Analysis of Samsung Corp.
Introduction
Samsung Corporations operates as a multinational company operating in electronics industry with the headquarter in Suwon, South Korea. It is a blue chip company listed in Dow Jones. The company makes profits in terms of trillion with over 200 trillion of assets and 168.088 trillion of equity (Michell, 2010). As of 2015, the company had around 307,000 employees contributing to its operations. This makes the company a big corporation thereby forming a platform for practicing how to analyze businesses.
The profitability of a Samsung’s operation is dependent on the efforts put by the management towards ensuring sustainability. This is quite essential since it is a determinant of the image that the company portrays to the investors and creditors. Investors will review the financial statements to determine if the company is a potential for giving them a desirable return on their investors while creditors will also look for whether the company will remain in operation for foreseeable future. Any instance of bankruptcy will make the company to be undesirable in the eye of the investors and the creditors. In order to determine the capability of the company, under these aspects, there is need to apply financial analysis tools to access a company’s performance; and among these include accessing ratio analysis, working capital management, strategic planning, and risk analysis among other concepts of corporate management.
The results from the financial analysis helps in comparison of Samsung’s performance to its other major competitors. The competitor chosen for this exercise is Apple Inc. Apple Inc. also operates in the electronic industry as a large cap company.
Samsung’s financial statements, balance sheet and income statement, were obtained from Yahoo Finance. The data was obtained over a three year period, from 2013 to 2015. These were then placed in excel spreadsheet for analysis. The financial statement were reviewed by carrying out a horizontal analysis followed by calculating the financial ratios, carrying out risk analysis and its overall capital management. The result were then compared with those obtained from LG.
Result and discussion
Prices
The historical prices for Samsung’s stock was obtained from Yahoo Finance and then the percentage change calculated
Time series plot showing change in historical prices
The graph shows the fluctuation of the prices with an extreme dip between September and October. However, the percentage change in prices has most of the time been positive. This is an indication of strong performance of the company.
Financial ratios
Liquidity ratio
This involved calculating the value of current ratio and quick ratio for 2013 and 2014
Profitability ratio
The process of analyzing the company’s profitability involves looking at the trend depicted by return on assets and return on equity.
As it comes outs, Samsung’s ROE and ROA witnessed a decrease from 2013 to 2014. This is an insinuation that the company exhibited a decline in net income yielded from its equity and assets during the analysis period. Even though the ROE and ROA are quite favorable, this trend shows that the management had deteriorated in terms of management of assets and equity to give returns to the shareholders (Schniederjans et al, 2010).
Solvency
This will involve calculating debt to equity and interest coverage for the company. .
As shown, Samsung’s corporation debt to equity ratio decreased from the 2013 to 2014. This is an evidence that the company was able to reduce its dependence on debt as a way for supporting its assets operations. This shows that the company is best placed to use its own assets without relying much on debts (Cobbaut & Lenoble, 2015). However, the number of times that the company takes to cover its interest significantly reduced from 2013 to 2014 as signified by the decline in interest coverage over the years.
Analyzing riskiness of the company’s stock
As recorded by Yahoo finance, Samsung Corporation records a beta of 1.01. This beta is more than one and thereby indicates a measure of systematic risk related to investing in the company. A beta of more than one is a characteristics of most blue chip corporations and Samsung being one of them makes an analyst to conclude that the company is potential for higher return rate to the investor. However, the higher rate of return is coupled by more risk associated with the investment. It means that the company’s stock I more volatile as compared to that of the market. It is theoretically 1% more in terms of volatility when compared to the market. Consequently, only the risk tolerant individuals should be ready to invest in Samsung’s stock.
Comparison to a major competitor
The exercise of comparison will involve analyzing Apple Inc for the same ratios as done with Samsung Corporation.
Liquidity
As shown in the above table, Samsung is best placed in the competition because it has a higher current ratio and quick ratio than Apple. This is an indication that Samsung exhibits more effective management of its assets in covering it obligation. Apart from the direct comparison, the trend witnessed by the two also showed that Samsung showed an increase in both quick ratio and current ratio while Apple showed a decline. This again indicates that management of assets at Apple deteriorated when compared to that of Samsung.
Financial health
As shown from above, Apple indicates a higher debt/equity ratio than its counterpart Samsung. This comparison provides platform for determining the company’s dependence on debt. With higher debt/equity ratio, it means that Apple has too much dependence on debt, in financing its asset, when compared to Samsung. This projects a bad image of Apple when it is compared to Samsung because it depends much on debt rather than its own shareholder’s equity. Dependence on debt portrays a bad image of a firm to investors because it means that the operations per se are not self-sustaining.
Common size analysis
Common size balance sheet
In order to review the financial statements, horizontal analysis was carried out to determine the change over the years.
As can be shown from horizontal analysis, the company’s current assets maintain an increase from 2013 to 2015. From 2013-2014, the current assets increased by 0.3% and from 2014-5 rose to 4.0%. This was also reflected by total assets with the change rising from 5.1% to 7.6%. This is an indication that the company’s management is effective in managing well its assets because of increase in financial value of receivables, short-term and long-term investment. Consequently, this is a sign that the company is likely to sustain its growth.
In terms of liability, Samsung’s value for liability declined by 2.7% from 2013 to 2014 but then increased by 1.3% from 2014 to 2015. However, the total current liabilities decreased sharply from 2014 to 2015. The cause for the increase in total liabilities could be contributed to sharp rise in long term debt between 2014 and 2015. This means that the company increased their borrowing rate in order to sustain its operations.
Income statement
The company’s revenue decreased from 2013 to 2014 by 9.8% but this percentage then reduced to 2.7% between 2014 and 2015. The same scenario was depicted by gross profit and the total operating expense. Putting all these together, the company witnessed an increase in its operating income with 5.5% increase from 2014 to 2015 following the decline between 2013 and 2014. The net income decreased by 22.6% from 2013 to 2014 but then there was a decline between 2014 and 2015, with 17.4% decrease. Consequently, this means that the company was able to improve its sales process from 2014 to 2015 as compared to 2013 to 2014 where the profit sharply decreased by 22.6%.
Summary of Samsung’s financial position
Major Factors to consider to evaluate possible investment projects
The key consideration for any investor from either corporate level or individual level should always be safety (Pride, 2010). The degree of safety is in an investment can be viewed in terms of liquidity, risk, Safety and income (Pride 2010). For Samsung this can easily be determined since they have the advantage of having been on international market for quite some time. Basing on financial analyst report the corporation can easily check the profits or losses, marketing index, management and planning strategies that influenced the general financial status of the corporation over the years.
Samsung should be able to gauge the stock market by use of security index over say the last 5 years before making any investments. The review of the stock market will give an overall grasp of current affairs in the investment prices. They can use the information provided to make investment goals say opening a subsidiary branch in Africa, investing in research so as to come up with a new innovation whose need is felt in the market. The degree of safety usually is dependent to the investment goal that the corporation wishes to incur (Pride 2010). If the risk of investment is so great then the potential returns should be greater.
Rates of returns for different Samsung investments are a key consideration factor. There are assets which add no value to the corporation. For example if Samsung decides to invest in a building a very big office for sales and marketing department it may not yield as much returns. This is because sales and marketing is mostly an outside job. With digitalization marketing does not require structures as much as it requires creativity. It is therefore important to list all the products and respective departments dealing with them and gauge in terms of potential risks and profits that each present with. After this a proper decision can be made.
Risks
Many industries making smart phones have propped up which has already caused a slow down on the hand set sales. This poses a major risk to the Samsung business because if they won’t be able to innovate and make more distinct software then they will be just the same as any Android phones producers. The risks hear is that most of the upcoming producers sale their products at a cheaper price and well, Samsung is sure to lose many of their customers.
Important to note also is the fact that Samsung has a grounded engineering culture bound put the corporation into an industrial risk. Efforts to develop software and services ventured to support the smart phone have been cut short curtsey of this culture. This has already had some negative impacts as quite a number of services have closed down some even within its launching year. This not only puts the company into considerable investment loses but also affect customer loyalty. Customers may be disappointed by a corporation which starts offering a service only to shut it down.
In the corporation’s 2020 Strategy there are at least five new fields that it wishes to venture in. This include; medical devices, LED lightening, solar panels, biotech drugs and E- vehicles batteries. Billions have already been allocated to cater for the investments. Samsung has been on top mostly because of their highly preferred smart phones and other electronics. Since this field is currently facing a lot of competition the only key to a better future for Samsung is innovation. Samsung is currently working on internet push up (Mitchell, 2010). This innovation which has been dabbed the internet things will enable a combination of roads, cameras, sprinklers and phones. This strategy on widening the innovation areas is bound to keep Samsung on top despite competitions from other corporations offering similar products and services as Samsung.
References
Reilly, F. K., & Brown, K. C. (2012). Investment analysis and portfolio management. Mason, Ohio: South-Western Cengage Learning.
Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2010). Business. Australia: South- Western/Cengage Learning.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2015). Financial reporting, financial statement analysis and valuation. (8th ed.). Cengage
Cobbaut, R., & Lenoble, J. (2003). Corporate governance: An institutionalist approach. The Hague: Kluwer Law International.
Schniederjans, M. J., Hamaker, J. L., & Schniederjans, A. M. (2010). Information technology investment: Decision-making methodology. Singapore: World Scientific.
Mitchell, T. (2010). Samsung Electronics and the struggle for leadership of the electronics industry. Singapore: Wiley.
