit plan in 2015. The gross profit margin was 7.51%, down 0.29%, ROA and
ROE decreased significantly from 3.22 and 12.3 to 0.383 and 3.61 in respectively. Additionally,
EPS was VND 750 per share which was much lower the EPS in 2014 (VND 2,200 per share).
This study will make a deeply analysis in the operation of the company over the period 2013-
2015 in order to find the real problem causing the fallen in Hung Vuong Corporates operation in
recent years.

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The Framework of Thesis
Company's
symptoms
The higher increasing in the revenue, the greater rising in cost and expenses
The decline of HVG’s performance efficiency over the time
The fluctuation and reduction of HVG’s stock price
Problem
identification
Potential problems: factors affecting on the profitability such as control-
ownership disparity; macro-economic; industry attribute and firm attributes
such as financial structure, size, market share, and business strategy.
Real problem: Low business efficiency related to high cost and expenses in
operation.
Main causes Recognizing possible reasons through theory information, Dupont model
analysis and In-deep interview, including:
- The asset was not utilized effectively; and;
- Poor management of cost and expenses lead to profit margin down;
 The asset was not utilized effectively;
 Poor management of cost and expenses lead to profit margin down:
(i) COGS and especially (ii) Financial expense (Financial structure)
Design
Solutions And
Suggestions
Theory information:
- Firms prioritize using endogenous sources (such as retained earnings), then
debts and finally equities issued;
- Most of the firm prefers internal to external financing; ect…
Solution: reconstructing the capital structure
- Maintaining the debt percentage in the capital structure as the level of
average of the industry;

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- Raising equity instead of raising borrowing capital:
 Internal capital: Paid-in capital, Undistributed earnings; and
 External capital: Debt; Issuing new share
Action plan - Identifying capital needs for operating activities;
- Capital mobilization options to choose reasonable source of capital;
- Making a capital distribution and utilization plan effectively and efficiently

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Chapter 2: Problem Identification
2.1. Company’s Symptoms
After investigating some of the financial ratios and interviewing all the responsible
members of the company, the symptoms of the problem had revealed as following:
- The growth rate of the HVG’s cost of goods sold and expenses is greater than this of
its revenue;
- HVG’s profit margin and profitability have decreased steadily over the time;
- HVG’s stock price has fluctuated in a wide range and illustrated the down-ward trend
in the last few year.
In detail, the symptoms have been proved as below:
2.1.1 The higher increasing in the revenue, the greater rising in cost and expenses
For the whole company, export value and operating revenue increase gradually over the
period 2013-2015. In detail, the Company’s export value increased sharply in 2014 and got the
highest value at USD 400 million in 2015 (Appendix 3). Operating revenue increased from VND
7,749 billion in 2012 to VND 11,179 billion and VND 15,042 billion in 2013 and 2014
respectively. Although in 2015, its operating revenue could not maintain this amazing rate and
decreased slightly 17%, in general, the company has a high growth rate over the period. The
average growth rate during the period 2012-2015 was 20.5% - quite high when comparing to the
average rate at 10.6% of the fishing industry as published by the General Statistics Office of
Vietnam.
In the mean of time, the cost of goods sold increased dramatically from VND 10,058
billion in 2013 to VND 13,782 billion in 2014. This trend continued in 2015 with the cost of
goods sold raised to VND 11,446 billion, accounted for 91.98% in the structure of the revenue.

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In addition, the financial expense showed an up-ward trend during the period, it rose from VND
298 billion in 2014 to VND 325 billion in 2015. The growth rate of financial expense in 2015
was 8.9% and this kept increasing highly up to 32.36% in just the first three quarters of year
2016, value VND 430 million. On the contrary, other expenses from selling, administrating,
etc.… illustrates the down-ward trend. This leads to the result of net profit in 2015 which drops
deeply 59% in comparison with its net profit in 2014. Details could be found on Table 1 below.
Items
Value (in billion VND) Position (%)
2013 2014 2015 2013 2014 2015
Revenue from sale of
goods and services
11,179 15,042 12,445 100.00% 100.00% 100.00%
Cost of goods sold 10,058 13,782 11,446 89.97% 91.62% 91.98%
Gross Profit 1,121 1,260 998 10.03% 8.38% 8.02%
Financial Income 188 248 63 1.68% 1.65% 0.51%
Financial Expenses 325 298 325 2.91% 1.98% 2.61%
Operating Profit 160 377 121 1.43% 2.51% 0.97%
Other profit 30 44 31 0.27% 0.29% 0.25%
Profit before tax 292 450 151 2.61% 2.99% 1.22%
Net profit 248 291 120 2.22% 1.93% 0.96%
Table 1: Income Statement of HVG 2014 – 2015
2.1.2 The decline of HVG’s profitability and profit margin over the time
The Table 1 also illustrates the most serious symptom that although HVG has a good
growth rate in the operating business, its profitability of business showed the down-ward trend
during the period. In detail, the result of operating profit down 68.0% from VND 377 billion in
2014 to VND 121 billion in 2015 and the net profit also decreased 58,9% in comparison with its
result in 2014. Moreover, the position of net profit in the revenue decreased steeply from 2.22%
in 2013 to 0.96% in 2015.

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Additionally, Table 2 illustrates that most of the company’s financial ratios of efficiency
showed the down-ward trend over the period. In 2012, ROA and ROE was 4.08% and 11.97%
respectively and these ratios decreased significantly to 0.83% and 3.61% respectively in 2015.
The profit margin on revenue (GOS) also decreased from 3.39% to 0.97% in 2015, this problem
leads to EPS going down gradually to 0.75 in 2015, this is the lowest rate of EPS in the last five
years.
ITEMS 2012 2013 2014 2015
ROA 4.08 2.48 3.22 0.83
ROE 11.97 10.6 12.3 3.61
ROS 3.39 2.25 1.95 0.97
Gross profit margin 14.12 8.92 7.51 7.22
EPS 3.32 2.08 2.2 0.75
Table 2: Capital structure of HVG over the period 2014 – 2015
2.1.3 The fluctuation and reduction of HVG’s stock price
The stock price of HVG fluctuated in the past three years in a wide range and showed the
down-ward trend. From 2013 to 2014, the stock price increased steadily from VND 11,000 per
share and got the peak at VND 22,000 per share in the last quarter of year 2014. In 2015, the
stock price kept fluctuated and went down steeply in the last quarter, the lowest point was VND
8,500 per share. Since 2016, its stock price has fluctuated in the region from VND 9 per share to
VND 11 per share and it has shown the down ward trend in general.

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Pig. 1: HVG’s stock price performance over the period 2013 - 2016
Is there any relation between HVG’s performance and the capital structure? according to
the result of Myers’ theory (3) that predicts a negative effect of leverage change on stock prices
and a stronger effect for firms more likely to experience debt overhang. Cai, Jie et al (4) also
confirmed in their research that when a firm is more prone to debt overhang, an increase in the
leverage ratio may affect future investment and expected future cash flow more severely and
thereby effecting on the stock price.
2.2 Problem identification
The problem for empirical work in HVG’s operation is its profitability decreasing steadily
over the time despite of its good growth rate in the revenue which is equivalent higher than this
of the competitors and the average in the industry. In detail, the symptom has been showed
clearly through most of the profitable ratios like ROE, ROE and EPS etc., which decreased
rapidly over the year. According to some of the related theory information, there are numbers of
determinants of firm profitability, including control-ownership disparity, industry attributes and
firm attributes. In a firm with a high control-ownership disparity, a controlling shareholder

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exercises control but owns only a small fraction of the firm’s cash flow (5). Shleifer and Vishny
argued that as the control-ownership disparity increases, controlling shareholders appropriate
more firm resource. Thus, conflicts of interest among shareholders can lower firm performance.
Additionally, Joh and Sung Wook (5) argued that the other factors can affect the profitability
includes industry, macro-economic and firm attributes such as financial structure, size, market
share, and business strategy. In term of capital structure, Joh and Sung Wook (5) emphasized that
there are mixed effects of debt on firm profitability. A rise in debt increases default risk, firms
can reduce wasteful investment and increase firm performance to secure their survival. On the
other hand, debt can increase conflicts of interest over risk and return between creditors and
equity holders. Facing large debts, equity holders with limited liability may encourage the firm to
undertake overly risky projects.
In case of the HVG, with all the symptoms mentioned above, the problem may be related
to the factor of firm attributes in general and in expense management in detail. For further
evidence to pursue that there is an existing problem in the company business. Further
investigation on the competitor, market will be executed and made the comparison with the
company. The Pig. 1 illustrates that HVG dominates the market share and its growth rate in
revenue is always at the highest rate in the industry. The value of revenue increased steadily over
the period 2012 – 2015 and the gap between the company’s revenue and the other corporates’ is
enormously huge. On the contrary, HVG’s profit margin went down gradually over the time
while its rivals showed the opposite trend during the period 2012-2014 and its profit margin got
the lowest value among the four corporations in 2015. As gross profit margin is the quick
indicator of the ability of generate profit from the company main activity (6), it should be a
positive number or at least show the positive improvement trend. The negative trend in HVG’s

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profit margin over the time signals that there must be a problem in the basic activity.
Pig. 2 Revenue of the 4 biggest companies in the
fishery industry
Pig. 3 Profit margin of the 4 biggest companies
in the fishery industry
In detail, in 2015, among the four biggest corporates in the fishery industry, HVG
achieved the highest revenue among the four corporates in the industry, with IDI, were the two
companies having the highest growth rate in the industry, approximately increased 20.2%
comparing with year 2014 (Table 4). However, HVG’s net profit decreased 56.2%, this was
much lower than VHC’s. IDI and FMC are the two companies which have the positive growth
rate of profit while their revenue are less approximately 6 times in comparison with HVG’s
revenue. Net profit of IDI and FMC are positive and increase 16.3% and 51.3% respectively.
Revenue
Profit after
tax
Growth rate
of Revenue
Growth rate
of profit
ROE EPS
HVG 17,920 219 20.2% -56.2% 5.8% 720
VHC 6,495 322 3.2% -26.6% 15.4% 3,494
IDI 2,543 105 20.0% 16.3% 8.6% 1,069
FMC 2,876 95 -0.1% 51.3% 27.5% 4,750
Table 3: Performance of 4 biggest corporate in the fishery industry in 2015
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2012 2013 2014 2015
HVG IDI FMC VHC
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
2012 2013 2014 2015
HVG IDI FMC VHC

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In term of the profitable ratios, the Table 4 has showed clearly the accurate number and
undeniable comparison with its competitors, In 2012, HVG’s ROA and ROE were 4.08% and
3.32% in respectively and were much higher than IDI’s and FMC’s. In 2015, these financial
ratios of HVG’s decreased steadily and were much lower than that of the others in industry, its
ROA and ROE were 0.83% and 5.8% respectively and were much lower than this ratio of FMC
and VHC. This is the reason why the capability earning profit per share of HVG is lowest among
the four corporates in the statistic.
ROA
(%)
2012 2013 2014 2015
EPS
(%)
2012 2013 2014 2015
HVG 4.08 2.48 3.22 0.83 HVG 3.32 2.08 2.20 0.75
IDI 2.49 2.23 4.64 2.88 IDI 0.96 1.08 2.18 1.13
FMC 1.33 4.41 5.28 7.24 FMC 0.84 2.95 4.94 3.97
VHC 6.85 6.21 9.78 7.40 VHC 4.54 2.58 4.81 3.27
Table 4: ROA and ROE of the 4 biggest companies in the fishery industry
From result of analysis the company’s annual financial report and comparing with the
competitors, it could be seen that for similar company in the industry, their gross profit margin
increased during the period 2012-2014 or slightly decreased in 2015 in spite of their lower
revenue in both value and the growth rate than this of HVG. Additionally, their profitable ratios
showed the up-ward trend instead of going down as the company’s. It is proven that the problem
of HVG is unlikely due to the market condition but the company itself.
2.4 Possible reasons of problem
2.4.1 Recognition of Possible reasons
To find the possible reasons of low efficient in HVG’s operation, an analyzing process was
executed in Dupont Analysis based on the data collected from annual financial report of HVG.
According to S. Christina Sheela1 el at (7) the model was created by F. Donaldson Brown in the

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early 1900s and is valid to use for assessment of the profitability which is based on analysis of
Return on Equity (ROE) & Return on Investment (ROI). The return on equity disaggregates
performance into three components: Net Profit Margin, Total Asset Turnover, and the Equity Mu
ltiplier, the formula can be defined clearly as:
Net Income/Total Equity = (Net Income/Net Sales) x (Net Sales/Total Asset) x (Total Asset/
Total Equity); or it can be rewritten as
Net Income/Total Equity = (Net Income/Net Sales) x (Net Sales/Total Asset) x (Total
Asset/Total debt) x (Total debt/ Total Equity).
According to calculation from HVG’s financial reports, Dupont Analysis for HVG case is shown
in table 5 below:
2012 2013 2014 2015
Dupont (ROE) = (1) x (2) x (3) x (4) 0,120 0,106 0,123 0,036
Net Income/Net Sales (1) 0,034 0,022 0,019 0,010
Net Sales/Total Asset (2) 1,213 1,119 1,667 0,861
Total Asset/Total debt (3) 1,680 1,472 1,462 1,297
Total debt/Total equity (4) 1,748 2,902 2,614 3,367
Table 5: HVG Dupont Analysis 2012 – 2015
Table 5 shows an obvious analysis of components impacts on ROE. The Total debt/Total
equity ratio is increasing from 1,748 to 3,367 in the period of 2012-2015. In contrast, the Net
sale/Total Asset and Net Income/Net Sales ratio is decreasing, which causes Dupont – ROE in a
downward trend. Technically, It can be pointed out that there may be two reasons causing ROE
declining over the period. These are:
- The asset was not utilized effectively; and
- Poor management of cost and expenses leads to profit margin down; in detail

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The asset was not utilized effectively that means the capability of making revenue per one
unit asset decreasing. The ratio of net sale to total asset deceased dramatically from 1,67 in 2014
to 0,86 in 2015. According to the annual financial report of year 2015, HVG’s total asset
increased significantly from VND 9.025 billion in the end of year 2014 to VND 14.446 billion.
The large proportion increased in the short-term receivable from customers and inventories,
which increased 49,1% and 62,9% respectively. In contrast, the revenue in 2015 declined in
comparison with last year, down 20,9%. This leads to the ratio net sale to total asset drop
dramatically in 2015.
Moreover, According to the fishery industry of Asean security report, the market of
industry faced many difficulties over the time 2013-2015 due to tariff barriers and dumping law
of main exported markets. The statistic of General Deparment of Vietnam Custom shows that the
total exporting revenue of fishery industry in 2015 is USD 6.57 billion, down 16% in
comparison with 2014. The report also forecasts that in 2016, the fishery industry continues to
face many disficulties related to price, exchange rate, tariff barriers and international dumping
regular. Therefore, it can be confirmed that this reason may be the effects of external
environment and this is the common problem which every corporates in the industry have faced.
Poor management of cost and expenses lead to profit margin down: these are cost of
goods sold and expenses related to the company’s operation, such as depreciation of machine,
location fee, transportation, delivery… In his book, Hansen et al (8) stated that for pricing
decision, product decision and strategic profitability analysis, all traceable costs need to be
assigning to the product. This mean the cost is not just only the manufacturing cost but also the
non-production cost that related to the products such as: Research and Development cost,
Administrative cost, selling cost, etc... In case of HVG, its (i) COGS and especially (ii) Financial

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expense increase steadily over the time, and the growth rate of financial expense is much higher
than its revenue. On the contrary, its other expenses from selling, administrating, etc.…
illustrated the down-ward trend.
(i) In term of Cost of goods sold: As it can be seen in the Table 1, the percentage of COGS
in revenue increased slightly 91.62% in 2014 to 91.98% in 2015, while financial expense
increased steeply 8.92% over the period. On the other hand, HVG is one of the biggest
corporations in the industry which has a closed system of producing breed, aquaculture,
processing, cold storage, and exporting. Thus, the company is able to self - supply raw materials,
helping the company do not reply much on the outside materials and strictly control the quality
and cost of operation. Therefore, this reveals the problem may not come from COGS, it may be
specific from the expenses.
(ii) In term of financial expense: As it can be seen in the Table 6 that the company uses a
very high capital structure, total debt increased from VND 3.804 billion in 2012 to VND 11.138
billion in 2015, the total debt was 1.75 times higher than total equity in 2012 and total debt kept
increasing and was over 3 times higher than total equity in 2015. On the other hand, the capital
structure ratios show that HVG increased the percentage of debt by borrowing money from
financial institutes instead of raising its equity. The percentage of short-term debt in total asset
increased highly from 88.2% in 2014 to 93.0% in 2015. Although long-term debt to total asset
ratio decreased in 2015, total debt over total asset and equity increased significantly from 68.4%
and 216.3% in 2014 to 77.1% and 336.7% in 2015 respectively. .
(in Billion VND or %) 2012 2013 2014 2015
Total debt/total equity 175% 290% 261% 337%
Total Equity 2,176 2,339 2,361 3,308
Total Debt 3,804 6,788 6,172 11,138

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Short-term debt 3,769 6,771 5,443 10,354
Long-term debt 35 16 729 784
BEP (EBIT/Total asset) 9.47% 6.18% 8.30% 3.30%
Table 6: HVG’s debt and BEP ratio 2013 - 2015
According to the fishery industry report in April 2016 by Asean Security, the typical
character of the fishery industry is that material expense accounts highly in the revenue, most of
the corporates in the industry use much short-term debt to sponsor the operating activities, the
average short-term debt to total debt ratio is 79.1% and the average of capital structure is 0.61. In
comparison to the industry, HVG has short-term debt to total debt ratio and capital structure
much higher, valued 92.96% and 0.77 in 2015 respectively. Additionally, HVG’s financial
leverage is 5.74 while financial leverage of most corporate in industry is 3.65 in average. This
leads to the financial expense increasing rapidly during the time and then affecting on the profit.
Shubita et al. (9) argued that the higher the debt ratio, the greater the risk, and thus higher the
interest rate will be. At the same time, rising interest rates overwhelm the tax advantages of debt.
Coricelli et al. (10) also stated that net benefits to debt financing rise for companies with low
debt but decrease as leverage becomes high, implying that net benefits are a non-monotonic
function of leverage. They also argued in their research that at low levels of leverage, higher
leverage is likely to be associated with higher TFP growth as the benefits to leverage outweigh
the costs and debt is used to finance productive investment. As leverage increases, the costs of
debt become larger and erode the net benefits to leverage.
Short-term debt (Billion VND) Short-term debt/Total debt (%)
2012 2013 2014 2015 2012 2013 2014 2015
HVG 3.769 6.771 5.443 10.354 HVG 99,1% 99,8% 88,2% 93,0%
IDI 839 1.201 1.216 1.916 IDI 80,2% 84,7% 81,9% 74,8%

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FMC 302 506 793 993 FMC 89,8% 89,9% 89,1% 79,4%
VHC 1.669 902 2.534 1.819 VHC 90,0% 80,8% 87,3% 70,2%
Total debt (Billion VND) Capital structure (%)
HVG 3.804 6.788 6.172 11.138 HVG 59,5% 67,9% 68,4% 77,1%
IDI 930 1.268 1.323 2.260 IDI 43,3% 58,7% 57,8% 54,9%
FMC 302 506 801 999 FMC 55,9% 58,3% 57,3% 54,3%
VHC 1.669 993 2.605 2.268 VHC 44,3% 39,0% 48,0% 42,0%
Table 7: Capital structure of 4 biggest corporates in the fishery industry in 2015
In comparison with the competitors, HVG’s short –term debt increased gradually over the
time with a much higher growth rate in comparison with the other corporates. Highly short-term
debt in the total debt seems a typical character of the industry, however, this ratio of HVG was
higher the average of the industry (79.1%). In term of capital structure, HVG also showed the
up-ward trend over the time and was the highest among the four corporates.
Another evidence to pursue the reason related to the financial expense has been
conducted through an analysis based on the Basic Earning Power (BEP) ratio which indicates
basic profitability of assets and is useful in comparing firms with
different degree of leverage. The formula to calculate this ratio is
Earnings Before interest and tax (EBIT)/Total assets (TA). Robert B. Burney et al. (11)
demonstrates that in order for financial leverage to increase ROE, the interest rate must be lower
than BEP ratio (r < EBIT/TA). As showed in the Table 6, HVG’s BEP ratio decreased
significantly from 9.47% in 2012 to 6.18% and even to still 3.3% in 2015. This is quite low in
comparison with the interest cost that HVG has to pay to some financial institutes and even
lower than the average interest rate of saving in the Vietnam’s market which is approximately
6.5%. This means the more HVG uses debt for financing its operating activities the worst the

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profit rate is. This is in order with the finding of Shubita et al (9) that an increase in debt position
is associated with a decrease in profitability; thus, the higher the debt, the lower the profitability
of the firm.
2.4.2 In-deep on-the-field interview for more understanding the causes
In order to identify the real of problem of HVG, a survey of deep interview HVG’s staff
and a financial analysts of Saigon Securities Incorporation (SSI) have been conducted.
Through interviews, the responders have specified the whole situation of the HVG over the
period (2012 – 2015), this can be summarized:
Mr Tuan Vu, an experience accountant of HVG, stated that the most worrying point is the
expansion of HVG too fast accompany the total short and long - term debt increased from 2,958
billion in 2012 to 8.355 billion in 2015 (accounting for 58 % of total assets) has created
considerable pressure on interest rates. Interest expense is always at the high level, 2015
recorded 239 billion.
In detail, Ngoc Thuy, a financial staff of HVG, illustrated that the reasons why HVG’s
profit decreased over the period while it revenue showed the opposite trend, includes internal and
external causes. The external causes come from the unstable market over the a few last years, the
pangasius market become very competitive, the price decreased steadily and the demand of main
foreign market become narrow, such as USA, Asean, Mexico… and especially European market,
the value exported to this market decreased deeply because of the dumping rule published by
these countries. The internal causes come from investing with a high growth rate and using high
leverage. The total of short-term and long-term debt increased sharply over the period. This lead
to the financial expense always being at the high percentage in the revenue and increased
steadily.

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Moreover, according to Mr Tuan Vu, another problem which HVG facing is quite large
accounts receivable increased from 1,854 billion in 2012 to 5,641 billion in 2015 makes
provision for bad debts of up to 347 billion in 2015. Additionally, HVG’s inventory also showed
the up-ward trend over the period, accompany with investing with a high growth rate making
fixed assets increased steadily over the year. This lead to the total asset increased highly while
the net profit decreased. This means that the capability of making revenue per one unit asset
decrease.
After the meeting and in-depth interview with the company’s staff and base on symptom;
data collected from competitors. From that result, the concise cause-effect tree of this division
problem is generated in Figure 1 below:
Pig. 4: Potential causes and effect tree of the problem
In summary, it could be illustrated that during the period of 2012 - 2015, HVG’s
competitors could maintained the growth rate of profit higher than HVG’s profit growth rate
HVG’s
performance
efficiency
decreasing
Highly
increase in
COGS
High
financial
leverage
(Main cause)
The growth rate of cost
and expenses greater
than this of revenue.
The decline of
performance efficiency
over the time
The fluctuation and
decrease of HVG’s
stock price
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even though both value and the growth rate of revenue of HVG are much higher. On the other
hand, HVG used financial leverage much higher than its competitors and the average of industry.
The cause of this incident is due to internal of HVG rather than the external environment.
Therefore, the general problem HVG could be pointed as that using high financial leverage
causes decreasing the profitability which lead to ROE and ROA decreased steadily. This used to
be proposed by Myers (3) suggests a negative relationship between profitability and leverage,
because highly profitable firms that generate high earnings are expected to use less debt capital
than those that are not very profitable. Lang et al. (12) found that leverage is negatively related
with future growth. In other words, firms with higher leverage ratios appear to exhibit lower
future growth rates.
Therefore, the main issue for solving the problem is how to decide the volume of debt in an
effective capital structure and try to maintain it at the same level. This is the only way that the
financing costs and the weighted average cost of capital (WACC) are minimized thereby
increasing firm value and corporate performance.
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25
Chapter 3: Design Solutions and Suggestions
The capital structure is defined as the mix of debt and equity that the firm uses in its
operation, determining the optimal capital structure is one of the most fundamental policy
decisions faced by financial managers. A change in leverage ratio can affect a firm’s financing
capacity, risk, cost of capital, investment and strategic decisions, and ultimately shareholder
wealth. Utkarsh Goel, et al. (13) claimed that financial leverage showed the relationship between
borrowed funds and owner’s funds in the capital structure of a firm. It includes debt, common
equity and preferred equity that are used to finance the firm’s total assets, operations and
financial growth. The core issue of an effective capital structure is the choice of the percentage
between the debt and the equity in which earnings before interest and taxes (EBIT) is higher than
interest rate and the enterprises could take advantage of the leverage. Cause the main benefit of
debt financing is the tax-deductibility of interest charges, which results in lower cost of capital
(according to Krishnan & Moyer (14)). Additionally, Jensen (15) concludes in his research that
the costs of debt include bankruptcy and agency costs. According to this view, the leverage
decision is fundamentally an exercise in balancing the costs and benefits at different levels of
debt.
There are a numbers of studies on the effect of optimal capital structure on corporate’s
ROE and ROA. Vătavua (16) researched on many Romanian manufacturing companies and got
the final finding that the most profitable manufacturing companies were those maintaining a high
proportion of equity in their capital mix, avoiding borrowed funds. The researcher also stated
that shareholders’ equity has a positive impact on performance indicators, while total debt and
short-term debt have negative relationships with ROA and ROE.
In another study, Do Xuan Quang & Wu Zhong Xi (2) stated that the higher firms’
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