Profits from savings
The Vietnam Dairy Products Joint Stock Company (Vinamilk) has just announced its third quarter financial result with after tax profit at VND 3,138 bn, up 17.2% year on year. This is the highest profit growth since the first quarter of 2019, especially in the current saturated milk market that allowed Vinamilk profit to increase only by one digit in last many quarters, and even showed negative growth in the fourth quarter of 2019 and the first quarter of 2020. A two-digit growth, however, does not mean that Vinamilk production and business has improved.
For example, by cutting down on advertising and market research the company saved almost VND 560 bn, however, expenses on promotions, displays, and product introduction have soared costs from VND 6,281 bn to VND 9,672 bn, with expenses still increasing by 4% in last nine months. Vinamilk administrative expenses also increased by 33.6% to touch VND 1,222 bn.
A significant contribution to Vinamilk came from income from savings deposits. According to a consolidated financial statement, at the end of the third quarter, Vinamilk had VND 2,336 bn in cash and cash equivalents. However, financial investments, mainly in short term deposits, amounted to VND 17,872 bn, a 44% increase compared to the beginning of the year.
According to previous quarter financial statement, short term deposits of less than twelve months enjoyed interest rate of 7.1% to 8.65% per year, and long term deposits of more than twelve months had interest rate of 7.4% per year. With this high interest rate, the deposit alone helped Vinamilk earn VND 869 bn, bringing profit up by 71% to reach VND 979 bn.
The Vietnam Gas Corporation (PV GAS) always maintains very high bank deposits. As of 30 September, PV GAS total assets reached VND 61,700 bn, in which cash and bank deposits were a total of VND 26,732 bn. In the context of onshore gas output and average oil prices also plummeting, income from banks partly helped PV GAS not to get bogged down.
According to a consolidated financial statement of third quarter, PV GAS revenue decreased by 16%, reaching VND 15,937 bn, and gross profit decreased 33%, reaching VND 2,906 bn. In the first nine months, PV GAS recorded revenue of VND 48,625 bn, down by 16%, and net profit of VND 6,129 bn, down by 31%. Income from bank deposits, although declining compared to the same period last year, was still the main source of income for PV GAS with VND 1,162 bn in the last three quarters.
Revenue from savings deposits also significantly supported the Vietnam Engine and Agricultural Machinery Corporation (VEAM). As of 30 September, VEAM had VND 17,672 bn in cash and bank deposits, an increase of VND 3,000 bn compared to the end of the second quarter. Revenue from financial activities in last nine months reached VND 741 bn, up 18.9% over the same period. Revenue from bank deposits partly helped offset the decline from VEAM's joint ventures. According to one financial statement, profit from joint ventures decreased by 33.5%, leading to decline in profit as well. In the first nine months, VEAM recorded net revenue of VND 2,668 bn, down 20.4%, and profit after tax was at VND 3,853 bn, down 25%.
Cash creates options
In normal times, investors in the stock market seek out businesses with abundant cash on balance sheets. Where investors are concerned, having a lot of cash liquidity is a sure sign that the business is doing very well or flourishing. This sort of liquid cash helps businesses invest further and easily cope against losses during an unfavorable business environment. Cash creates options for businesses to seek more and alternate opportunities even in difficult times. All businesses with extra cash flow are always in the eye of investors in the stock market.
However, the fact that a business is cash rich is not necessarily a good sign, if that capital is not recycled back into production. According to financial experts, businesses should keep only appropriate amounts of cash, enough to pay interest and production or for emergency situations. However, in the current volatile scenario created by the ongoing Covid-19 pandemic, the decision to store in savings seems to be the right step. Although, in the long run, it will cause business losses, in the difference between interest earned in cash deposits and the loss of just holding onto cash and not investing.
When a company invests in a new project or expands production, it is capable of generating a return on equity of 20%. As demand deposit interest rates are usually very low, cash should not be retained at the company, but distributed to shareholders in the form of dividends or fund-shares to increase liquidity and the value of shares. In the future, if businesses find new investment opportunities, they can sell these fund shares or issue shares to raise the necessary capital.
In fact, large amounts of cash can also give rise to negative actions. In VEAM's case, its management misused its huge cash reserves and caused much loss in return. In early March, the Police Investigation Agency in the Ministry of Public Security prosecuted Mr. Vu Quang Tam, Deputy General Director and member of Board of Directors of VEAM for misuse of funds. Earlier, Mr. Lam Chi Quang, Chairman of Board of Directors from 2004 until 2011, and Mr. Tran Ngoc Ha, Chairman of Board of Directors from 2011until 2014, were both found to be reckless in the distribution of funds, such as by issuing low interest loans to member companies that were losing money, and allowing for long standing debts.