The Impacts of Working Capital Management on Enterprise Value: A Typical Study in Listed Enterprises on Ho Chi Minh City Stock Exchange

Transcription

1 The Impacts of Working Capital Management on Enterprise Value: A Typical Study in Listed Enterprises on Ho Chi Minh City Stock Exchange Vu Thi Thuy Van 1, Phan Trong Nghia 2, Do Hong Nhung 3 1,3 School of Banking and Finance, National Economics University, Hanoi, Vietnam 2 Quy Nhon University, Binh Dinh, Vietnam 1 thuyvan1507@gmail.com, 2 phatrongnghia@fbm.edu.vn, 3 nhungdh@gmail.com Abstract Working capital management plays an important role in business operations. An enterprise with proper working capital management will increase its profitability of your business operations, limit the payment risks, and thereby increase the enterprise value. This paper analyzes and evaluates the impacts of working capital management on the value of 198 non-financial companies listed on Vietnam's stock market for the period from 2012 to The results of the study have shown that representative variables of working capital management such as debt to equity (D/E), Account receivables turnover (AR), current ratio (CR), the rate of cash on total assets (CASH) affects the enterprise value. In addition, the controlling variables in the model such as Company size (Ln(Sale)), earnings per share (EPS) also affect the enterprise value of non -financial companies listed on the Vietnam market. The study also provides some important implications for corporate executives in managing working capital to increase the enterprise value. Keywords: Non-financial company, Corporate value, Working capital management 584

2 1. Introduction Working capital management is an important component in financial management, helping businesses avoid the risk of bankruptcy, thereby increasing the enterprise value. Management of working capital and that of profits are correlated to each other. In the context of a volatile business environment, managing working capital requires close and thorough attention. However, working capital management is relatively new to Vietnamese enterprises, therefore, there exists confusion and inefficiency during implementation process as well as studies on the issue being quite small and excursive. In general, a financial manager is required to have the acumen to avoid too many decisions regarding working capital. Any amount of idle funds can be wasted by not utilizing the resources of the company. Correspondingly, a company is deemed to be freely operating, usually by extending credit terms to customers. This will lead to a higher level of debt and higher demand for working capital. So a company that operates with an optimal working capital and minimizes the inevitable and uncertain risks will be able to achieve good returns and maximize shareholder value. The efficiency of working capital management will increase the cash flow of the business, thereby increasing the growth opportunities of enterprises, raising enterprise value and returnings to shareholders. Although traditional companies are focus on long-term capital planning and capital structure, recent trends are that many companies in different sectors are paying attention to efficient working capital management. A number of studies in Vietnam such as Vuong Duc Hoang Quan and Duong Diem Kieu (2016) studing the impacts of working capital management on the profitability of listed firms on the Ho Chi Minh Stock Exchange. The results have shown that the impact levels of working capital management on the profitability of different sectors are various. The research conducted by Nguyen Thi Tuyet Nga and Bui Ngoc Toan (2017) has shown that a non-linear impact exists between working capital management and performance at Vietnamese seafood enterprises. The study by Vo Xuan Vinh (2013) has indicated that working capital management (through variables of cash collection time, inventory time and cash flow) has impacts on the profitability of industrial companies listed on the Ho Chi Minh Stock Exchange. In general, the studies have highlighted the impacts of working capital management on revenues, profitability, and efficiency of enterprises. However, there has not been any studies on the impacts of working capital management on enterprise value in Vietnam. Working capital management is the governance of short-term financial requirements of a company. This includes maintaining optimal balance of working capital components - receivables, inventory and payables combined with efficient utilization of cash for daily operations. There are many factors that build up the working capital, therefore, the management of working capital is also diversified, in which the the liquidity of the business can be first referred to. Highlighted is the study by Dash, M., & Ravipati (2009) that proposed a model for establishment of targets for working capital management. Target planning is needed to model the working capital decisions, as a balance must be reached between conflicting objectives of liquidity and profitability. In addition, studies in the world have also been focusing on how the management of each component of working capital management affects the profitability of the business, thus influencing the enterprise value, including the number of days for an inventory turnover, the number of days for an Account receivables turnover cycle, debt to equity ratio,... Juan García-Teruel, P., & Martinez-Solano, P. (2007) specially recognized the importance of working capital management in small and medium sized companies. Their studies are of great meanings for industrial restaurants since small and medium-sized businesses are more financially 585

3 limited, similar to the average restaurant company. In addition, a low working capital level can degrade the corporate performance. Blinder, A., & Maccini, L. J. (1991). For example, if a company maintains a low inventory level, it will need to buy a small amount regularly, which in turn increases the cost of supply. Thus, the company cannot get the appropriate discount from the suppliers. In such cases, it may also be forced to struggle with achieving high levels of consistency and quality of raw materials. In addition, companies may have difficulties in maintaining sustainable profitability because business has potential of unexpected losses due to product scarcity (Blinder, A., & Maccini, L. J., 1991). Authors Huynh Phuong Dong and Jyh-tay Su (2010) have studied the correlation between cash flow and profitability, which is measured by the percentage of gross operating profit on a sample of 130 listed companies on Vietnam stock market for the period of The authors have found a strong relationship between profitability and the cash flow cycle and suggested that the management board could increase the value of its assets for shareholders by determining the appropriate cash flow cycle and maintaining each component of the cycle at an optimal level. The author Kim Thoa and Uyen Uyen (2014) studied the relations between floating capital management and business profitability in 208 companies listed on the Ho Chi Minh Stock Exchange (HOSE) and Hanoi (HNX) from 2006 to The results drawn from various methods have shown that floating capital management measured by cash flow cycle has negative effects on profitability from business operations of state-owned companies. In addition, to measure Enterprise value, the study uses Enterprise value (EV) measures of Tobin's Q and Maxwell & Kehinde (Maxwell & Kehinde, 2012). Based on the view of (Modigliani & Johnson, 1980), empirical researchers, (Maxwell & Kehinde, 2012) have defined the enterprise value as follows: Enterprise value = Capitalization of Equity + Long-term interest bearing liabilities Meanwhile, Tobin Q measures the relationship between the stock market values with the replacement cost of the company resources. It is considered to be the best forecast for market adjustment and it can also account for the vast majority of investment discrepancies (Cooper and Ejarque, 2003). It can also be applied to the analysis of a corporate financial condition, which means that the first equity investors shall be able to calculate the value of Tobin Q. The high enterprise value shows the Replacement value of a factory and its equipment is low and vice versa. Due to this situation, companies with high Q coefficient are appropriate (Jahani, Zalghadr- Nasab and Soofi, 2013). follows: Tobin s Q indicator, according to the study by (Chung & Pruitt, 1994), is defined as Tobin s Q = = Market capitalization + Preferred stock value + Net debt Book value of total assets 2. Method 2.1. Data for analysis The study has applied data from 198 companies listed on the Ho Chi Minh City Stock Exchange in the period of 2012 to Data are provided by StoxPlus Financial Communications the company specializing in compilation and analysis of financial data in Vietnam. 586

4 Proceedings of 14th International Conference on Humanities and Social Sciences 2018 (IC-HUSO 2018) 22nd-23rd November 2018, Faculty of Humanities and Social Sciences, Khon Kaen University, Thailand 2.2. Researching variables in the model First of all, from the data set collected, the research team has conducted calculation of required indicators for the research paper using Microsoft Excel. Then, data have been processed via Stata statistics software according to the array data model. Next, the authors used the estimation method in developing the regression model in order to choose among three models: Random Effect Model, Fixed effect model, or Pooled OLS method for regression using Stata statistical software. - Dependent variables: Firm Value (FV) is determined as follows: EV = Ln (Market capitalization + long-term interest bearing liabilities - cash and cash equivalents) TobinQ = (Market capitalization + Liabilities) / Total assets - Independent variables: Factor Symbol Current Ratio CR Debt/Equity D/E A c c o u n t AR Receivable period Inventory period INV Cash/ Total Asset CASH F i x e d a s s e t s / FATA Total Assets Logarit of Sales (Ln(Sale)) Research H. Jamal Zubairi (2010); Tu Thi Kim Thoa and Nguyen Thi Uyen Uyen (2014) Deloof (2003); Lazaridis & Tryfonidis (2006); Tu Thi Kim Thoa and Nguyen Thi Uyen Uyen (2014); Dash and Ravipat (2009) Deloof (2003); Lazaridis & Tryfonidis (2006) Deloof (2003); Lazaridis and Tryfonidis (2006); Lazaridis và Tryfonidis (2006), Martínez-Solano và J. García-Teruel (2007), Deloof (2003) Lazaridis và Tryfonidis (2006); Dash and Ravipati(2009); Huynh Phuong Dong and Jyhtay Su (2010) Lazaridis and Tryfonidis (2006); Huynh Phuong Dong and Jyh-tay Su (2010) Source: Summary by the study team - Controlling variables: The study has utilized two controlling variables in the model, including earnings per share (EPS) and growth rate of the total assets (GROWT). Based on the study overview, the team has conducted an analysis to examine the impacts of working capital management on the value of the listed company in Vietnam based on the regression model with the table data as follows: FV = β 0 + β 1 CR + β 2 DE + β 3 AR + β 4 INV + β 5 LnSale + β 6 FATA + β 7 CASH + β 8 EPS + β9 GROWT + et 3. Results 3.1. Descriptive Statistics and Correlation Matrix 587

5 Table 1: Descriptive statistics of variables Variable Mean Std. Dev. Min Max CR DE AR INV LnSale FATA EPS GROWT CASH EV Tobinsq Source: Calculation by the group of authors Table 1 shows that the largest mean of the studied variables was INV, while the lowest was CASH. Basically, the correlation among the variables is relatively low, as shown in Table 2. Table 2: Matrix of correlation coefficient among variables CR DE AR INV LnSale FATA EPS GROWT CASH EV CR DE AR INV LnSale FATA EPS GROWT CASH

6 EV Tobinsq Source: Calculation of the groups of authors 3.2.Selection of suitable models Initially, the authors used the Hausman test to select either the fixed-effects model (FEM) or the random-effects model (REM) for the data set to be studied. ** Models with dependent variable - EV After performing the Hausman test, the result shows that Prob> chi2 = , therefore the RE model is chosen. The testing results are shown in Table 4 as follows: Table 4: Test results in accordance with REM method EV Coef. Std. Err. z P > z [95% Conf. Interval CR DE *** AR *** INV 5.54e e e LnSale *** FATA EPS 4.01e e GROWT CASH *** _cons (*, **, *** represents the significance level corresponding to 10%, 5% and 1% respectively) Source: Calculation by the group of authors The outcome of the study has shown that variables of DE, AR, Ln(Sale) and CASH represents the statistical importance of 1% **Models with dependent variable - Tobinsq After performing the Hausman test, the result shows that Prob> chi2 = , therefore the FE model is chosen. The testing results are shown in Table 5 as follows: 589

7 Table 5: Test results in accordance with FEM method Tobinsq Coef. Std. Err. t P > t CR *** DE AR INV 1.72e e LnSale *** FATA EPS e *** GROWT CASH *** _cons (*, **, *** represents the significance level corresponding to 10%, 5% and 1% respectively) Source: Calculation by the group of authors The outcome of the study has shown that variables of CR, Ln(Sale), EPS and CASH represents the statistical importance of 1% 4. Discussion and Conclusion Table 4 presents the regression results of the relationship between working capital management and the enterprise value represented by the variable EV. The results have shown that the debt to equity ratio (D / E) is negatively correlated with the enterprise value and the variable Account receivables turnover (AR) is positively correlated with the enterprise value. According to the research outcome, if companies have high financial leverage, the effects of working capital management shall reduce the value of the company on the market. On the other hand, in the case that companies have a high Account receivables turnover, the impacts of working capital management will increase the value of the company. In addition, in the model that examines the effects of working capital management on the enterprise value through variable E, corporate size variables (Ln (Sale)) have a positive effect on the enterprise value. This implies that if companies possess large capital and proper working capital management, the value of the company on the market will be increased. In contrast to the corporate size variable, the ratio of cash to the total assets (CASH) is negatively correlated with the enterprise value. This suggests that if companies have a high ratio of cash to the toal assets and poor working capital management, the enterprise value on the market shall be reduced. 590

8 In this study, the authors have examined the effects of working capital management on the enterprise value through two representative variables, which are EV and Tobin's Q. Table 5 shows that the representative variable for working capital management is Current Ratio (CR) has the direct proportion with the enterprise value. This shows that companies with proper current ratio shall increase the value of the company and vice versa. In both models, the size of the company (Ln(Sale)) and the ratio of cash over the total assets (CASH) impose the same impact on the value of the company. However, in Model 2, the variable earnings per share (EPS) has a positive impact on the value of the company. This has shown that proper management of working capital together with a high proportion of earnings per share shall help increase the value of the company on the market. Conclusion Thanks to the regression method for table data of non-financial companies listed on the Vietnam stock market for the period of , the authors have discovered the relationship between the representative variables for working capital management and those for enterprise value. Thus, corporate executives are aware of an additional factor that affects the value of the enterprise and through working capital management to increase the value of the company on the market. The outcome of the study shall suggest some implications for managers in working capital management in particular and corporate governance in general to increase the company value and achieve its business objectives. 5. References Blinder, A. S., & Maccini, L. J. (1991). The resurgence of inventory research: what have we learned?. Journal of Economic Surveys, 5(4), Chung, K. H., & Pruitt, S. W. (1994). A simple approximation of Tobin's q. Financial management, Cooper, R., & Ejarque, J. (2003). Financial frictions and investment: requiem in q. Review of Economic Dynamics, 6(4), Dash, M., & Ravipati, R. A Liquidity-Profitability Trade-Off Model for Working Capital Management (May 10, 2009). Available at SSRN Deloof, D. (2003), Does Working Capital Management affect Profitability of Belgian Firms, Journal of Business Finance and Accounting, Vol 30 No 3 & 4 pp Juan García-Teruel, P., & Martinez-Solano, P. (2007). Effects of working capital management on SME profitability. International Journal of managerial finance, 3(2), Huỳnh Phương Đông, Jhy-tay Su (2010), The Relationship between Working capital management and Profitability: A Vietnam case, International Research Journal of Finance and Economics, Issue 49, pg H. Jamal Zubairi (2010), Impact of Working Capital Management and Capital Structure on Profitability of Automobile Firms in Pakistan, Finance and Corporate Governance Conference 2011 Paper 591

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