FINANCIAL
RATIO
ANALYSIS
REPORT
Financial Accounting - ACCT 2010
Professor Alex Lan Nguyen
Duong The Long
Phan Huu Hoang Gia Bao
Nguyen Xuan Huy
Le Nguyen Van Anh
Khuat Duy Minh Quang
Nguyen San Ha
Hoa Phat started selling construction equipment in 1992. In 2007, Hoa Phat
launched on the Vietnam stock market with the symbol HPG. The manufacture
of steel accounts for 90 percent of the company's revenue and profit, followed by
iron and steel, steel products, agricultural, real estate, and home appliances. To
diversify their income, they are increasing their real estate investments. Hoa Phat is
an important industrial production organization in Vietnam and one of the 15 largest
steel companies in the world (Hoà Phát, 2022).
I. Financial Ratios
HPG 2019
Liqudity
Current ratio
Quick ratio
Cash ratio
Asset turnover
Total asset turnover
Inventory turnover
Days of Inventory
Acc receivable turnover
Days of sales outstanding
Acc payable turnover
Days of payable outstanding
Operating cycle
Solvency
Interest coverage
Debt/Total assets
Debt/Equity
Debt/Tangible assets
LT asset/LT Debt
Profitability
Gross profit margin
Operating profit margin
Net profit margin
ROA
ROE
Dupont analyses
Tax effect
Interest expense effect
Operating profit margin
Total asset turnover
Financial leverage
HPG 2020
HPG 2021
HSG 2019
HSG 2020
HSG 2021
1,13
0,41
0,17
1,09
0,59
0,26
1,28
0,71
0,31
0,84
0,32
0,03
1,00
0,39
0,06
1,30
0,44
0,03
0,71
3,13
116,61
25,56
14,28
4,28
85,26
45,63
0,77
3,12
117,11
27,11
13,47
5,14
71,02
59,56
0,97
3,17
115,01
33,55
10,88
5,82
62,67
63,22
1,46
4,45
81,97
20,77
17,58
20,31
17,97
81,57
1,57
4,55
80,25
19,47
18,74
16,16
22,58
76,41
2,20
4,46
81,85
15,97
22,85
13,86
26,33
78,37
10,71
53,0%
1,13
1,14
2,64
8,01
55,0%
1,22
1,23
3,68
15,67
49,1%
0,96
0,97
6,01
1,62
68,3%
2,15
2,25
3,30
3,46
62,9%
1,69
1,75
4,02
14,84
59,3%
1,46
1,49
5,63
17,6%
14,2%
11,8%
8,4%
17,0%
21,0%
17,0%
14,9%
11,5%
25,1%
27,5%
24,7%
23,0%
22,3%
46,0%
11,4%
0,9%
1,3%
1,9%
6,8%
16,8%
5,0%
4,2%
6,6%
19,1%
18,2%
10,1%
8,9%
19,4%
49,5%
0,83
0,91
0,16
0,71
2,04
0,88
0,88
0,19
0,77
2,18
0,93
0,94
0,26
0,97
2,06
0,78
0,38
0,04
1,46
3,62
0,84
0,71
0,07
1,57
2,90
0,88
0,93
0,11
2,20
2,55
II. Industry’s perspective
The steel sector is notoriously cyclical and reflective of general market circumstances, with
demand rising during economic expansions and falling during global recessions (Frost & Sullivan,
2020). Intriguingly, Hoa Phat is the only business in the Vietnamese manufacturing industry, along with
Formosa from Taiwan, which has the technology to create HRC (a worldwide in-demand
commodity).
In addition, Hoa Phat has entered the container manufacturing industry, which is a
booming market, with the ability to produce unique steel materials.
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III. Global, regional, and local factors
Global factors that have strongly impacted the steel industry include the Zero-COVID policy
of China and the Russia-Ukraine war. Firstly, China is the biggest steel-consuming country, accounting
for 60% of the world's steel consumption. With the Zero-COVID policy, a sudden drop in China's
demand negatively affects the supply chain and leads to excess inventory. Secondly, Russia ranks fifth
in the world in steel production. With disruptions caused by the war, the steel supply that Russia exports
drops, making steel prices rise. (Hòa Phát, 2022)
For local factors, our government has had the following measures: a policy for moderate tax
when importing steel, forecast steel demand, and adjust the imbalance of steel supply. These actions
were taken in order to improve efficiency, prioritize the domestic market, and balance steel export
amounts. (Phương, 2021)
IV. Analyses of Hoa Phat's financial ratio
1. Profitability Ratio Analysis
In general, each component of Hoa Phat Group's profitability rose during the last three years,
with 2021 being the most prosperous one. Firstly, the Gross Profit Margin increased by around 4% in
2020 and 7% in 2021, mainly because of the ability to manufacture steel at a cheap price (Vietnamplus,
2021). Now that the firm was able to minimize the cost of products sold, the Gross Profit Margin grew.
The Operating Profit Margin also shared the same trend as the Gross Profit Margin. There are 3 main
reasons for the increase in this index: the official launch of the commercial hot-rolled; the restructuration
of their operating model; the full operation of Hoa Phat Dung Quat Integrated Steel Complex in Quang
Ngai (Hoa Phat, 2021). Besides, the Net Profit Margin increased to 23% in 2021, mostly because Hoa
Phat was able to create greater net revenue from exporting 2.6 million tons of goods in 2021, which
was twice the amount exported in 2020 (Hoa Phat, 2021). During the COVID-19 pandemic, the trade
openness enables Hoa Phat Group to broaden its consumer markets.
Both the ROA and ROE indicators exhibit the same upward pattern, indicating that the capital
structure has not changed. Furthermore, ROE is just two times greater than ROA, suggesting that the
firm does not rely on financial leverage. As described in Hoa Phat's annual report (2020), the Return
On Assets (ROA) increased over the same period in 2020, could be explained by the substantial growth
in profit after tax. Additionally, the high rise in ROE (from 17% to 46% in 2021) shows their strategy
in “optimizing shareholders’ capital efficiency” (Hoa Phat, 2020).
2. Asset Turnover Ratios Analysis
In terms of Asset Turnover Ratios, Hoa Phat demonstrated its strengths in revenue generation,
collection and payment of debts. Asset Turnover Ratios have increased by 0.2 in the 3 years, indicating
that the company is becoming more proficient in generating revenue from its assets. The driving factor
behind this trend is the high revenue performance from the Agriculture, Electrical Refrigeration, Real
Estate and predominantly the Steel sector, with its massive sales from Hot-rolling coil (HRC) (Đào,
2021). In addition, Hoa Phat’s expansion campaign to the Southern region also contributed considerably
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to the revenue. Lastly, Hoa Phat’s record revenue can be attributed to the immense sale volume and
heightened price due to exports to Europe, North America and Asia (Hoa Phat Annual Report, 2021).
As a global steel-producing leader, China’s lockdown policy’s restrictions on their steel exports has
left the exceedingly high global steel demand unsatisfied. Hoa Phat was able to capitalize on this
opportunity by expanding their exports.
Regarding Account Receivable Turnover, Hoa Phat witnessed an upward trend during the
period while its Days of Sales Outstanding has dropped markedly, implying the company’s increasing
effectiveness in collections from customers. Hoa Phat’s high sales volume has also come with increased
Net Credit Sales, and with it, a potentially enormous risk of bad debt. To address this issue, the company
has presumably employed methods to collect payments from their consumers more frequently, as
reflected in the declining Days of Sales Outstanding. On the other hand, Inventory Turnover and Days
of Inventory have remained stable, which illustrated a sustainable consumption rate and Hoa Phat’s
ability to manage Inventory.
Furthermore, Hoa Phat’s Account Payable Turnover has reported a significant increase and a
drastic reduction in Days of Payable Outstanding, which suggests that the corporation is hastening
payments to its suppliers. Hoa Phat’s founder Trần Đình Long stated that as the market demand for
steel surged, so did the company’s raw materials demand from the suppliers (Việt, 2022). As a result,
Hoa Phat needed to maintain a healthy relationship with their suppliers through timely payments, which
allowed the business to sustain a high level of production and sales. Moreover, increased prices of iron
ores and other raw materials due to the Brazil mineral waste reservoir incident have resulted in inflated
Cost of Goods Sold. This has also contributed to a higher Account Payable Turnover.
3. Liquidity Ratio Analysis
In terms of Liquidity, there are three main focused ratios are the Current ratio, the Quick ratio,
and the Cash ratio. Hoa Phat’s current assets have been sufficient to pay off the liabilities throughout
the period of 2019-2021 despite its recognizable fluctuation. The ratio, as illustrated, decreased in 2020
(from 1,13% to 1,09%) because the increasing rate of current liabilities was higher than that of current
assets, which resulted from the fact that they had to increase their long-term liabilities and short-term
liabilities (mainly from loans from banks) to invest in new projects and to serve the needs for working
capital (Hoang & Huy, 2021). We recognized an increase in Quick and Cash ratio in two consecutive
years. It can be attributed from the increase in revenue from HRC, together with the mature investment
and the market expansion to the South that increase cash and cash equivalents of the company, which
also allows the ratios to increase over the year.
4. Solvency Ratio Analysis
In terms of Solvency, Interest coverage, and Debt/Equity will be explained. There was a strong
fluctuation in the interest coverage (10,71 in 2019; 8,01 in 2020; and 15,67 in 2021). In 2020, there was
a decrease in the ratio, which was due to the significant increase in the interest expense from the
liabilities that we mentioned earlier. However, in 2021, revenue increased tremendously from two main
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factors: Increasing sales and increasing the international selling price of HRC. They can be the results
of many external events, including but not limited to the Chinese policy of cutting down on the
production of steel in the country for the sake of the environment (Viet, 2022). For that reason, Hoa
Phat has had the opportunity to export its products to the global market, specifically Chinese. Moreover,
as the iron supply from Brazil decreased and the international delivery fee increased, as well as the
increase in car sales from China and India, the sales of steel strongly increased, we can also witness a
fluctuation in the Debt/Equity ratio throughout the period 2019-2021. In 2020, there was a decrease in
Debt/Equity due to the increase in debt from the mentioned activities (for expanding investment
activities). Nevertheless, in 2021, as Retained Earnings increased due to the increased revenue from
market expansion, the Debt/Equity ratio also increased.
5. Dupont Model Analysis
The increasing trend in the number of the tax effect implies that there is a decreasing trend in
the tax rate. First, it was because Quang Ngai province allowed the steel factory in Dung Quat to have
a lower tax rate of 10% (the standard corporate tax is 20% per year) in 30 years because Hoa Phat
corporate invested in the Dung Quat economic zone (Ngọc, 2021). Moreover, in 2021, there was a tax
subsidy from the Government's fiscal policies for enterprises to stimulate the economy due to Covid19 (Nguyen & Nguyen, 2022). Regarding the interest expense effect, as mentioned above, the year 2020
is the year that Hoa Phat borrows most, so the interest expense is highest accordingly. In 2021, the profit
increased more significantly than interest expense due to the dramatic rise in HRC sales, so the figure
of interest expense effect consequently experienced a considerable climb from 0.88 to 0.94. In terms of
operating profit margin, besides those aforementioned reasons leading to the climb in operating
revenue, Hoa Phat owns a deep-water port in Dung Quat that allows cargo ships with four times higher
capacity than usual (Hạnh, 2021), which saves a considerable amount of the transporting expense.
Moreover, in 2021, the operations of four factories in Dung Quat led to an increase in productivity and
more economies of scale. The next ratio to analyze is asset turnover ratio. As proved, the company is
becoming more efficient at generating revenue from its assets. Financial leverage is the final indicator.
The enterprise has been calling for more short-term loans for investment in new projects, such as the
Phố Nối II urban area. However, the credibility of Hoa Phat allows the enterprise to expand its business
scale by borrowing. For instance, they borrowed a significant budget from 8 famous banks in Vietnam
in 2020 (Thắng, 2022). In conclusion, those five indicators above can explain why ROE increased
slightly from 2019 to 2020, but it experienced a sharp rise from 25.1% to 46% in the next year.
V. Comparison with a peer company
Hoa Sen is a powerful steel manufacturing contender for Hoa Phat, ranking 4th in the market
while Hoa Phat holds the 2nd position (Vietnamcredit, 2021). Particularly, Hoa Sen also dominates
with a market share of 40% in the corrugated iron market, in which Hoa Phat only accounts for nearly
6% (Quyền, 2021). Given its position, Hoa Sen is one of the few comparable rivals of Hoa Phat in the
Vietnamese Steel Industry. Additionally, because both Hoa Phat and Hoa Sen need nearly similar input
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material for production, in the last three years, with the global and local changes in the steel industry,
both have been affected relatively equally, which serve to provide a balanced comparison. The primary
difference appears to be the companies' strategies, as reflected in the change in the ratios.
There are three ratios that clearly demonstrate the differences in performance between Hoa Phat
Group and Hoa Sen Group. The first indicator is tax effect. While Hoa Sen group does not enjoy any
tax preference, Hoa Phat is allowed to pay lower enterprise tax for the Dung Quat factories in Quang
Ngai. Regarding total asset turnover, the data for HPG is considerably lower than for HSG, but this
does not indicate that HSG’s financial performance is better. Upon closer inspection, HSG’s low total
asset is a result of its inventory sales to pay tax and interest while HPG’s sharply increasing total asset
can be ascribed to its expansion and investments. This clearly explains why although the net operating
revenue of Hoa Phat is higher, it still has a lower total asset turnover. The final ratio is days of payable.
The data for HPG is far higher than HSG. As the main market leader, Hoa Phat could be able to pay
accounts and notes payable at a later date due to its high integrity. By comparing the two companies, it
appears to be that Hoa Phat is the market leader in this manufacturing industry.
VI. Future prediction
The steel industry is in the declining phase, which deter new investors from joining. The
domestic steel industry is facing three major risks: the risk of material price fluctuations; the risk of
anti-dumping tax in the export market; and the export restriction risk due to the international political
unrest.
Our group predicts that only two factors can potentially revitalize the steel industry. Firstly, the
inflation rate in the world must be lower in the future which will stimulate the government’s public
infrastructure investment. Secondly, the results from the Chinese party congress as China is one of the
potential markets in Vietnam (it decreased the steel production for environmental problems) (Reuters,
2022). After the congress, if China changes its primary goal from stabilizing the country to approving
the country’s giant steel project and altering some policies in real estate, it will be a good chance for
Hoa Phat in specific and Vietnamese businesses as a whole.
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