The problem of capital structure that affecting profit margin: the case of Hung Vuong Corporation

Abstract

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 borrowing capital from outside. Finally, the action plan is also suggested in the study.