Chapter 2 - 1

CHAPTER II:
FINANCIAL STRUCTURE
ANALYSIS
1
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
2
Financial structure & analysis purpose
•Investment policy
•Management •Funding policy
operations •Interest rates
•Accounting policy
•Profit distribution
policy
•Types of ownership
3
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.
4
• 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
5
• Proportion of cash & cash equivalents
• :
cash & cash equivalents

Proportion of cash &
cash equivalents = Total assets
* 100%
• Notes:
6
• Proportion of short-term financial investment:
Net value of short-term

Proportion of short- financial investment
term financial = * 100%
investment Total assets
• Notes:
7
• 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
8
• Proportion of inventories:
Net value of inventories

Proportion of
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
9
• Proportion of fixed assets:
Net value of fixed assets

Proportion of fixed
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
10
RESOURCE STRUCTURE ANALYSIS
• Financial autonomy
o Self-fund ratio
o Debt ratio
• Fund stability
o Long-term resource ratio
o Short-term resources/temporary resources ratio
11
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
12
ANALYSIS OF FINANCIAL AUTONOMY
Total owner’s equity
Self-fund ratio = * 100%
Total resources (assets)
Total liabilities
Debt ratio = * 100%
Total resources (assets)
Total liabilities
Debt/equity
ratio =
the ratio is also known as risk, gearing or leverage J2.3

13
ANALYSIS OF FUNDING STABILITY
CURRENT LIABILITIES Temporary

(SHORT-TERM LIABILITIES) resources
ASSETS
-NON-CURRENT LIABILITIES
Long-term
(LONG-TERM LIABILITIES)
resources
- OWNER’S EQUITY
14
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
Total value of long -term resources
Long-term
resources ratio = Total resources
* 100%
Total value of short-term resources

Short-term
resources ratio = Total resources
* 100%

Owner’s equity/long-
term resources ratio = Long-term resources
* 100%
15
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
16
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
17
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
18
19
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
20
SCENARIO 3: 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
21
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
22
SHORT-TERM FINANCIAL BALANCE
Net working Short-term account Short-term liabilities

capital = Inventories + receivables & other - (excluding interest
requirement current assets bearing liabilities)
23
• 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
24
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.
25
LT
LT Resouce
E + Long-term
assets s
Liablities
NWC
ST
Liablitie
Inv + s E+
Assets Acc Rec (exclude Liabili
d
NWCR NWCR>0
NWC>0
ties
NF >0
NF >0
Tiền +
Đtư NH Vay NH
Data on Balance sheet of ABC Company
(Unit: 1.000 VND)
Assets 01/01/N 31/12/N Liabilities & Owner’s 01/01/ 31/12/N

equity N
Cash 220 250 Short-term borrowings 790 600
Account receivables 410 460 Account payables 210 320
Inventories 520 610 Other short-term liabilities 50 80
Fixed assets 1.950 3.360 Long-term liabilities 550 1.000

(historical cost)
Accumulated (100) (200) Owner’s equity 1.400 2.480

depreciation
Total assets 3.000 4.480 Total liabilities & 3.000 4.480

Owner’s equity
Analyze asset structure of ABC
Assets Note 01/01/N 31/12/N
1.Cash 220 250
2.Account receivables 410 460
3.Inventories 520 610
4. Fixed assets (historical cost) 1.950 3.360
5. Accumulated depreciation (100) (200)
6.Total assets 3.000 4.480

1.Cash 220 250
Proportion of Cash
Proportion of Account
receivables
Proportion of Inventories
Proportion of Fixed assets
1.Cash 220 250
(7) = (1)/(6) x 100%
Proportion of Cash
Proportion of Account (8) = (2)/(6) x 100%
receivables
(9) = (3)/(6) x 100%
(10) = [(4) – (5)]/(6)
1.Cash 220 250
(7) = (1)/(6) x 100%
Proportion of Cash 7,33% 5,58%
receivables
(9) = (3)/(6) x 100%
(10) = [(4) – (5)]/(6)
1.Cash 220 250
(7) = (1)/(6) x 100%
Proportion of Cash 7,33% 5,58%
receivables 13,67% 10,27%
(9) = (3)/(6) x 100%
Proportion of Inventories 17,33% 13,62%
(10) = [(4) – (5)]/(6)
Proportion of Fixed assets 61,67% 70,54%
Analyze financial autonomy and stability of ABC
Items Notes 01/01/N 31/12/N
1.Owner’s equity
1.Owner’s equity 1.400 2.480

2.Total assets (Owner’s equity + Liabilities) 3.000 4.480

3. Liabilities =(2)-(1) 1.600 2.000


3. Liabilities =(2)-(1) 1.600 2.000

4. Long term liabilities 550 1.000

3. Liabilities =(2)-(1) 1.600 2.000

5. Long term resources =(1)+(4) 1.950 3.480
6. Short term resources =(2)-(5) 1.050 1.000

3. Liabilities =(2)-(1) 1.600 2.000

7. Self-fund ratio
8. Debt ratio
9. Debt/equity ratio
10. Long-term resources ratio
11. Short-term resources ratio
12. Owner’s equity/long-term resources ratio

3. Liabilities =(2)-(1) 1.600 2.000

7. Self-fund ratio = (1)x100/(2)
8. Debt ratio = (3) x100/(2)

9. Debt/equity ratio = (3)/(1)
10. Long-term resources ratio = (5) x100/(2)
11. Short-term resources ratio = (6) x100/(2)
12. Owner’s equity/long-term resources ratio = (1) x100/(5)


3. Liabilities =(2)-(1) 1.600 2.000

7. Self-fund ratio = (1)x100/(2) 46,67% 55,36%
8. Debt ratio = (3) x100/(2) 53,30% 44,64%
9. Debt/equity ratio = (3)/(1) 1,14 0,81
10. Long-term resources ratio = (5) x100/(2)
11. Short-term resources ratio = (6) x100/(2)
12. Owner’s equity/long-term resources ratio = (1) x100/(5)


3. Liabilities =(2)-(1) 1.600 2.000

7. Self-fund ratio = (1)x100/(2) 46,67% 55,36%
8. Debt ratio = (3) x100/(2) 53,33% 44,64%
9. Debt/equity ratio = (3)/(1) 1,14 0,81
10. Long-term resources ratio = (5) x100/(2) 65,00% 77,68%
11. Short-term resources ratio = (6) x100/(2) 35,00% 22,32%
12. Owner’s equity/long-term resources ratio = (1) x100/(5) 71,79% 71,26%
Analyze financial balance of ABC
4. Long-term assets 1.850 3.160
5. Inventories 520 610
6. Account receivables 410 460
7. Account payables 210 320
8. Other short-term liabilities 50 80
9. Net working capital = (3)-(4)
10. Net working capital requirement = (4) +(5) –(7)-(8)
11. Net fund =(9)-(10)
9. Net working capital = (3)-(4) 100 320
10. Net working capital requirement = (5) +(6) –(7)-(8) 670 670
11. Net fund =(9)-(10) -570 -350
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)
46
COST OF CAPITAL
E D
WACC = Ke * (E+D)
+ Kd (1-t) * (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
47
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%
48
E D
WACC = Ke * (E+D)
+ Kd (1-t) * (E+D)
WACC of year N:
= (15% X0,45) + (12%x (1-25%) X0,55) = 11,7%
WACC of year N+1:

= (15% X0,4) + (12%x (1-25%) X0,6) = 11,4%
* If debt/owner’s equity = 4, debt: 80%, owner’s equity: 20%

WACC = (15% X0,2) + (12%x (1-25%) X0,8) = 10,2%

Chapter 2 - 1

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Chapter 2 - 1

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CHAPTER II:

• Financial structure: asset structure, capital structure

o Determine the factors that influence to financial

structure  reasonable financial structure

PROPORTION OF CURRENT-ASSET PROPORTION OF NON-CURRENT ASSET

cash & cash equivalents

Net value of short-term

Net value of account

Net value of inventories

Net value of fixed assets

o Short-term resources/temporary resources ratio

• Autonomy is the condition of being self-governing or independent.

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

CURRENT LIABILITIES Temporary

Total value of short-term resources

Total owner’s equity

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

• Working capital = current assets

Net working capital = Current assets - Current liabilities

Long-term Non -current

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

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

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

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

Net working Short-term account Short-term liabilities

• Short -term financial balance is presented by the

Net working Net working capital

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

Assets 01/01/N 31/12/N Liabilities & Owner’s 01/01/ 31/12/N

Cash 220 250 Short-term borrowings 790 600

Account receivables 410 460 Account payables 210 320

Inventories 520 610 Other short-term liabilities 50 80

Fixed assets 1.950 3.360 Long-term liabilities 550 1.000

Accumulated (100) (200) Owner’s equity 1.400 2.480

Total assets 3.000 4.480 Total liabilities & 3.000 4.480

1.Cash 220 250

2.Account receivables 410 460

3.Inventories 520 610

4. Fixed assets (historical cost) 1.950 3.360

5. Accumulated depreciation (100) (200)

6.Total assets 3.000 4.480

1.Owner’s equity 1.400 2.480

1.Owner’s equity 1.400 2.480

3. Liabilities =(2)-(1) 1.600 2.000

1.Owner’s equity 1.400 2.480

3. Liabilities =(2)-(1) 1.600 2.000

1.Owner’s equity 1.400 2.480

3. Liabilities =(2)-(1) 1.600 2.000

1.Owner’s equity 1.400 2.480

3. Liabilities =(2)-(1) 1.600 2.000

1.Owner’s equity 1.400 2.480

3. Liabilities =(2)-(1) 1.600 2.000

8. Debt ratio = (3) x100/(2)

10. Long-term resources ratio = (5) x100/(2)

11. Short-term resources ratio = (6) x100/(2)

12. Owner’s equity/long-term resources ratio = (1) x100/(5)

1.Owner’s equity 1.400 2.480

3. Liabilities =(2)-(1) 1.600 2.000

11. Short-term resources ratio = (6) x100/(2)

12. Owner’s equity/long-term resources ratio = (1) x100/(5)

1.Owner’s equity 1.400 2.480

3. Liabilities =(2)-(1) 1.600 2.000

• The cost of fund used for financing a business