Financial Performance of Haier Company - Essay Example

Financial performance of Haier Company [Insert al Affiliation] Table of Contents Introduction 3 2.(The trend analysis of Haier Company) 3 2.1.(The trend analysis of Haier Company’s income statement) 4 2.2.(The trend analysis of Haier balance sheet items) 5 3.(The Common size) 6 3.1.(Common size analysis of Haier Company) 7 4.(Haier’s cross-sectional performance analysis) 7 5.(Industrial average comparison) 10 6.(Recommendations to assist improvement of the company performance) 11 7.(Reference List) 14 1. Introduction Haier Company is a multinational company based in China with several subsidiaries spread across the global and fundamentally majors on manufacturing ofhome-based devices and electronics. The growth and sustainability of the company is due to Haier’s investment in labeling of its merchandises to meet the customers’ tastes and preferences. The faster growth and rate of the holding company with its subsidiaries has been the root cause of the performance analysis of the company over a period of five years; 2010 to 2014 respectively. This wide-ranging report is going to comprehensively analyze the company’s performance from different perspectives as listed below. The first angle of analysis is the trend exploration of the company over the period of five years. Additionally, the common size analysis for the company will be done to figure out the item percentage change over the last five years. Secondly the report will address the cross-sectional investigation between Haier Company and Tesco plc Company. The main aim of the cross-sectional analysis is to compare the performance of the company with others so as to identify the key points to the failure or success of the firm. The third performance analysis will be for industrial average comparison to weigh how the company is performing compared to other firms globally. Finally, the recommendations pursuant to the analysis will be at last. 2. (The trend analysis of Haier Company) It is also known as the horizontal analysis. It is a financial psychoanalysis technique that demonstrates the variation in the amounts of matching items financial statements over a certain span of time (Logan, 2014). Two or more periods grants a trend analysis. 2.1. (The trend analysis of Haier Company’s income statement) The first important item is the revenue. It can be evidently being seen that there is an increase in the total returns each year from 2010 to 2014. The returns amplified from 48,500 in the initial year 2010 to 50,089.9 in the following year. The increase percentage will be (which translates (1589.9/48500)*100 = 3.28%. In the year 2012, the revenue increased to 55615.0 hence an augmented revenue of (55615-48500) =7115. Calculated as an increase in percentage by (7115/48500)*100 = 14.67%. By the year 2013, the proceeds earned was 62,263.2 scaling up by 13763.2 leading to increase percentage of (13763.2/48500)*100 = 28.38%. 2014 had revenue of 67,134 and when calculated as a percentage increase the result is (18634/48500)*100 = 38.42%.It is evident that the income improved by 3.28% from 2010, 14.67% from 2011, 28.38% from 2012 and 38.42% from 2013. This demonstrates that the proceeds have scaled up over the years (Laitinen, 2005). The other item is the cost of sales that affects Haier’s revenues generation (Jablonsky & Barsky, 2010). The cost of sales increased to 42582.6 from 2010. This is a hike of (42582.6 -39615) = 2967.6. Calculated as a percentage, we get (2967.6/39615)*100 = 7.49%. The cost increased to 46673.9 in 2012 hence an increase of (46673.9-39615) = 7058.9 hence percentage increase of (7058.9/39615)*100 = 17.82%. The cost of sales increased to 53125.6 in 2013 leading to a scale up of (53125.6 -39615) = 13510.6 computed as a percentage increase of (13510.6 /39615)*100 = 34.10%. In 2014, the COS was 57292 hence an upsurge of (57292-39615) = 17677 this is an increase in percentage of (17677/39615)*100 = 44.62%. The next item is the expenses. From the income statement, the expense recorded in 2010 was 49100 m. The operating expenses increased to 5730.3m, 6722m, 6625.4m and 6948m from 2011 to 2014 respectively. The increase in percentage expenses is expressed as 16.71%, 36.90%, 34.94% and 41.51% from 2011 to 2014 respectively. This can be represented in a table form as follows. 2014 2013 2012 2011 2010 Million Million Million Million Million Selling general and admin expenses 6948 6625.4 6722 5730.3 49100 41.51% 34.94% 36.90%% 16.71% - The next item is the operating income. The operating income for 2010 was 1525m and increased to 1777m, 2214.9m, 2502.3m and 2872.7m, from 2011 to 2014. This specifys an increase of 16.52%, 45.24%, 64.09% and 88.37% from 2011 to 2014. 2.2. (The trend analysis of Haier balance sheet items) The first vital item is the company asset totals. From the analysis of financials, it is ostensible that Haier had total assets of 10823.5 m in the year 2010. The total assets improved to 14355.6m, 18213.3m, 21881.2m and 27515.3m from 2011 to 2014. The total assets increased by 3532.1m, 7389.8m, 11057.7m and 16691.8m from 2011 to 2014. Calculating the increase in total assets, the increase in percentage total assets will be 32.63%, 68.27%, 102.16% and 154.22% from 2011 to 2014 (Icon, 2006). 2014 2013 2012 2011 2010 Million Million Million Million Million Total assets 27515.3 21881.2 18213.3 14355.6 10823.5 154.22% 102.16% 68.27% 32.63% - The total liabilities were 8641.6m in the year 2010. The total operating liabilities increased to 10049.8m in 2011, 12373m in 2012, 13823.5m 2013 and 15413.2m in 2014. The increases in the total liabilities were 1408.2m in 2011, 37314m in 2012, 5181.9m in 2013, and 6771.6m in 2014. The increase in the total liabilities were 16.30%, 43.18%, 60% , 78.36% from 2011. 2014 2013 2012 2011 2010 Million Million Million Million Million Total liabilities 15413.2 13823.5 12373 10049.8 8641.6 78.36% 60% 43.18% 16.30% - The firm had total long-term debt of 598.3m. The total debt amplified to 669.8m, 759.2m, 716.8m and finally 1800.7m from 2011 to 2014. This stipulates a hike of 71.5m, 160.9m, 118.5m and 12024m from 2011 to 2014. The debt percentage was 11.95% in 2011, 26.89% in 2012, 19.81% in 2013, and 200.96% in 2014. ‘2014’ ‘2013’ ‘2012’ ‘2011’ ‘2010’ Million Million Million Million Million Debt 1800.7 716.8 759.2 669.8 598.3 200.96% 19.81% 26.89% 11.95% - 3. (The Common size) Common size analysis entails the study income statement’s items normally expressed as a percentage of sales. 3.1. (Common size analysis of Haier Company) The cost of sales has been rising over the years. The firm had cost of sales of 91.74 from 91.15% in 2010. These costs include the purchasing expenses and have been rising over the period. The profit of the firm has been scaling down to -0.56% in 2014 from 5.19%. The drop is due to rise in expenses hiked. The company inventory improved from 7.17% to 8.14% to 2011 and 2014 respectively. The equipment turned down from 84.0% to 82.4% in the year 2013 and 2014. Additionally, accounts payable dropped to 13.72% 10.64 in 2013. The total cash equivalent declined from 2.62% to 2.51% from 2013 to 2014 respectively. The total long-term debt for the Company scaled up from 23.21% to 23.70% that is from 2013 to 2014. This enlarges in the total debt due to the Company’s incapability to fund its activities by use of equity, a factor that inevitably increases Haier’s financial risk. 4. (Haier’s cross-sectional performance analysis) The inter-firm comparison is the contrast between one company and the other that are in same industry. The ratios that are used in making this a success are: liquidity ratios that are ratios that determine the company’s capability to meet its debts (Shimerda, 2013). Current ratio = in the Haier Company’s annual report, the firm had aggregate assets of 27,515.3 million and aggregate liabilities of 15,413.1 million. The current ratio is calculated as = 1.78. In opposition, Tesco balance sheet, the firm had assets of 46,489 million while aggregate liabilities of 24,157 million. Therefore, the company current ratio is = 1.91. The outcome demonstrates that Haier firm has a current ratio (1.79) lower than that of Tesco firm (1.92). This obviously shows that Tesco has acceptable working capital and Haier has a deficit in working capital. The quick ratio is a ratio that evaluates the firm’s ability to use its liquid assets to meet aggregate current liabilities. Therefore, in computing the quick ratio, inventories are subtracted because of lack of ability to be changed into cash simply. Pursuant to the information from Haier Company’s balance sheet, aggregate assets were 27,515.4 M, aggregate liabilities were 15,413.3 M and stock were 3668.1 M hence quick ratio tantamount to = 1.547. Tesco Company had aggregate assets of 46488, aggregate liabilities of 24,157 million and stock of 3,576 million. The acid ratio of the firm is = 1.77. It is palpable that Haier firm has a quick ratio of 1.547 as contrasted to Tesco that has 1.78. This then stipulates that Haier Company has a lower aptitude to meet its liabilities than Tesco Company (Conrick & Hanson, 2013). Profitability ratios demonstrate the firm’s income potential from its revenue and sales. Gross profit margin =. The ratio designates the extent of effectiveness by the management to generate the product. The firm, the firm had total sales of 67133 million and produced a gross profit of 9841.8 million. Gross margin = =14.66%. Conversely, Tesco firm had sales of 63, 5576 and a gross profit of 6,310leading to a gross profit margin of = = 9.91%. This outcome illustrates that though Haier Company has a low ability of meeting the liabilities; it has a higher profit margin of 14.67% as compared to Tesco firm that has 9.91%. Haier has a high likelihood of existing in the industry than the other firms. The net profit margin delegates the extent of a Company to be in control of meticulous funding fixed cost (Bragg, 2007). Haier had a profit of 2872.6 million from sales of 67,133 M hence a gross profit margin = = 4.28%. Tesco firm, conversely, had 63,556 million revenue and 2343 million operating income (Byun, 2012). Operating profit of the Company is = 3.68%. This stipulates that Haier Company is a brilliant position to produce more profits in prospect (Cafaggi, 2011). ROI; it can be described as the degree of profit earned from investments. Haier firm had net aprofit2, 872.6 M while had aggregate assets of 27,515.2 million = 10.43% loss ROI. Tesco firm had aggregate operating assets of 46488 million and profit 2343 M. ROI = = 5.03%. It is clear that Haier firm has a ROI that is high than Tesco firm. ROE profit return to shareholders that is usually donated by shareholders. The formula for the ROE is given by. Haier firm had a shareholders’ equity of 2, 872.7 million while net profit stood at 2, 872.7 million hence = 23.74%. On the other hand, Tesco firm had equity of 14,714m with net profit of approximately 2,343m leading to a ROE of = 15.92%. Haier firm has a lower ROE as compared to Tesco’s firm return. This highlights that Tesco firm maximizes the shareholders wealth than Haier. The asset turnover evaluates the income that is contributed from the aggregate assets. Asset turnover = income/total assets (Bull, 2008). Haier’s income was 67,134 m while aggregate assets were 27,515.3 hence 27,515.3 /67,134 = 0.41. Tesco had income amounting to 63,557 and aggregate assets of 46489 hence asset turnover being computed as 63,557/46489 = 1.37. Tesco firm has a high income generation than Haier. 5. (Industrial average comparison) Haier firm had ROA of 10.44% while Tesco company had ROA 10.03%. A firm such as Sainsbury had ROA of 10.963% while Ocado firm had ROA of 5.784%. It is evident that Haier is performing higher than some industries that exist in the industry. However, the Company comes second in the industry as far as performance is concerned. From operating profit point of view, Haier firm had 23.741% while Tesco firm had 3.692%. Company like Ocado and Sainsbury had operating profit margins of 1.74% and 3.44% correspondingly. It is evident Haier firm is the leading firm in generation of profits and, therefore, good for investment. Conversely, Ocado Company has the worst performance in the industry as it continuously operate at a loss. The Asset Turnover for Haier Company was 0.41 while that of Tesco Company was 2.721., Sainsbury firm had 3.18 while Ocado garnered 3.32.4%. The two companies had a low ROA articulating their inefficiency in asset utilization to produce profits. The ROE for Haier was 23.737%, Tesco company had 12.224%, Sainsbury firm garnered 12.21% while Ocado firm had ROE of 3.47%. Haier Company has the highest ROE as compared to other firms in the industry hence obvious that the Company maximizes its market value and shareholders’ value. The Company, therefore, is stable (Hwang, 2011). Conversely, Ocado Company stand a chance of being the worst performing company in the industry as it generates no ROE. Averagely, Haier is performing well in the industry and Tesco Company is the worst in the industry. 6. (Recommendations to assist improvement of the company performance) The company is highly recommended to increase its revenue generation by 20% to cater for the persistent increase in the cost of sales over the years. It is noted that an increase in the revenue generation will lead to a consequent increase in the gross profit generation given making an assumption that the cost of sales will remain constant in future. Additionally, the management should improve on the utilization of the resources to generate revenue. Any misuse or sub-utilization of resources will lead to wastage and hence detriment to the company. The cost of sales should be minimized as they have been increasing over time. The cost of sales have a direct effect to the profit generation and, therefore, a reduction will increase the profit generation hence improvement in the performance. The company is encouraged to use internal sources of finance such as equity instead of debts to finance its investments and other business activities. Debt capital requires a heavy cost of capital that can lead to a poor financial health of a company due to financial distress. More so, the debt increases the financial leverage subsequently opens the way to company’s bankruptcy hence cannot operate sufficiently. The company is recommended to have a strong internal control system to ensure that no vices such as defraud are done by the accountants as this might lead to continued loss in the net earnings hence reduction in firm’s value. Additionally, the management should encourage the full disclosure of the accounting information and any assumptions that are made when preparing the financial statements to avoid insider trading by the company’s employees. The company should employ working capital management. Capital management and important because the current assets influence the financial risk of the company. The Company is encouraged to mishmash long and short-term funds to finance its present assets. The sources available are bank overdrafts and promissory notes. The firm can adopt hedging method to avoid the risks such as price changes, and the increase in interest rates which increases the cost of borrowing the funds and a consequent increase in financial leverage. For the company to experience a high production, the advancement of technology should be called for. The technology is well known for the efficiency, faster production and production of high quality products that can be sold at a high price hence generation of income that lead to profit generation in the firm. Technology on the other hand reduces the fatigue that may be experienced buy some of the workers in the company hence feel relieved and can perform other tasks a part from the production one. The company can as well reduce the average collection period of the debts in order to increase the revenue collection. Increase in bad debts increases the provision for doubtful debts and in turn reduce the net revenue generation of the company. Therefore, a reduction in the average debtor turnover will also reduce the bad debts that have been increasing substantially over the period. 7. (Reference List) (2015). THE TESCO, PLC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME. Retrieved from: http://files.the-group.net/library/tesco/annualreport2014/pdfs/tescoar14_fs_comprehensiveincome.pdf Bragg, S. M. (2007). Business ratios and formulas: A comprehensive guide. Hoboken, NJ: Wiley. Bull, R. (2008). Financial ratios: How to use financial ratios to maximise value and success for your business. Oxford: CIMA. Byun, J. J. (2012). Horizontal and vertical intra-industry trade of Korea: A cross-country and industry analysis. Cafaggi, F. (2011). Contractual networks, inter-firm cooperation and economic growth. Cheltenham (UK: E. Elgar. Conrick, C. J., & Hanson, S. (2013). Vertical option spreads: A study of the 1.8 standard deviation inflection point. Hwang, L. A. (2011). An investigation of financial ratios in predicting firms future performance: An application of PRs methodology. Icon, G. (2006). Economic competitiveness of Russian Federation, the: financial returns, labor productivity and international gaps. ICON Group. Jablonsky, S. F., &Barsky, N. P. (2010). The managers guide to financial statement analysis. New York: John Wiley. Laitinen, E. K. (2005). The effect of a large investment project and technology on profitability ratios.Jyväskylä: University of Jyväskylä. Logan, T. (2014). Profiting from market trends: Simple tools and techniques for mastering trend analysis. Mayes, T. R., & Shank, T. M. (2015). Financial analysis with microsoft excel. THE HAIER COMPANY. (2015). THE HAIER COMPANY CONSOLIDATED BALANCE SHEETS. Retrieved from: http://www.bloomberg.com/research/stocks/financials/financials.asp?ticker=1169:HK&dataset=balanceSheet&period=A¤cy=native THE HAIER COMPANY. (2015). THE HAIER COMPANY CONSOLIDATED BALANCE SHEETS. Retrieved from: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0CCMQFjAB&url=http%3A%2F%2Fwww.ocadogroup.com%2F~%2Fmedia%2FFiles%2FO%2FOcado-Group%2Fannual-reports%2Focado-annual-report-2014.pdf&ei=xIdTVb-KAcj-Uo-YgeAH&usg=AFQjCNFbNaJp-IZMwdVYTVB4lxEsm1xG_Q&sig2=C5wQkIHFzn2h717IPpXqQQ&bvm=bv.93112503,d.ZGU THE HAIER COMPANY. (2015). THE HAIER COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY. Retrieved from: http://www.bloomberg.com/research/stocks/financials/financials.asp?ticker=1169:HK&dataset=balanceSheet&period=A¤cy=native THE HAIER COMPANY. (2015). THE HAIER COMPANY CONSOLIDATED STATEMENTS OF INCOME. 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