A new study has uncovered worrying trends on the ­operation of Vietnamese businesses over the past four years.

According to PwC Vietnam’s assessment findings, local companies are lagging behind most regional and global peers. Flat margins and returns on capital employed, and deteriorating working capital performance in the wake of a lengthening cash-to-cash cycle were highlighted in the study.

Titled “Cash for growth or growth for cash?”, the assessment features analysis of the past four years of the largest 400 companies by revenue, across 14 sectors listed on both the Ho Chi Minh City Stock Exchange (HSX) and the Hanoi Stock Exchange (HNX).

Top companies have been growing in line with economic growth, at 6.1 per cent per annum for the fiscal year between 2013-2017, thanks to a conducive monetary policy and high foreign direct investment flows.

However, margin growth has been flat for the same period due to expenses outgrowing revenues.

Moreover, there was a deterioration in return on capital employed (ROCE) of companies, whilst the financial leverage has increased, with more borrowing to fund capital expenditure.

The cash-to-cash cycle (C2C) - the average number of days a company takes to convert resource inputs into cash flows - has increased by six days over the past four years as a result of more working capital used to generate revenue, which was financed through borrowing rather than internal cash release from operational improvements.

Meanwhile, there has been a wide variance in financial performance between top and bottom working capital performers, for which companies who managed their working capital more efficiently exhibited the best financial metrics.

Inefficiency of companies in managing receivables and inventory was the reason behind the variance, despite efforts from companies to delay payments towards suppliers to maintain liquidity.

In addition, 15 out of the 400 companies studied were able to shorten their C2C, while improving their financial performance for the same period.

What’s more, Vietnamese companies are lagging behind in terms of working capital management. According to the study, the figure is 20-40 days behind, compared to mature Western markets like the US and Europe, and by 15 days compared to other Asian peers. The lag is caused primarily by the engineering and construction, healthcare and pharma and consumer product sectors.

“Inefficient supply chains, the changing landscape of trade, and sub-optimal usage of financing solutions are the biggest reasons why Vietnamese businesses lag behind their regional and global peers in working capital performance,” said Mohammad Mudasser, practice lead of Working Capital Management at PwC Vietnam.

In light of the report, six out of 14 sectors have improved their working capital performance over the last four years. The industries with the greatest improvements were energy and utilities, oil and gas, and retail (at 15 per cent per annum) while a significant deterioration in working capital performance was observed in technology, consumer products and the metal and mining sectors (at 10 per cent per annum).

The study also found that $10 billion in cash was still trapped in net working capital. There is, however, the potential to release up to 40 per cent of the total (or $4 billion) if the organisations featured in the assessment were to optimise their working capital performance to the top quartile level within the sector.

VIR