Company Overview
Sony Corporation is among the largest manufacturers of consumer electronics products in the world. The company engages in the design, development, manufacture, and sale of various types of electronic instruments, equipment, and devices for consumer, industrial, and professional markets. Primarily, the company operates in Asia, Middle East, Africa, Europe, and America. The company also distributes gaming software and hardware ('Sony Corporation SWOT Analysis' 2013, p. 3). The company does the distribution, manufacture, and broadcasting of image-based software such as motion picture, television products, and recorded music. The company’s manufacturing facilities are mainly located in Asia, but the company utilizes third party contract manufacturers to deliver certain product parts. The company’s products are distributed to various markets in the world using unaffiliated distributors and sales subsidiaries ('Sony Corp', 2013, p. 3). The Internet also forms an important market for distributing products. Other major operational activities for the company include the issuance of financial services and insurance.
Sony’s operations are divided into seven business segments that comprise of professional device and solutions (PDS), consumer products and services (CPS), pictures, financial services, music, and Sony Mobile communications. Major products for the company include televisions, home theatres, audio systems, Blue-ray Disc players, personal and mobile products, gaming devices, Music, CMOS image sensors, and components. Major services include financial services such as savings, loans, and insurance.
Revenue Analysis
Sony Corporation recorded revenues totaling $82,463.8 million for the financial year 2012. This represented a decrease of 9.6% when compared to the total revenue for FY2011. Japan is the company’s largest geographical market and accounted for 32.4% of the total revenue for the company. The company’s revenues are generated through seven distinct business segments with consumer products and services (CPS) forming the largest volume of revenues generated by the company.
Ratio analysis
Liquidity Analysis
A company’s liquidity is significant especially when the management decides to take a loan measured through quick ratio and the current ratio (Al-Shubiri, 2012, p.23). In 2010, the current ratio of Sony Corporation was 1.02, whereas in 2013 it was 0.85, signifying a decrease in the liquidity ratio.
Quick ratio of Sony Corporation has been fluctuating in the last five years. The ratio decreases from 0.52 in 2009 to 0.66 in 2010, whereas in 2013, it was 0.57 up from 0.56 in 2012. For the past five years, the Quick ratio for Sony Corporation has been less than 1.00 times. This signifies that Sony Corporation cannot maintain its liquidity without being compelled to sell some of its inventory or stock to meet its financial obligations (Altman 2009, p.590). The company will therefore be forced to sell its stock to compensate its short-term liabilities (Crosson & Needles 2010, p. 106).
Financial leverage analysis
The financial leverage of Sony Company has been increasing from 4.05 in 2009 to 6.46 in 2013.The increase indicates that the company is increasingly utilizing borrowed money to finance its operations. The increase in the financial leverage is risky because high ratios imply that the business is at the verge of bankruptcy risk in the event that it cannot repay back its debts (Ilter, 2012, p.157). The increase in the ratio can also make it hard for the company to access loan in future, although there is tax advantages associated with debt, referred to as leverage. Financing the business using assets is not enough especially for a firm that wants to expand and compete well in the market (Tiner 2005, p. 605).
The debt equity ratio of Sony Corporation increases throughout the five years. At 2009, the ratio stood at 0.22 and in 0.43 in 2013. A low debt ratio indicates that the firm has been consistent in financing its growth using equity over debt. The debt equity ratio enables Sony Corporation to measure its ability to repay its obligations and financial health (Maskell & Baggaley 2003, p. 4). The company’s ratio has been low for the five years, although it has been increasing over the years. This is an indication that the company is increasingly financing its projects or operations from debt from creditors rather than equity or its own financial sources, which is risky (Kirkham, 2012, 4). Investors and lenders prefer low ratios of debt-to equity so that in the event of collapse or decline in business, their interests are protected.
Profitability Analysis
Corporations pay taxes on their returns and earnings, which includes mostly the profits earned. The amount of tax paid by the company depends on the range of losses incurred profits earned or by the same company as per the rate set by the government. The increase in profits before tax results from reduced costs of operation incurred by the company in the course of doing business. In general, reduced cost of sales and maximization of the company’s sales boost the profit earnings (Porter & Norton, 2010, p.504).
Net margin is a measure of translation of profits from the company’s earnings. For the five years, the net margin has been exhibiting a fluctuating trend from 2009 to 2013, implying an increased, followed by decrease in the margin of safety from 2009 to 2013. The two companies’ risks of experiencing a loss from the use of profits have declined, improving the viability of Sony Corporation (Porter & Norton, 2010). The trend show that Sony Corporation has not relatively improved its efficiency in production, enhanced its cost structure, and adopted efficient pricing policies (Kotler & Armstrong, 2010, p. 4). The trend on Sony’s Return on Assets (ROA) ratio has not been impressive in the last five years, with the ratios fluctuating up and down and increasing from 2012 to 2013, then decrease for 2011 to 2012. Over the same period, Sony Company exhibits an increase of the ratio from 2009 to 2010 followed by a decrease of the same from 2010 to 2011.
The trends indicate that the Sony’s management of has failed enhanced its efficiency in utilizing its assets in profit generation. The low earnings from the assets of the company could be because of lack of viable asset investment decisions by the management company over the period (Riedl & Srinivasan, 2010, p.300). The ratio exhibits inconsistent trend implying that the company has diversified its investment portfolio into risky and safe ventures (Leitner, 2007, p. 29-30). Over the past three years, from 2010 to 2013, the trend to return on Equity (ROE) has been fluctuating by increasing and decreasing. Apart from 2013, the company’s shareholders have witnessed a negative return on their equity, implying that the shareholder’s wealth is not being maximized.
Sources of funding
Maintain a strong balance sheet and securing adequate liquidity for business operations is one of the major financial objectives for Sony Corporation. According the company’s annual report, the liquidity sources comprises of the value of cash balance (cash and cash equivalents) and the unutilized amounts of committed credit lines (Sony Corporation, 2013, p. 82; Brigham, 2013, p. 6). The company’s funding requirements are obtained from cash flow collected from the company’s operating activities such as the sale of assets in addition to the cash balance (Güler, 2012, p. 164).
Sony is also capable of procuring funds from capital and financial markets Sony Corporation, 2013, p. 82). If the capital and financial markets become illiquid, the company is capable of obtaining additional sources of funds because of its access to committed credit lines from financial institutions (Varotto, 2011, p. 135). The company’s cash balance also becomes handy in the case where financial and capital markets face illiquidity. The company’s financial subsidiary in the United Kingdom, Sony Corporation and SGTS, enables Sony Corp to procure funding from capital and financial markets. For instance, Sony Corporation obtained a syndicated loan in July 2012 worth 65.0 billion that has a maturity period of 3 to 6 years. The company used the funds to finance its general corporate purposes. Equally, Sony Corp. issued a Zero Coupon Convertible Bonds (this bond has stock acquisition rights) in November 2012 that matures in 2017. The aggregate principal amount of the loan was valued at 150.0 billion yen. The company used proceeds from the issuance of this bond to finance equity investments, fund capital expenditures, and for debt redemption purposes.
Sony Corporation also runs Commercial Paper (CP) programs that enables the company to access U.S., European, and Japanese CP markets subject to the prevailing conditions of the market. By March 31, 2013, the company’s CP program limits amounted to 782.2 billion yen for the company and SGTS. Straight bonds and bank loans (including syndicated loans) forms other major sources of funding for the company. As of march 31, 2013, the unused committed credit lines for the company totaled 806.1 billion yen. These comprises of US $ 1.5 billion multi-currency committed credit line with a syndicate of banks in Japan that were effective until last December, 475.0 billion yen also committed credit line with a syndicate of banks in Japan that are effective until November 2015, and a us $2.02 billion multi-currency line of credit contracted with a syndicate of different foreign banks and is effective until April 2015. In all committed credit lines listed above, SGTS and Sony Corporation are listed as borrowers of the funds. The aims of the above contracts were aimed at securing stable and quick sufficient liquidity for the company.
Limitations
If any situation leads to a downgrading of Sony’s credit ratings, it is more likely that the cost of borrowing will increase (Huefner, & Largay, 2013, p. 307). This can be attributed to the lack of financial covenants between Sony and other issuers of financial credits. In addition, it would cause an impairment to the company’s ability to obtain credit from unused financial activities. Sony Corporation also has a financial covenant in form of agreement with commercial customers that is aimed at reimbursing advance payment under liable conditions such as a downgrade of the company’s credit ratings (Pennington, 2012, p. 24). Another limitation regarding the company’s usage of funds prevents the company from using its borrowing to acquire certain securities listed in the U.S. stock exchange market or other over-the-counter transactions depending on the regulations and rules stipulated by the Federal Reserve Board.
Recommendations
Management:
The company’s management should diversify its investments to increase the chances of the company generating cash from other activities apart from its stock. The debt equity ratio of the company has been low although steadily increasing over the five years. This indicates that the company has been using equity as its key source of finance but is increasingly starting to use debt. Therefore, the management should continue using asset financing for its operations to lower its debt-equity ratio rather than increasing it. Thus far, the ratio is less than 1 but increasing towards it, implying increase in use of debt (Warren, Reeve, & Duchac, 2011, p.151). Continued use of equity financing or other sources ensures that the management does not pay a significant proportion of its cash as interests on loan (Leitner 2007 p. 30). The company should consider financing its operations mostly from non-debt sources like rights issue to avoid a high financial leverage. In addition, the business stands the risk of shareholders selling their shares because of losses being experienced. The budgeting priorities for the coming year should focus more on reducing cost of operation and increase of sales in order to earn more profits. The management should seek ways of cutting costs and increasing sales in their strategic plan.
The company should outsource some of its operations to trim down its operation costs. In addition, shifting from debt to asset financing will enable the company reduce its costs of refinancing debt capital (Whittle 2012, p.44). Alternatively, the strategic plan of the company should focus on increasing sales, increasing production and operational efficiencies, and reduction in liabilities like loan repayment.
Investors:
Most investors prefer to venture in less risky business and in business where their wealth is maximized and returns on their equity is high. However, Sony does not appear as a lucrative business with returns on invested equity mostly negative in the last five years. In addition, the net margin is also low and negative, implying that in the last five years. The return on the capital invested has been negative for the five years implying that prospective investors should not buy equity shares in the company. In 2013, the return on equity showed an increase from 2012, which gives a positive indication that the business is looking up for existing investors to hold on to their shares. The financial health of the company relatively bad although last year, 2013, was promising for existing shareholders to hold on to their shares and wait to sell them when the market price of their current shares rises.
Lenders:
Sony Corporation has a low debt to equity ratio, which suggests that the interests of the lenders are protected in case of any decline or collapse in business. Therefore, the lenders are safe to lend the company more cash. The debt to equity ratio is less than one although it has been increasing over the five years. This implies that the lenders have faith in the loan repayment by the company; hence, has been advancing more loans as the years progress. The lenders can lend the company more money because the loans will be repaid. The increase in the financial leverage of the company; however, is evidence that the company is increasingly utilizing borrowed money Warren, Reeve, & Duchac, 2011, p.119). Increased borrowed funds are indication of risk in future when the company will be unable to repay its debts. However, currently, the lenders can still advance credit.
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