Advanced Management Accounting - Elcom Corporation

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SPEAKER NOTE
I. Introduction about Elcom Corporation
Electronics Communications Technology Investment Development Joint Stock Company, which
was established in 1995, is a leading high-tech company in Vietnam. ELC offers network
operators best-in-class software products and system integration services, as well as turnkey
solutions and technical services for the telecommunications and security industries. ELCOM
began as a small shop run by five young men who were excited about technology and sold self-
assembled computers and "homemade" software. After that, with the rapid development of the
technology, the company had recognized the trend and had been consistently producing high-
quality products that met the needs of customers. There are several products that helps the
company success in the beginnings of the company such as: call distribution box, polarity card,
...
II. Financial performance measures
In this presentation, I will analyse the financial information of ELC through financial
performance measures: Profitability ratio, Leverage ratio, Liquidity ratio, Operational ratio and
Investor ratio to deeply understand the development of the company.
2.1. Profitability ratio
Gross profit margin Net profit margin
Formula GPM = Gross Profit
Revenue x 100 NPM = Profit before tax
Revenue x 100
Meaning - A company's gross profit margin
(GPM) measures the difference
between its gross profit and its sales
within a certain time (Ratnasari and
Handayani, 2013).
- Gross profit margin is heavily
influenced by sales pricing.
- The net profit margin indicates whether
or not a business can produce enough
revenue to pay its fixed expenditures and
other expenses (Harahap, 2002).
- The net profit margin is heavily
influenced by the cost of goods sold.
With higher prices for sold goods, the
OPM will fall.
ELCOM CORPORATION
2020 2019 +/- %
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Revenue 785,939,778,481 882,685,709,689 -96,745,931,208 -11%
COGS 657,156,175,908 720,446,916,479 -63,290,740,571 -9%
Gross profit 128,783,602,573 102,238,793,133 26,544,809,440 26%
Profit before tax 41,114,160,678 32,048,262,479 9,065,898,199 28%
GPM 16.386% 11.583%
NPM 5.231% 3.631%
Overall, the Gross Profit Margin and Net Profit Margin of 2020 increased significantly in
comparision with the previous year.
The Gross Profit Margin of Elcom Corporation in 2020 is 16.386%, and the ratio of Gross Profit
Margin in 2019 is 11.583%. Meanwhile, the Net Profit Margin of the company in 2019 is
3.631% and in the next year, the ratio rose to 5.231%. This is a good sign for Elcom Corporation
in financial performance.
As can be seen from the Financial Statement of the company, both revenue and cost of goods
sold decreased remarkably in 2020 compared to 2019, which were 11% and 9% respectively. On
the other hand, the ratio of gross profit rose considerably to 26%.
In fact, the reason for increasing gross profit of the company is the increase in the cost of service
rendered, which increased by 68.055% (Note 27).
Moreover, the business results of the company in the last two years (in 2019 and 2020) showed
that the growth rate of the company's production and business activities has been more stable. In
2020, the COVID-19 pandemic caused unprecedented negative impacts on the economy of the
world in general and the economy of Vietnam in particular. Thus, Elcom Corporation was also
affected, which led to the decrease revenue of the company (ELC, 2020).
Last but not least, answering at the 2020 Annual General Meeting of Shareholders about the
reason for poor business results, the management of the company admitted that it had been too
focused on the telecommunications segment (ELC, 2020). So, it made the company unable to
adapt in time when the market falls into crisis and saturation.
2.2. Leverage ratio
 Formula: Leverage ratio = Long−term debt
Equity x 100% Meaning:
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Leverage ratios are used to evaluate the relative level of debt that a company has accumulated.
When the ratio is high, it indicates that a company has taken on more debt than it can be
reasonably expected to service with current cash flows (Hodula et al., 2019).
ELCOM CORPORATION
2020 2019 +/- %
Long term debt 3,381,588,259 3,509,225,679 -127,637,420 -4%
Equity 854,984,615,706 824,230,579,432 30,754,036,274 4%
Leverage ratio 0.3955% 0.4258%
In general, the leverage ratio of Elcom Corporation in 2020 was 0.3955%, which was lower than
the leverage ratio of the company in the previous year with 0.4258%. Therefore, it showed that
the leverage ratio of ELC tended to decrease slightly from 2019 to 2020.
From the Financial Statement of ELC, it can be seen easily that the long-term debt of the
company reduced 4% in 2020, which compared to 2019. Otherwise, the Equity of the company
increased 4% from 2019 to 2020.
It is clear that the reason for the decrease in long-term debt is that Long-term provisions declined
10% compared to 2019.
Looking into the Owner’s Equity, the Profit after tax raised 17% compared to 2019. In fact, the
increase of Profit after tax because the company has signed and implemented some essential
contracts, which increased the sales and service revenue for the company. In addition, the
company also reduced the expense for selling during the period to increase the efficiency of the
business (ELC, 2020).
When comparing with FPT, the leverage ratio of ELC was 18 times higher than FPT. In detail,
ELC had no plan of increasing their capital in 2020 and their increase of owners’ equity only
came from profits for the year of 2020. Moreover, ELC had a slight decrease in the long-term
liabilities, which was 4%. Therefore, ELC had to deal with more financial risks
2.3. Liquidity ratio
Current ratio Quick ratio
Formula Current ratio = Current assets
Current liabilities
Quick ratio =
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Current assets−Inventories
Current liabilities
Meaning It measures the ability of business to
pay for the current liabilities in the
short – term or within one year
(Durrah, 2016).
It contains the most current assets and
current loans. The rising value of this
ratio indicates the company’s high
liquidity. However, it does not include
the prepaid expenses and inventory from
the current assets (Sinha, 2012).
ELCOM CORPORATION
2020 2019 +/- %
Current assets 1,132,671,468,502 1,013,801,923,854 118,869,544,648 12%
Current liabilities 611,585,234,296 535,546,137,019 76,039,097,277 14%
Inventories 185,174,943,486 172,896,139,665 12,278,803,821 7%
Current ratio 1.85 1.89
Quick ratio 1.55 1.57
As can be seen that both Current ratio and Quick ratio of Elcom Corporation had almost no
fluctuations. To specify, Current assets, Current liabilities and Inventoríes had noticeable
changes from 2019 to 2020.
It is clear that, Cash and Cash equivalents had a large contribution to the increase of Current
assets. In detail, Cash and Cash equivalents raised from 34,142,471,362VND in 2019 to
298,810,864,818VND in 2020 (775%).
In fact, ELC has taken back money from Short-term receivables, which decreased 18%
compared to the previous year (Note 5). Especially, ELC reclaimed 63,400,000,000VND from
Bac Ninh Information Technology and Communication Transaction Center. Therefore, the
Current assets of ELC in 2020 was higher than 2019.
Looking into the current liabilities, there was an increase in the current liabilities, which was
14.08% in the period of 2019 – 2020. To specify, they had a significant increase from the short-
term advance from customers, which was 4 times higher than 2019.
According to Note 18, this increase came from the cooperation with the Ministry of Public
Security in the security monitoring solution, intelligent transportation systems (ELC, 2020),
which can be recorded as a big profit when they completed the projects.
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Moreover, their other short-term payables witnessed a considerable rise from VND 3.6 billion to
VND 20 billion due to the Business corporation accounts payable. This increase is the profits
that ELC had to pay 60% of total profits before tax by following the business cooperation
contract with N.D.C Company (Note 21).
The Inventories of ELC also rose 7% compared to 2019 because of the increasing of Working in
progress expense and Finished goods expense. Since the projects have not been implemented, the
company cannot hand over to partners. Furthermore, ELC also researched new AI products
applied into Road and Bridge Management like automatic toll collection, automatic cold penalty,
... (ELC, 2020).
When comparing with a big technology corporation such as FPT, there was a huge difference
between FPT and ELC. In detail, in 2020, the current ratio of ELC was 0,72% higher; during the
period of 2019-2020, this ratio of ELC decreased 2.12%. Although we can clearly see the
decrease of current ratio of ELC, its high level of current ratio still shows that the efficiency in
using its asset of the management was not good. The increase in the cost of management and cost
of project implementation (Note 20, 21) and the high level of cash at banks and investment held
to maturity (Note 3) instead of investing in operation and projects lead to this result.
Looking into the quick ratio, the quick ratio of FPT and ELC also had a big difference. In 2020,
the quick ratio of ELC was 1.49 and also 5.1% lower than in 2019. It can be seen that the quick
ratio of ELC was better than FPT, which was a higher quick ratio as well as lower decrease with
the previous year. Due to the higher than 1 of quick ratio by increase in the cash and cash
equivalents of ELC, they can easily pay for their current liabilities in the short term and instantly
get rid of its current liabilities.
2.4. Operational ratio
Trade receivable turnover
in days
Inventory turnover
in days
Trade payable turnover
in days
Formula =
Trade receivables
Credit sales x 365 days
= Inventory
COGS x 365 days =
Trade payable
Purchases x 365 days
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Meanin
g
It is an accounting metric
that measures how well a
company collects its cash
owed by customers
(Gorczynska, 2011).
It determines how
rapidly the inventory
of the company can be
sold (Kwak, 2019).
Trade payable turnover
shows the company takes
how many times to paid
for the account payable in
a given period (Amanda,
2019).
ELCOM CORPORATION
2020 2019 +/- %
Trade receivables 536,334,523,529 656,545,391,000 -120,210,867,471 -18%
Net revenue 785,939,778,481 822,685,709,689 -36,745,931,208 -4%
Inventory 185,174,943,486 172,896,139,665 12,278,803,821 7%
COGS 657,156,175,908 720,446,916,556 -63,290,740,648 -9%
Trade payable 283,380,354,252 437,358,148,920 -153,977,794,668 -35%
Trade receivable turnover in
days
249 291
Inventory turnover in days 103 88
Trade payable turnover in days 157 222
From the result of operational ratio, it can be seen easily that both trade receivables and trade
payable turnover in days in 2020 decreased in comparison with the previous year. On the other
hand, the inventory turnover in days was higher than the ratio of 2019.
Firstly, trade receivables turnover in days reduced from 291 days in 2019 to 249 days in 2020. It
is a good sign that the company can change the credit from customers to cash faster, which
represents the efficiency of the company. In fact, ELC has received lots of trade receivables from
the customers like: Bac Ninh Information Technology and Communication Transaction Center
(63,400,000,000VND) and QT Global High-Tech Engineering Co., Ltd (16,200,000,000VND)
(Note 5). Moreover, the net revenue of the company in 2020 also decreased 4% compared to
2019.
Secondly, inventory turnover in days rose from 88 days in 2019 to 103 days in 2020. It means
that a number of products that the company manufactured are not consumed in the market
because the expense for finished goods increased 632% compared to 2019 (Note 10).
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Moreover, the cost of goods sold in 2020 also reduced 9% in comparison with 2019. It is clear
that both cost of goods sold and cost of selling software products decreased significantly, 10%
and 94% respectively.
Lastly, trade payable turnover in days of ELC reduced 65 days in comparison with the previous
year. It indicates that the company had good finance to deal with the debt. To specify, the trade
payable of ELC decreased 35% compared to 2019. ELC paid for the short-term payable to the
suppliers such as: Comverse Network Ltd. (274,664,056,448VND), PPH Applied Science Joint
Stock Company (43,440,580,000VND), ... (Note 17).
When comparing with the FPT, every element of ELC was higher than the elements of FPT. In
detail, the trade receivables turnover in days of ELC was 181 days higher than FPT. It means that
the ability to collect receivables from customers of ELC still remain at a high level even though
it had a decrease with the previous period. Receivables of some Projects/Contracts still
outstanding for a long time, showing signs of being difficult to recover, some capital contribution
investments have not been effective (ELC, 2020). Besides, the inventory turnover in days of
ELC was also 77 days higher than that of FPT. It showed the weak sales and excess inventories,
which may be challenging for a business. Lastly, the trade payable turnover in days of ELC was
almost 100 days higher than that of FPT. It means that the company has low level of short-term
liquidity and needs more time to pay recently. However, Elcom believes that the risk
concentration for debt repayment is controllable. The Company's ability to pay its debts as they
come due from cash flows from operating activities and proceeds from maturing financial assets
(Elcom, 2020).
2.5. Investor ratio
Earning per share ratio (EPS) Price per earnings ratio (PE)
Formula EPS = Earning
No of ordinary shares PE = Current market price per share
EPS
Meaning EPS is a widely used indicator
for measuring corporate value
because it indicates how much
money a firm makes for each
It relates the price of a company's stock
to its earnings per share, which leads to
the decision making of the investors to
purchase the shares of the company
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