Financial analysis – FRT:

Outline:
1. Firm’s Value
1.1. Market capitalization vs book value vs M/B ratio vs enterprise value
1.2. Eps vs p/e
2. Firm’s Leverage: Debt – equity ratio
3. Firm’s Liquidity: Current and quick ratio (acid test ratio)
4. Firm’s asset efficiency: Asset turnover vs fixed asset turnover
5. Firm’s working capital: AR turnover vs Inventory turnover
1. Firm’s profitability: Gross/ Operating/ Net profit margin ROA ROE
4.1. FPT Retail (Ticker symbol: FRT):
1.Firm’s Value
1.1. Market capitalization vs book value vs M/B ratio vs enterprise value:

FRT’s overall value (2018 - 2020)

In 2020, FRT's market capitalization increases about 52% compared to 2019 but only
equals half of that in 2018, which is clearly a dramatic decrease. But is the value of the
business itself, which is the underlying business assets, unencumbered by debt and
separate from any cash, in the same situation? The answer lies right in the chart above.
Looking at the enterprise value, the enterprise value did decrease about 25% from 2018
to 2020, however, overall, the enterprise value remains much higher than the market
capitalization and book value over 2018 and 2020. More specifically, compared with the
market capitalization and book value of equity, the 2020 enterprise value is as 1.6 times
and up to 8 times as the former and the latter, respectively. Accordingly, the market – to –
book ratio noticeably drops from 4.22 (2018) to 1.30 (2019), yet in 2020, it did rise
approximately 60% compared to 2019.
1.2. Eps vs p/e

FRT’s P/E ratios (2018 – 2020)

FRT’s net income (2018 – 2020) FRT’s non-manufacturing expenses (2018 -2020)

A glance at the first chart reveals that the price – to – book ratio (P/E ratio)
experiences a rocket rise from 8.16 in 2019 to 247.38 in 2020, which is such a
dramatic increase, i.e., 30 times. This means that investors have to pay 247 dollars for
only 1 dollar in the company’s profit. This is much higher that P/E ratio of the retail
industry, which is 25.14. It can be easily seen that the reason leading to this jump is
the collapse of net income from 203,847,491,755 VND to only 10,216,730,526, which
is up to 20 times decline. Besides, the number of outstanding shares does not change
(78,981,792 shares), so the plummeting net income causes the P/E ratio to increase
like that. The representative of FRT’s management said that the main reason for such
 a decline in net income is selling and administrative expenses increased sharply
because chains of Long Chau pharmacy is in the process of expanding investment.
2. Firm’s leverage:

FRT’s debt – equity ratios (2018 – 2020)

As we can see from the line chart of FRT’s debt – to – equity ratio, there was a slight
increase from 3.46 (2018) to 3.40 (2019) and mildly decrease to 3.40 in 2020. All in all, it
is obvious that this ratio has not changed much over these three years, varying around the
mean of 3.67, which is nearly as 4 times as the average of the retail industry, i.e., 0.95.
This observation reveals that FRT has relied on debt as a source of financing for activities
rather than using stockholder’s equity. Also, investors will take more risk than most of
other retail firms, but it is likely that they will gain more thanks to the higher leverage.
3. Firm’s Liquidity

FRT’s inventory and current assets (2018 – 2020)

 FRT’s liquidity ratios (2018 – 2020)
From 2018 to 2019, it is easy to see that FRT's current ratios did not change much, varies
at 1.2, 1.16, 1.19, respectively or around the mean of 1.18, which is just equal to 0.3 of
the average ratio of the retail industry. Although FRT’s current ratios show that it is able
to cover short – term debts, they are not too different from 1 and lower than other retail
firms. Besides, looking at quick ratios, these 3 years' ratios are all less than 1, also, the
great difference between current ratios and quick ratios prove one more point that
inventory occupies a large portion of current assets. It can be easily seen from the
Inventory – Current assets line chart, inventory occupies more than 50% of the total of
current assets. It seems that FRT may have some difficulty in selling its inventory, and
creates worrisome for creditors. In 2019, the amount of inventory is highest, which
increased 35% compared to 2018, yet, inventory considerably declines in 2020, which
equals to 45%. Accordingly, quick ratio improved slightly. Overall, these ratios seem not
attractive to creditors because it implies higher risk of the firm experiencing a cash
shortfall in the near future.
4. Firm’s asset efficiency:

FRT’s asset efficiency ratios (2018 – 2020)

Investors can use the asset efficiency ratios as a metric to gauge how efficiently the firm
is utilizing the firm’s asset. Those ratios are asset turnover and fixed asset turnover. It is
crystal clear that asset turnover of FRT does not vary noticeably. From 2.96 in 2018, it
slightly declined to 2.52 in 2019 and go up to 2.72 in 2020, which is around the mean of
2.73. This shows us that each dollar of assets invested will generate about 2.73 dollars of
sales, which is not so attractive. On the contrary, looking at the fixed asset turn over, this
has remained at the level of above 300, which is extremely high. It means that one dollar
invested in fixed assets will generate up to 300 dollars of sales. Overall, we can see that
FRT is doing quite well in leveraging assets.
5. Firm’s working capital:

FRT’s working capital ratios (2018 – 2020)

After observing the bar chart of working capital ratios, we can see that the mean of
accounts receivable turnover is 11.3 or we can understand that the average period of
time from selling to receiving money is about 32 days over 2018 - 2019. Besides, the
mean of inventory turnover over these three years is 5.5, which indicates that the
number of turnovers of inventory is about 5.5 times per year, in other words,
inventory is stored in the warehouse approximately 2 months before it is sold. It is
easily seen from the chart that in 2020, accounts receivable turnover decreases 30%
compared to 2019 (it took FRT 40 days in average to collect money from clients),
implying that this year FRT may have done a worse job of controlling account
receivable or it may try to boost sales by offering generous credit terms. On the other
 hand, inventory turnover in 2020 is the highest among the three years with up to 7
turnovers a year, 1.6 times as higher than in 2019.
6. Firm’s profitability:

FRT’s gross margin, operating margin, net profit margin (2018 – 2020)
From the line chart above, it is explicitly observed that gross margin of FRT has been
quite stable over 2018-2020, which is around 13.32% and it does increase from 12.96%
to 13.92% in 2020, the highest in 3 years. Yet, this gross margin is still lower than that of
the retail industry in general (14.60%). In terms of operating margin and net profit
margin, it is easily seen that the two lines representing these ratios are nearly aligned with
each other, which implies that there is hardly a difference between net income and
operating income. Furthermore, we can easily see that these margins gradually decrease
from 2018 to 2020 when these two ratios are nearly 0%, which means that the net profit
the firm can earn is nearly 0, and FRT is about to have loss. Yet, when compared to the
average margins of other firms in the retail industry which are all negative numbers, the
FRT’s situation turns out much better.
 FRT’s ROE and ROA (2018 -2020)
It could be plainly viewed that there is a downward trend in return on equity (ROE) and
return on asset (ROA) of FRT. Additionally, return on equity has experienced a
significant decline, in 2019, it decreased 50% compared to 2018 and in 2020 up to
closely 95% compared to 2019 with only 0.83%, meaning that FRT can earn only 0.83%
on its past investment, which is totally a disappointment. Looking at return on assets or
ROA of FRT, in 2019, it decreases 54% compared to 2018 and in 2020 it is only 0.19%
that decreases up to 94% compared to 2019. This indicates that owners can only earn
0.19 cent on 1 dollar of total assets in general including both debt and equity. Overall, it
is apparent that FRT’s profitability is quite bad in 2020.
ASSESSMENT AND RECOMMENDATION:
After carrying out the above financial analysis of FRT, we are able to give some
assessment and recommendation for the company. First, in terms of the firm’s value, we
can see that FRT’s stock is growth stock, yet this ratio is not large enough, and also
decreases considerably, to be an attractive investment choice. In addition, market
capitalization has gone down a lot, which could be the result of investors’ dwindling
belief on the firm’s valuable assets that are not captured on the balance sheet, for
instance, the expertise of employees, the firm’s
reputation in the marketplace, the relationships with customers and suppliers, the value of
future research and development innovations, and the quality of the management team.
Besides, P/E ratio experiences such an unexplained increase could be due to the very low
net income in a short term, not because of the investors’ high expectation. Second, we
can clearly find out that the biggest problem of FRT in this year is net income is too low,
which declines up to 20 times as much as that of 2019. Consequently, return on equity
and return on assets is terribly disappointing (nearly 0%), when compared to the direct
competitor with 25% and 9%. We believe this is mostly the main reason of such low
profitability ratios because there is scarcely change in sales stockholders’ equity and total
assets. In addition, the reason for such low net income is non – manufacturing expenses
are so large, which is the result of intensive investment in developing the chain of Long
Chau pharmacy.
Here are some our recommendations for FRT’s circumstances, especially to improve net
income:
It is the fact that Long Chau pharmacy chain is a great potential source of revenue,
especially since Covid 19, this market is believed to be one of the most profitable. As a
result, there are some strong competitors like Pharmacity, An Khang,… Therefore, we
think that the company should propose some strategy to develop competitive advantages
and value proposition in customers’ mind.
It is obvious that FRT is spending a lot of money on sales expenses. Hence, we highly
recommend the company should look inside its body of operation, particularly its SOP,
analyzing each stage to find out steps that can be eliminated or whether some processes
are done at the same time. Moreover, this is the era of digital transformation and
ecommerce, so it is crystal clear that the company should apply IT infrastructures with a
view to optimizing its operations, which may be costly at first but we believe that FRT
would save further more money. Also, applying more technology will certainly help the
company reduce a number of unnecessary employees, which boils down to a decline in
expenses. Additionally, since Covid 19, ecommerce has developed dramatically, so it
would be a great idea if FRT focused on developing online channels to reach out to more
customers. We believe that with its parent company, FPT, a company specializing in
technology and software, FRT is totally able to do these recommendations easily and
conveniently.
All in all, with its great prestige being a subsidiary company of FPT group, it is believed
that FRT is preparing a detailed strategy to improve its current financial situation and
keep up with MWG in the near future.