Big difficulties are attacking Vietnamese businesses from all sides. Meanwhile, they still cannot use the mobilized capital in the most effective way.

Capital use efficiency on the decrease

A recent survey by Vietnam Report showed that the ROE (return on equity) of the 500 Vietnamese biggest companies (VNR500), tends to decrease gradually in the last three years. The decrease in the capital use efficiency has been most serious in telecom and waterway transport enterprises, with the decrease of 50 percent in the 2010’s ranking from the 2009’s ranking.

Especially, though the capital use efficiency has been decreasing in recent years, Vietnam’s big enterprises have still been trying to increase their chartered capital and expand business scale instead of paying attention to increasing the capital use efficiency.

Over 60 percent of enterprises polled by Vietnam Report said, the difficulty in mobilizing capital is one of the three biggest problems of enterprises in 2011 and 2012. Meanwhile, only 30 percent of enterprises think that the lack of profitable investment projects would be the big difficulty for them in the next two years.

Not only big enterprises on the VNR500 list and fastest growing enterprises on the FAST500 list cannot use capital effectively, small and medium enterprises are also facing the same problems.

According to the 2010 annual report about small and medium enterprises, released by the Vietnam Chamber of Commerce VCCI, the capital use capability of enterprises in the eight surveyed fields (telecom, insurance, electricity production and distribution, waterway transport, mechanical production, garment, rubber-plastics production and construction) all has been decreasing. Especially, the sharpest decreases have been seen in the telecom and electricity production and distribution sectors.

Businesses lacking capital structuring strategy

An inborn defect of Vietnamese enterprises, especially small and medium enterprises, is that only when enterprises need to make investment, will they think of borrowing capital or issuing shares to mobilize capital. Enterprises do not set up long term capital mobilization and use plan in order to use capital in the most effective way. Therefore, Vietnamese enterprises miss many opportunities, while the lack of long term capital use strategy badly affects the safety of the capital structure.

Experts have also pointed out that Vietnamese enterprises have been much relying on borrowed capital. They cannot control the proceeds because they run after the revenue target and use short term capital for long term investment, which leads to the capital imbalance.

Meanwhile, many enterprises have only been relying on their own capital, while they do not want to use borrowed money and do not try to mobilize capital from different sources. As a result, their production scales remain small because they do not have enough money to expand business. Of course, the businesses are not capable to access big projects, and do not have the opportunities to make breakthroughs to develop.

In recent years, many enterprises, especially the ones that list their shares on the bourses, have been trying to increase capital continuously, even though they do not have feasible projects that need the capital. As a result, while the capital increases, the ROE and EPS (earning per share) has been decreasing, hindering the long term development of enterprises.

The companies which pursue the capital-efficient model always try to restructure items in the balance sheet in order to see all opportunities to make profits from every dong of capital they spend.

On June 10, 2011, the annual Vietnam CFO Summit 2011 will take place at Sheraton Hotel in Hanoi, discussing the solutions to optimize the capital structuring and the capital mobilization efficiency. The conference will be the place where CFO and CEO’s of Vietnamese enterprises and financial experts from leading domestic and international institutions, share experiences and mobilizing and using capital in the new economic circumstances.

The conference will be organized by Vietnam Report and VietNamNet newspaper. Further details of the conference agenda can be found at www.vietnamreport.net.

Minh Duc VEF