Research On Financial Risk Of Evergrande Group Under Diversification Strategy

An enterprise will make expanding its business scope an imperative after it has reached a certain scale and to implement diversification strategies becomes one of the key means to achieve this.However,diversification indicates that the enterprise must possess more capital and resources to support its participation in other fields,which may result in problems such as internal financial resources strain and thus bring pressure and risks to the company’s financial status in the long run.Therefore,it is important to explore the effect of diversification strategy on the financial risks of the enterprise in depth under the multi-strategic circumstances.Evergrande Group,as one of the leading real estate companies in China,is actively implementing the diversification strategy.On the one hand,it focuses on the real estate industry while on the other hand it is involved in such industries as finance,food,sports,and technology.This thesis takes Evergrande Group as a case and thoroughly examines its financial risk situation in the context of its diversification strategy.The thesis first presents the theoretical basis of diversification strategy and then discusses the relation between diversification strategy and financial risk as well as the effect of the former on the latter on the basis of an exploration into the motivation of the diversification strategy.It then takes Evergrande Group’s diversification strategy operation as an example and constructs Evergrande Group’s financial risk identification mechanism from the perspective of financing risk,investment risk,and operational risk.The thesis finally expounds on the causes of financial risks under the diversification strategy of Evergrande Group based on the identification results and puts forward relevant enlightening suggestions accordingly.The findings of the study are as follows: Firstly,the analysis of the money raising risks indicates a serious imbalance of the company’s debt structure and an aggravation of its financial risks,resulting from the continuously expanding sum of loan and borrowing as well as the unreasonable period allocation between the long-term and short-term borrowing after the company’s implementation of the diversification strategy policy.Secondly,the analysis of investment risks shows a rising investment risk,judging from the radical decreases in the three indicators,namely ROA(Return on Assets),ROE(Rate of Return on Common Stockholder’s Equity)and NOG(Net Operating Gains)in the past ten years.Thirdly,the analysis of the operation risks suggests the growing pressure on the company’s financial chain and a possible financial collapse based on the "high outflow and low inflow" cash flow and an over 60% inventory rate.Given the increased financial risk caused by Evergrande Group’s diversification strategy,this study gains the following insights: First,the scope of Evergrande Group’s diversification strategy should be limited to prevent the financial risk caused by blind expansion.Second,the ROI(Return on Investment)should be increased by means of improving the company’s NOG and strengthening the control of related costs.Third,the probability of a financial collapse should be reduced by strengthening the company’s management of operating capacity and optimizing its cash flow structure.Fourth,formulate industrial and talent plans to avoid huge losses caused by diversification strategies.