For every VND100 that businesses have, they borrow VND65: FiinGroup

20 February 2020 - 05:29 PM Alternate Text


FiinGroup’s president Nguyen Quang Thuan said the ratio is calculated based on more than 1,000 listed enterprises.

Controversy has been raised among economists these days about the conclusion of a group of experts that the GDP generated every year is not big enough to pay loan interests.

The group of experts reported that the total outstanding loans of non-financial enterprises had reached VND13,800 trillion and their total capital VND22,000 trillion.

FiinGroup’s president and CEO Nguyen Quang Thuan disagrees with the viewpoint.

FiinGroup’s data from 1,019 enterprises listing shares on three bourses shows that the Debt/Equity (DE) ratio of Vietnam’s public companies is at 0.65. This means that for every VND100 worth of capital they have, they would borrow VND65.

This level of financial leverage, in theory, is safe, because it is lower than 1x. However, it is still necessary to consider other factors as well, including the typical characteristics of industries.

For example, the ratio of the real estate sector is on the decline and staying at 0.57 at the end of Q3 2019 (the figure was calculated based on 110 real estate firms).

This is because real estate developers have reduced loan use while their clients borrow to buy houses under the cooperation programs between real estate developers and banks.

The outstanding loans provided to house buyers have increased rapidly in the last five years, accounting for 13.14 percent of total outstanding loans. Meanwhile, the loans provided to real estate firms just account for 6.1 percent.

So, when assessing the risk of the real estate sector, they not only consider the risk for real estate firms, but also the hundreds of thousand of clients who borrow to buy houses.

Regarding the Interest Cover index, FiinGroup’s data shows that it was 3.5x in 2018. This means that for every VND3.5 dong enterprises could create, VND1 was used to pay loan interest. This is relatively safe.

However, the index will decrease slightly in 2019 because there are signs of decrease in EBIT (Earnings Before Interest and Taxes) and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)

It is unreasonable to calculate the cost in loan interest based on the total liabilities, because the total liabilities comprise items which don’t mean ‘borrow’ by nature and enterprises don’t have to pay debts.

If non-financial enterprises had stockholder equity of VND8,500 trillion in 2017 as reported by the group of experts, with the D/E at 0.65 as above, the debt would be VND5,500 trillion, not VND13,800 trillion.

The D/E of 0.65 is calculated for public companies. Meanwhile, the unlisted companies are believed to have a lower financial leverage level.