The report has presented financial performance of Samsung Electronics Co., Ltd. The analysis reveals that the smartphone giant has started to recorded negative trends in its performances. Total revenues and profits for the fiscal years 2013 and 2014 have shown significant declines. For instance, revenues dropped by 9.83% while operating profit also reduced by a significant margin of 31.97%. Analysts have observed that Samsung will continue to face difficult market environments as Chinese manufacturers flood the market with cheap products. In addition, the company has recorded low operating profits because of high-level of inventory and related costs, as well as low demands. Samsung is however still a profitable company.
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The purpose of this report is to present financial analysis of the performance of Samsung Electronics Co., Ltd. It includes financial reports highlighting trends in performance using appropriate and relevant ratios analysis techniques, and non-financial performance indicators by designing a balanced scorecard covering two perspectives, analysing the two balance scorecards and an evaluation of the technique used. Samsung Electronics is the largest South Korea’s electronics company, specialising in various types of consumer devices, such as household appliances, IT and mobile communications and device solutions. The company has a global presence.
Comparison of Latest year Results with the Previous Year Results (Horizontal and Vertical analysis)
|Revenue (in billions of KRW)||206,206||228,693||-9.83%|
|Cash Flows from Operating Activities||36,975||46,707||-20.84%|
|Cash Flows from Investing Activities||(32,806)||(44,747)||26.69%|
Samsung current state of financial results is disappointing. While it is the largest smartphone manufacturer in the world, the company has faced many challenges in the last two fiscal years, experiencing dwindling revenues and earnings. In the fiscal year 2013, for instance, the company had better result relative to the fiscal year 2014.
Despite shipping more smartphones during the year 2014, the revenue from the mobile division continues on its downward trend, threating the corporation. Operating profit also dropped from KRW 36,785 billion to KRW 25,025 billion. In fact, analysts believe that the future will be challenging for the giant (McCormick 1).
Nevertheless, the company asset size slightly increased.
Ratio Analysis of both Latest and Previous Years
The current ratio for the fiscal year 2013 and 2014 presented shows that Samsung has a ratio above 2. In this case, Samsung can sufficiently fulfill its short-term obligations as required when they are due.
Users of financial statements can rely on this ratio fast to evaluate financial health of Samsung. Notably, a higher ratio is better because it shows that the company can pay off its debts without financial difficulties. This means that Samsung has a significant part of asset values to its total current liabilities.
Samsung has also maintained a quick ratio beyond 1.6 in the analysed financial years of 2013 and 2014. As such, Samsung can meet its short-term debt obligations when they mature for payment.
Notably, both quick ratio and current ratio have improved marginally to boost the overall liquidity of the company.
It is imperative to recognise that ratios below 1 should be a source of concern for any company regarding its liquid assets and its position to pay off current liabilities. Samsung, based on these ratios, is therefore capable of meeting its short-term obligations whenever they fall due.
|Debt Equity Ratio|| |
Samsung equity ratio shows the fraction of assets funded by investors when total equity is compared to total assets. This ratio declined from 0.02 to 0.01 between 2013 and 2014. The ratio also helps in assessing how leveraged Samsung is when assets financed by debts are analysed. Today, Samsung dependence on investors to fund operations is satisfactory at that rate since higher ratios are not beneficial to the company.
The financial leverage ratio for the company declined from 1.48 to 1.42 between 2013 and 2014. This ratio shows that Samsung has not been aggressively using debts to fund its global operations. As such, the company does not have volatile earning situation in which additional interest expenses consume profits. Moreover, a higher ratio enhances chances of bankruptcy and default. Generally, a ratio above 2 should be a cause for concern for the company, investors, and creditors.
Working Capital Management
|Day’s Inventory|| |
Samsung inventory turnover is about 7. Conversely, Apple, Inc. has an inventory turnover of 83.45 and 57.94, Nokia has recorded about 6.29 and 6.82 while Huawei Technology Co Ltd inventory turnover ranges between 5.30 and 4.98 for the fiscal period 2013 and 2014 respectively.
Low inventory turnover is a sign of inefficiency because it is associated with the rate of return of zero. It shows poor sales or too much inventory, possible overstocking, poor liquidity and/or obsolescence. However, it could also reflect material accumulation to manage possible shortage. In the case of Samsung, its inventory turnover nearly matches some of its competitors, but not Apple, Inc.
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High inventory usually reflects strong sales, and better liquidity.
From the analysis, Samsung’s ratio ranges between 48.88 and 51.86 Day’s Inventory for the fiscal year 2013 and 2014. This means Samsung has adequate inventories to last the next 51.86 days. Alternatively, Samsung will turn its inventory into cash in the next 51.86 days. For the same periods, Apple, Inc. had Day’s Inventory of 4.37 and 6.30, Nokia recorded 58.04 days and 53.48 days while Huawei had 68.89 days and 73.35 days. Based on this industry figures, the length of days could be longer or shorter, but there is no specific Day’s Inventory for the industry.
|Net Margin %||11.32||9.72|
|Return on Assets %|| |
|Return on Equity %||19.82||13.09|
Net Profit Margin for Samsung declined from 11.32 to 9.72 between the year 2013 and 2014. This ratio has significantly dropped. Nevertheless, Samsung makes some profits for investors once all expenses, including operating costs, taxes, and preferred stock dividends have been paid. The ratio indicates that Samsung adequately generate profits for investors, but the decline points towards tough future.
Return on Assets ratio shows a decline from 13.11 to 9.02 between the fiscal period 2013 and 2014. Samsung is now generating almost 9 cents from every KWN held in assets.
Samsung return on equity ratio has dropped from 19.82 to 13.09 in the financial year 2013 and 2014 respectively. The dropped in the ratio is a bad indicator because the company would generate less revenue from its investments.
|Fixed Assets Turnover||3.18||2.64|
As can be observed, Samsung asset turnover ratio declined from 1.16 to 0.93 for the two fiscal periods. This implies that for every KRW in assets, Samsung only generates some 0.93 cents. That is, Samsung is not effective in using current assets to generate revenues. Conversely, fixed assets turnover ratio also declined from 3.18 to 2.64 in the same period. Samsung gets about KRW 2.64 from its fixed assets. Investors may be keen on the use of specific assets, including fixed assets to generate revenues.
For Apple, Inc., the asset turnover dropped from 0.89 to 0.83, fixed assets ratio also declined from 10.67 to 9.82 during the same periods. Nokia fixed assets turnover is 12.73 and 19.86 with asset turnover of 0.46 to 0.55, and Huawei fixed assets turnover ratio was 2.71 and 2.69 while asset turnover was 0.48 to 0.50 for the fiscal period 2013 and 2014 respectively.
These ratios show that different companies in the same industry use their assets in various ways to create efficiency. Hence, it is difficult to have a specific figure for the industry.
Comparison with Industry Average Figures as Available
As previously noted, ratios vary from one company to another within the same industry. In this case, three major competitors of Samsung, including Apple, Inc., Nokia, and Huawei have been used with the aim of comparing performances.
Apple, Inc. has far much better ratios relative to Samsung. For instance, its profitability ratio (net margin for fiscal year 2013 and 2014 are 21.67 and 21.61 respectively) is relatively high. In addition, other ratios also demonstrate similar superior performances. On the other hand, one can compare Samsung to Nokia and Huawei because these companies almost have same ratios in most instances. Still, ratios may differ significantly based on other variables. For instance, Nokia net margin ratio moved from 27.19 to 19.73 while Huawei ratio changed from 7.11 to 7.21 in the fiscal years 2013 and 2014 respectively. This implies that specific company variables significantly influence financial performance of firms within the same industry.
Discussion of the Performance of the Company
Samsung has experienced a decline in sales and profit between the fiscal years 2013 and 2014. The smartphone giant has seen its total sales revenues decline by 9.8% from KRW288 billion to KRW206 billion. At the same time, operating profits recorded a larger drop, with 2014 figures coming in at KRW 25 billion relative KRW 36 billion recorded in 2013, down 31.97%.
In fact, many analysts believe that Samsung will continue to experience major declines (Mundy 1; Triggs 1). The company and its investors have been anxious about future profits. Specifically, the IT & Mobile Communications Division, which handles the smartphone segment, has recorded the worst decline.
Samsung observes that its second quarter of the fiscal year is normally characterised by low demands. Nevertheless, some factors appear to have made the year particularly challenging for the giant. The company acknowledges that tablet sales have dropped. Its inventory level is high specifically in the EU. As such, shipment and sales have been poor. In fact, mid and low-end products were specifically affected due in part to enhanced price competition from low-end Chinese smartphone makers.
Further, the company continues to experience declining sales from display panel division because of reduced prices occasioned by low television demands and oversupply of such products by Chinese rivals, who seem not to pay much attention to profits (Mundy 1). Samsung inventory costs associated with smartphones have also weakened its operating profits.
Amidst these declines in revenues and profits, one must remember that Samsung is still a profitable company. In addition, Samsung is optimistic that its revenues and profits will grow once it launches new products into the market (Triggs 1).
Designing Two Balanced Scorecards for Directors and Managers
Samsung strategic vision focuses on new technology, innovative products, and creative solutions to inspire stakeholders.
The training perspective of the balanced scorecard strategic goal is to enhance employee efficiency at Samsung. Employee efficiency will lead to direct organisational operational excellence. To attain the strategic goal of employee efficiency, this component consists of outcome measures that focus on employees with the aim of advancing their skills and competence. In this regard, key performance indicators (KPIs) used focuses on the role of directors and managers to instil a culture that encourages collaboration and learning among employees (Kaplan and Norton 1).
Objective: to improve employee training and knowledge acquisition
Outcome measures (KPIs): enhanced access to information and knowledge, availability of resources to promote learning, innovative practices reflected in new products, and new creative solutions delivered by employees.
The internal process perspective sets a strategic goal of attaining operational excellence based on continuous efforts to perform better, delivery innovative solutions and products for the public. Employee efficiency will be responsible for driving internal process perspective and change all measures in this perspective. The outcome measures for the internal process reflect efficiency while KPIs assess effectiveness, prompt, innovative capabilities, and most importantly, relationship with stakeholders.
Objective: to establish a dynamic company
Outcome measures (KPIs): understand needs of customers and other stakeholders, adoption of modern technologies for service delivery, encourage access to information, and internal efficiency in service delivery.
The directors and managers would use the balance scorecard to quantify impacts of each objective and related KPI based on the realised strategic goals of Samsung noted in each perspective.
The company will conduct survey to collect useful data on performance and analyse them to determine the overall relevance of KPIs in realising the major goal (Anthoula and Alexandros 72-76).
Discussion of the Advantages and Limitations of the Ratio Analysis and Balance Scorecard
It is acknowledged that ratio analysis is an imperative tool for understanding financial statement. It therefore offers some distinct advantages to users. Ratio analysis simplifies contents of financial statements for users without technical accounting backgrounds. These ratios assist organisations to compare and understand performance among companies in the same industry as they strive to demonstrate financial health of a company. They are also imperative for trend analysis and help users to judge the company without tedious processes of evaluating the entire statement.
Despite the importance of ratio analysis, it has some inherent limitations. Ratio analysis fails to account for unique operating conditions, including markets, regulations, and geographical differences among others. These factors vary significantly for every company and, therefore, comparison could be misleading. Estimates and assumptions are adopted in financial accounting information. Besides, different accounting policies are used, and they can significantly limit comparison, making ratio analysis irrelevant for comparisons. Finally, ratio analysis does not give current or future information about the company.
The balanced scorecard offers a balanced assessment of performance, as well as a complete picture on customer, financial, employee training and process performance. It assists an organisation to assess possible immediate solutions for weaknesses identified. As such, it can help in setting short-term and long-term performance objectives. Finally, it helps organisations to set strategic goals and actions with preferred outcomes.
Conversely, as an accounting tool, balanced scorecard has some limitations. The tool is subjective and difficult to implement because of the four broad areas. Financial elements found in the metrics are limited. As such, economic value and risk management are not captured while it leads to additional reporting. Finally, designing the most effective metrics for a company could be a daunting task. Consequently, firms may not designing their own metrics for specific environments.
The report covers financial analysis of Samsung. It shows that the company has started to record declining total revenues and profits when performances for the fiscal period 2013 and 2014 were compared. These challenges have been generally attributed to fierce competition from cheap Chinese manufacturers, high levels of inventory, high costs of inventory and declining market demands and prices. As such, Samsung now faces challenging periods ahead. It is however imperative to note that Samsung is still a profitable company despite such financial performance challenges. Although the company’s financial performance can be compared against the industry peers, there is a general lack of uniformity on performances based on the ratio analysis.
Nevertheless, Samsung should continue assessing its performances using financial ratio analysis and balanced scorecard to understand its performance across various segments.
Anthoula, Kladogeni and Hatzigeorgiou Alexandros. “Designing a Balanced Scorecard for the Evaluation of a Local Authority Organization.” European Research Studies 14.2 (2011): 65-80. Print.
Kaplan, Robert S. and David P. Norton. “The Balanced Scorecard—Measures that Drive Performance.” Harvard Business Review. 1992. Web.
McCormick, Rich. “Samsung sales and profits down despite Galaxy S5 launch.” The Verge. 2014. Web.
Morningstar, Inc. Samsung Electronics Co Ltd. 2016. Web.
Mundy, Simon. “Samsung disappoints as tech sector slows.” Financial Times. 2016. Web.
Samsung Electronics Co., Ltd. 2014 Samsung Electronics Annual Report. 2015. Web.
Triggs, Rob. Samsung posts Q2 2014 earnings report – mobile division as poor as anticipated. 2014. Web.