Financial Ratios Analysis Interpretation Homework Sample
Go to the websites of Samsung and Sony (they can also be found searching in Google) and download the latest annual report (2016).
Using the information provided in their Balance sheets and Income statements to answer the following questions:
1. What do profitability ratios measure? Calculate the (i) Return on assets and (ii) Return on equity ratios for both companies
2. What do liquidity ratios measure? Calculate the (i) Current asset ratio and (ii) quick or acid test ratio for companies.
3. What do debt ratios measure? Calculate (i) debt ratio and (ii) Debt-to-equity ratio for both companies.
4. Compare various ratios of both companies and recommend which company is good company for buying shares (investing money into)?
5. Comment whether these two companies are performing better or poorly compared to industry.
ANSWER
Samsung Electronics Co. Ltd
Samsung Electronics Co. Ltd was founded in Suwon; Korea in 1969. It has been named as the number one consumer electronics brand in the world. It is acknowledged leader in the digital Convergence revolution.
With worldwide electronic product sales of $US36.9 billion, over 75,000 employees and a global network in 47 countries. The company’s offerings include home appliances such as TVs, monitors, refrigerators, and washing machines as well as key mobile telecommunications products like smartphones and tablets. Samsung also continues to be a trusted provider of key electronic components like DRAM and non-memory semiconductors.
Vision
The underlying principle that defines its vision for the future of Samsung Electronics is "Inspire the World, Create the Future".
Major products
- CDMA mobile phones
- LCD and CRT monitors
- DRAM memory chips
- microwave ovens
- washing machines
- smart phones and tablets
Sony
Sony Corporation is a Japanese multinational conglomerate corporation headquartered in Minato, Tokyo.
Its diversified business includes consumer and professional electronics, gaming, entertainment, and financial services. The company is one of the leading manufacturers of electronic products for the consumer and professional markets. Sony was ranked 113th on the 2016 list of Fortune Global 500.
DESCRIPTION OF SONY
The founder of Sony is 2 Japanese man which are Masaru Ibuka and Akio Morita on 7th May 1946. However, they complement each other and invent the unique product which achieves the people needs. The Sony company is formed and eventually grow into a more than $60 billion global organization.
MAJOR PRODUCTS
- Televisions
- LCD televisions
- Digital imaging
- Video cameras, digital still cameras, etc.
- Blu-ray Disc players, DVD
- players, home audio, car audio, etc.
- PCs and other networked products
- Electronic components
CORPORATE MISSION
Sony's corporate mission is to be “a company that provides customers with kando – to move them emotionally – and inspires and fulfils their curiosity.” The concept of KANDO, which CEO Kazuo Hirai defines as “emotional involvement” or the “power to stimulate emotional response.”
ANALYSIS OF FINANCIAL STATEMENTS
Financial statements are the reports prepared by a company's management to present the financial performance and position at a point in time. There are basically three types of financial statements which can be stated as follows:
- A balance sheet/statement of financial position, states company's assets, liabilities, and owners’ equity at a given point in time.
- An income statement/statement of comprehensive income, statement of revenue & expense, P&L or profit and loss report, states company’s income, expenses, and profits over a period of time. A Statement of changes in equity or equity statement, reports on the changes in equity of the company during the stated period.
- A cash flow statement states company's cash flow activities, majorly its operating, investing and financing activities.
TYPES OF RATIOS AND ITS CALCULATION
1. Profitability ratios are a set of tools used to determine the ability of a business to create earnings. These ratios are favourable when they improve over a trend line or are comparatively better than the results of competitors. These are derived from a comparison of revenues to different groupings of expenses within the income statement. The main ratios are as follows:
- Contribution margin ratio: - This is used to determine the proportion of sales still available after all variable costs to pay for fixed costs and generate a profit.
Formula: variable expenses *100/Sales - Gross profit ratio: - This is used to determine the proportion of sales still available after goods and services have been sold to pay for selling and administrative costs and generate a profit.
Formula: cost of goods sold – expenses *100/sales - Net profit ratio: This is used to determine the net amount of earnings generated in a reporting period, net of income taxes.
Formula: net profits/sales - Return on assets is an indicator of how profitable a company is relative to its average total assets
Formula: net profits/average total assets - Return on equity. The ROE is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company.
Formula: net profits/total equity
ANALYSIS (values are in US Dollars $)
1. Return on assets.
Formula: net profits/average total assets
Samsung Electronics Co. Ltd
Net Profits= $ 21311230000
average total assets = $(226044667000+208805303000)/2
= $217424985000
Hence
$21311230000 = $.0980
$217424985000
Sony
Net Profits = $651053304
Average total assets = ¥ (17660556000000+16673390000000)/2
= ¥17166973000000
= $152500572939
Hence
$651053304/$152500572939 = $.00426
Interpretation
From the above analyses, it can be stated that return on assets ratio of Samsung ltd is $.0980 which is higher than the Sony i.e. $.00426. Hence, Samsung ltd is a more profitable company in comparison to its peer.
2. Return on equity.
Formula: net profits/Total equity
Samsung Electronics Co. Ltd
Net Profits = $21311230000
Total equity = $166371229000
Hence
$21311230000/$ 166371229000 = $.1280
Sony
Net Profits = $651053304
Total equity = $27860293849 (¥3135422)
Hence
$651053304/$27860293849 = $.0233
Interpretation
From the above analyses, it can be stated that return on equity ratio of Samsung ltd is $.1280 which is higher than the Sony i.e. $.0233. Hence, Samsung ltd is able to generate more profits from its shareholders investments in the company in comparison to its peer.
2. Liquidity ratios
Liquidity ratios basically analyse the ability of a company to pay off both its current liabilities as they become due as well as their long-term liabilities as they become current. Thus, these ratios show the cash levels of a company and the ability to turn other assets into cash to pay off liabilities and other current obligations.
Current asset ratio.
The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its short-term liabilities with its current assets. It is called “current” because, unlike some other liquidity ratios, it incorporates all current assets and liabilities.
The current ratio is also known as the working capital ratio.
Analysis
Samsung Electronics Co. Ltd
Current assets = $ 121939593000
Current liabilities = $47165446000
Hence
$121939593000/$47165446000 = $2.5853
Sony
Current assets = $38703464746
Current liabilities = $46398597363 (¥5221739000000)
Hence
$38703464746/$46398597363 = $.8341
Interpretation
From the above analyses, it can be stated that current asset ratio of Samsung ltd is $2.5853 which is higher than the Sony i.e. $.8341. Hence, Samsung ltd ability to pay off its short-term liabilities with its current assets is quite higher in comparison to its peer. However, the ideal current ratio is between (1-1.5), thus Samsung maintains more liquidity then required.
Quick acid test ratio.
The acid-test ratio is an indicator of whether a firm has sufficient short-term assets to cover its immediate liabilities.
It is calculated by:
Quick ratio = (current assets – inventories – prepaid expenses)/current liabilities
Or
= (cash and equivalents + marketable securities + accounts receivable) / current liabilities
Samsung Electronics Co. Ltd
Quick assets = $ 121939593000- $15824248000-$3019469000 = $103095876000
Where Current assets = $ 121939593000
Stock = $15824248000
Prepaid expenses = $3019469000
Current liabilities = $47165446000
Hence
$103095876000/$47165446000 = $2.18583
Sony
Quick assets = ¥4355722000000 - ¥640835000000 - ¥525861000000
= ¥3189026000000
= $28336600767
Where Current assets = ¥4355722000000
Stock = ¥640835000000
Prepaid expenses = ¥525861000000
Current liabilities = $46398597363 (¥5221739000000)
Hence
$28336600767/$46398597363 = $.6107
Interpretation
From the above analyses, it can be stated that quick asset ratio of Samsung ltd is $2.185 which is higher than the Sony i.e. $.6107. Hence, Samsung ltd has more than sufficient short-term assets to cover its immediate liabilities in comparison to its peer. However, the ideal current ratio is between (1:1), thus Samsung maintains more liquidity then required. Sony has a lower than ideal ratio and the current ratio below even 1 means that the company does not have sufficient current assets to pay off its current liabilities. It has a negative working capital.
Also, high current ratio of Samsung means that it has a higher amount tied up in current assets than ideally required. The higher investment in current assets is a trade-off against high profitability.
3. Debt Ratios
Debt equity ratio
Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage. The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity. This form of D/E may often be referred to as risk or gearing.
The formula for calculating D/E ratios:
Debt / Equity Ratio = Total debt / Total equity
Samsung Electronics Co. Ltd
Total debt = $50774000
Total equity = $166371229000
Hence
$50774000/$166371229000 = $.0030
Sony
Total debt = $ 6055239635 (¥681462000000)
Total equity = $27860293849 (¥3135422000000)
Hence $ 6055239635/$27860293849 = $0.2173
Interpretation
From the above analyses, it can be stated that debt equity ratio of Samsung ltd is $0.0030 which is lower than the Sony i.e. $0.2173. Hence, Sony’s debt content is quite higher in comparison to its peer.
Hence company has higher financial leverage compared to Samsung ltd.
Debt ratio
It is a financial ratio that indicates the percentage of a company's assets that are provided via debt. It is the ratio of total liabilities (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill').
It can be calculated as follows:
Formula: - total liabilities/Total assets
Samsung Electronics Co. Ltd
Total liabilities = $59673438000
Total assets = $226044667000
Hence
$59673438000/$226044667000 = $0.26398
Sony
Total liabilities = $ 128958258890 (¥14513076000000)
Total assets = $156925696027 (¥17660556000000)
Hence
$128958258890/$156925696027 = $.821
Interpretation
From the above analyses, it can be stated that debt ratio of Samsung ltd is $0.26398 which is lower than the Sony i.e. $0.821. Hence, Sony’s debt content is quite higher in comparison to its peer.
The percentage of a company's assets that are provided via debt is higher in case of sonny.
4. INVESTMENT RATIOS
Ratios which are used to assess the performance of a company's shares are called as investment ratios.
For example, price, earnings per share and earnings yield.
In addition to being of great interest to theordinary shareholders, investment ratios are also of interest to potential investors, analysts and competitors.
PRICE EARNINGS RATIO
The price earnings ratio of a company is company’s share price to its per-share earnings.
Formula = Current Value per Share/Earnings per share
Samsung Electronics Co. Ltd
Current Value per Share = $4.38
Earnings per share= $136.2(basic ESP.)
Hence
$4.38/$136.2 = $.03215
Sony
Current Value per Share = $6.05(¥860645000000/ ¥1263763660= ¥681.01)
Earnings per share= $.52 (¥ 58.07 basic ESP.)
Hence
$ 6.05/$.52 = $11.69
Interpretation
From the above analyses, it can be stated that price earnings ratio of Samsung ltd is $0.03215 which is lower than the Sony i.e. $11.69. Hence, Sony’s price earnings ratio is quite higher in comparison to its peer. The Price Earnings Ratio of Sony is higher indicating that Sony is a growth stock while that of Samsung is not a growth stock
Earnings per share
The earnings per share (EPS) represents the portion of a company's earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock.
Samsung Electronics Co. Ltd
EPS = $136.2
Sony
EPS = .52 (¥58.07)
Interpretation
From the above analyses, it can be stated that earning per share of Samsung ltd is $136.2 which is very high than the Sony i.e. $0.52. Hence the portion of a company's earnings i.e. Samsung ltd that is allocated to each share of common stock is quite high. EPS interpretation should be: If the entire profits are distributed among the shareholders, the amount that each share held by a shareholder will earn is higher for Samsung than for Sony.
5. Comparison
Samsung and Sony are two of the most highly developed companies.
Samsung is better positioned for growth and has a greater upside potential. The founder of the Samsung Company is Lee Byung-Chul. Since mid-1970s, Samsung has extended its activities all over the world, and electronics, particularly mobile phones and semiconductors, have become its most significant source of profits. Sony is a prominent technology company and is known best for its electronics such as phones, TVs, gaming systems, etc
As far as the comparison to the industry is concerned Samsung ltd is a more profitable company in comparison to its peer. Its ability to pay off its short-term liabilities with its current assets is quite higher in comparison to its peer. However, Samsung maintains more liquidity then required.
The portion of a company's earnings i.e. Samsung ltd that is allocated to each share of common stock is quite high. However, in terms of debt content Sony is on the higher side.
