The stories of business with debt burden

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Debt being many times higher than equity is an alarming situation for businesses. Photo: ST.

Thai Nguyen Iron and Steel Joint Stock Company (Tisco) has announced its second quarter consolidated financial statements with revenue down 5.7 percent compared to the same period last year, remaining VND 5,486 billion; earnings after tax also decreased from more than 41.8 billion dong in the same period in 2018 to some 37.3 billion dong. The most notable thing in this enterprise is the high level of financial imbalance, especially the total debt compared to the owners' equity. As of June 30, total debt of Tisco is over 8,313 billion dong, four times higher than the owner capital of over 1,896 billion dong. In particular, debt (short and long-term) is VND 5,268.5 billion.

Previously, talking about financial difficulties of enterprises, Tisco's Board of Directors 'report at the shareholders' meeting in early April said that at the end of April 2017, SCIC withdrew 1,000 billion dong with banks simultaneously raised interest rates to 8 percent, making Tiscomeet difficult in balancing cash flow and high financial costs. By the beginning of 2019, Tisco's financial situation was in a difficult situation and businesses were expecting a rescue from competent authorities and banks.

Another enterprise that has a large debt is Truong Thanh Wood Industry Corporation. Currently, this enterprise has not announced the second quarter financial report yet, but the financial report of the first quarter of 2019 shows this enterprise has total liabilities of over 2,625 billion dong, the difference is too "terrible" compared to the figure more than VND 19.6 billion of equity capital. In the total debt of this enterprise, the debt of short-term payment of buyers has reached more than VND 1,329 billion, short-term and long-term liabilities amounted to nearly VND 500 billion.

Similarly, at Hoa Sen Group Joint Stock Company, the financial statements of this enterprise recorded a sharp increase in total liabilities. Currently, the total liabilities of this enterprise have increased from VND 5,592 billion in the first quarter of 2016 to more than VND 13,139 billion in the second quarter of 2019, while the owner's equity only increased from VND 3,213 billion to VND 5,152 billion. Thus, the debt level of this enterprise is more than three times the equity capital.

In addition, among enterprises with high debts, real estate enterprises account for a significant number. Although the State Bank has required credit institutions to tighten real estate loans, debt is still very high. According to statistics, by the end of the first quarter of 2019, total liabilities of 10 real estate companies also increased sharply to more than 317,563 billion dong, although in the past few years, the consumption market was difficult, with inventory increased and credit tightened. Typically, Novaland's liabilities are over 48,910 billion dong, while owner's equity is 20,749 billion dong, "creditors" of this enterprise are mainly VietinBank, VPBank, Sacombank and Vietcombank.

Most of the enterprises mentioned above are facing with difficulties in business and there are many short-term debts that businesses have not been able to pay from year to year. Experts say this is a situation of "thin" capital, a "double-edged sword" with businesses. On the one hand, businesses have more money to expand the scale, expand production and business activities. If they do well, they can bring business efficiency as expected. On the other hand, there is a risk of not being able to pay debts, turning into bad debts, even leading to bankruptcy, especially those with outstanding loans many times higher than capital.

Therefore, some enterprises have too high debt balance, no longer can get bank loans and have to operate moderately or according to customers' methods, then use this money to buy raw materials and operate a factory. In addition, some businesses have been forced to narrow their operations, or stop expansion to focus on sales, restructuring financial resources. Typically, Hoa Sen Group, after a period of "aggressively" expanding its branch, now has to restructure its business model and optimise the distribution system. As a result, the amount of debt of this enterprise is still high, but it has decreased from VND 16,053 billion since the end of 2018.

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It can be seen that enterprises using financial leverage must be careful to avoid falling into debt traps. Experts assess businesses should limit the rate of loans and owners at a certain level, about 60/40 or 40/60. In addition for enterprise awareness, to ensure the operation of businesses and the economy, the State should also have regulations on "thin capital" suitable to each business sector, to help enterprises comply with regulations and besafe for the economy, especially in borrowing activity with banks.