Siemens Financial Performance - Case Study Example

Siemens Financial Performance Report Name: Institution: Date: Siemens Financial Performance Report Executive summary This report represents Siemens financial performance report that uses accounting ratios that comprise of liquidity/solvency, efficiency/activity, profitability and gearing ratios to analyze the financial performance of Siemens AG. Siemens is a global company that has diversified in many sectors and has played the pioneer role for several products. This report commences with a brief introduction that entails the background of the company, its mission, as well as vision in the global world. The purpose and objective of the report is stated in the section that follows. The main section involves determination of various ratios and their analysis while revealing their usefulness to the company management and shareholders. The industry figures have been given in some cases in order to see the benchmark against which Siemens performance is gauged. The report looks at profitability ratios, liquidity ratios, efficiency as well as gearing rations. The limitations of this analysis as well as challenges that Siemens faces have been discussed. The conclusion is drawn at the end of the every analysis of a ratio and final conclusion made when the possible ratio obtained have been exhausted. The recommendations are that suggest the way forward for the company is immediately after the conclusion. The final part involves the references that were used in explanation of various concepts with regard to ratios, their interpretations and limitations. Table of Contents Executive summary 2 Introduction 3 Purpose and Objective 4 Profitability ratios 4 Efficiency/activity ratios 7 Liquidity ratios 13 Current ratio 13 Quick ratio 14 Conclusion 15 Limitations 15 Recommendations 16 References 17 Appendix 17 Introduction Background of the company Siemens is a globally operating company that has core activities in the fields of healthcare, energy, infrastructure, Siemens IT solutions, Siemens Financial Services and Equity solutions and industry. Siemens Group is a German engineering and technology conglomerate with $112 billion revenue in 2009. Siemens occupy leading positions in the world in the majority of its businesses. Their innovation histories span back 166 years ago when the invention of the dynamo and the first electric streetcar was engineered (www.siemens.com/). Vision The global vision of Siemens is to remain the pioneer in energy efficiency, industrial productivity, intelligent and personalized healthcare, as well as personalized and affordable healthcare. Mission The mission of Siemens: on the basis of the company forward-looking and solutions respond to most challenging question in the Energy, industry and healthcare sectors. The wide range of solutions and products are designed with the environment in consideration and engage with the crucial subject of climate change. Purpose and Objective The purpose of this report is to represent the clear picture of the financial performance Siemens to the board of directors as well as current and potential investors who are interested with the future of the company. The objective is to use financial ratios to analysis the situation at Siemens in terms of performance over a four year period in order to establish a trend to interested parties. Profitability ratios These ratios show how best the company is running its business. Performance can be shown through analysis of profitability ratios. Profitability ratios measure the ability of the firm to use its assets and control of expenses in order to realize an acceptable rate of return. There are 3 main ratios that can be applied in measuring the profitability of a business. These ratios include gross profit margin, net profit margin, and Return on Capital Employed (R.O.CE.). Profitability ratios are usually used to measure the probability of a business earnings compared to expenses (Bragg, 2012). They portray the efficiency and performance of the company. Profitability ratios are used to measure the ability of the company’s to generate earnings relative to expenses and other costs. Profitability ratios measure the ability of the company generating profits, earnings, and cash flows relative to the amount of money which is invested. Return on Assets (ROA) Return on assets is used to measure the ability of the company to turn assets into profit. Return on Assets = (Net Income + Aftertax interest expense Expense)/(Average Total Assets) This profitability ratio is obtained by dividing net income by total assets. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 Net income attributed to shareholders of Siemens AG 5,903 5,878 7,972 5,174 Total Assets 140,466 142,777 135,240 136,448 Siemens AG ROA 4.20 % 4.12 % 5.89 % 3.79% Industry ROA - 6.01 % 7.06 % 6.06 % Siemens ROA improved from 2010 to 2011, it dropped in 2012 but slightly improved in 2013. ROA throughout the four year period fell below the industry benchmark. The company was not doing very well. Return on Equity (ROE) Return on equity is a ratio which measures the return of company on its investment by shareholders. Return on Equity = (Net Income)/(Average Shareholders’ Equity). This is a very important financial ratio to investors in any company since they want to know the return on the money that they have invested in the company. It measures how much net much net income has been earned as a percentage of shareholder’s equity. ROE is calculated as net income divided by common equity. Return on equity assist in determining how efficient a company is generating profits. Companies with consistently high returns on equity as compared to the norms in the industry make them have a competitive advantage. However, the ratio does not tell whether or not a company has an excess amount of debt. The net income is obtained from the income statement whereas the stockholders’ equity is obtained from the balance sheet. The higher the percentage, the better, except in some few cases. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 Net income attributed to shareholders of Siemens AG 5,903 5,878 7,972 5,174 Equity attributed to shareholders of Siemens AG. 38,736 40,523 40,906 37,614 Siemens AG ROE 15.24% 14.51% 19.49% 13.76% Industry ROE - 17.58% 20.24% 16.81% This is a profitability ratio that is obtained by net income with shareholder’s equity. Siemens AG ROE dwindled from 2011 to 2012 but slightly picked up in 2013. 2010 posted a lower value. The figures indicate inconsistency of the company. Gross profit margin The gross profit Margin (GPM) is the cost of goods sold expressed as a percentage of sales made. This ratio assesses how effectively a company is charge of its cost of inventory and the manufacturing of its products. It also ascertains the transfer the cost to the customers. The larger the gross profit margin, the better for the welfare of the company as far as operations are concerned. The gross profit margin shows the percentage of revenue that is available to cover operating and other expenses. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 Revenue in Euro Mil. 104,564 103,238 95,375 100,820 Gross profit in Euro Mil. 28,702 29,277 28,707 28,725 Gross Margin % 27.45% 28.36% 30.10% 28.49% Siemens AG gross profit margin dropped from 2012 to 2013 and from 2011 to 2012. The gross profit margin stayed within a close range. There was stability when it came to gross profit attained. Operating profit margin Profitability ratio is calculated as operating income divided by revenue Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 Revenue in Euro Mil. 104,564 103,238 95,375 100,820 Operating income 7,342 9,288 10,324 7,850 Siemens Operating Margin 7.02% 9.00 % 10.83 % 7.79 % Industry O.M. - 11.05% 12.14% 11.85% Siemens AG operating profit margin dropped towards 2012 and towards 2013. However the operating profit margin was less than that of the industry throughout the four year period. Efficiency/activity ratios Activity ratios measures how quickly a firm converts non-cash assets to cash assets. These ratios are used to analyze how effective a company uses its asset and liabilities internally. Efficiency ratios are able to determine the repayment of liabilities, turnover of receivables, the usage and quantity of equity as well as the general use of machinery and inventory. These ratios become meaningful when they are compared to peers within the same industry. Efficiency ratios are crucial because their improvement leads to the improvement of the profitability of a company (Adekunle, 2005). These ratios indicate how effectively a company manages its liability and utilize its assets. Some of these ratios include inventory turnover, receivable turnover, average receivable collection period, average inventory processing period, operating cycle, payable turnover, and working capital turnover. Inventory Turnover (I.T) This is an activity ratio that is normally calculated as revenue divided by inventory. \ Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 US$ ‘000,000’ US$ ‘000,000’ US$ ‘000,000’ US$ ‘000,000’ Revenue 104,564 103,238 95,375 100,820 Inventories 21,441 20,674 19,646 19,838 Siemens AG I.T. 4.88 4.99 4.85 5.08 Industry I. T. - 5.61 5.84 6.46 The inventory turnover of Siemens AG’s inventory turnover improved from the year 2011 to 2012 but slightly dwindled from the financial period 2012 to 2013 not attaining the 2011 level. Receivable Turnover (R.T) This is an activity ration that is obtained by dividing revenue by trade of receivables from the sale of services and goods. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 US$ ‘000,000’ US$ ‘000,000’ US$ ‘000,000’ US$ ‘000,000’ Revenue 104,564 103,238 95,375 100,820 Trade receivables from sale of gds and services 17,820 17,550 16,980 18,202 Siemens AG R.T. 5.87 5.88 5.62 5.54 Industry R.T. - 6.82 6.55 6.57 Siemens AG’s receivable turnover improved from the period 2011 to 2012 but slighted dropped from 2012 to 2013. In 2012 and 2011, the receivable turnover was greater than the industry turnover. But the 2010 receivable turnover was slightly less than the industry turnover. Average receivable collection period (A.R.C.P) This is also an activity ratio that represents the number of days in the period divided by receivable turnover. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 Receivable turnover 5.87 5.88 5.62 5.54 Siemens A.R.C.P 62 62 65 66 Industry A.R.C.P - 54 56 56 The average receivable collection period for Siemens AG improved from 2010 to 2013. It improved slighted from 66days in 2010 to 65days in 2011. There was also in improvement to 62 days in 2012. However, it stayed the same in 2013. It is perturbing to note that the average receivable collection period of Siemens AG always fell below the industry benchmark in the three years. In 2010 the industry average receivable collection period was 56 days with remained the same in the following year. This was ten days less as compared to Siemens Ag in the same period of time. The gap decreased slightly in 2012 when Siemens reported an average receivable collection period of 62 while that of the industry was 54. Average inventory processing period (A.I.P.P) This is another activity or efficiency ratio that is equal to the number of days in a period divided by inventory turnover reported in that particular period. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 Siemens AG I.T. 4.88 4.99 4.85 5.08 Siemens AG A.I.P.P. 75 73 75 72 Industry A.I.P.P. - 65 63 56 There has been inconsistency in the average inventory processing period of the company over the four year period. The period level was better in 2010 but deteriorated in 2011; it picked up in 2011 only to drop in 2013. A different trend has been exhibited by the industry average where it began at 56 days in 2010, dropped to 63 days in 2011 and dropped further to 65 days in 2012. This is the time that the company takes to turn its inventory and the shorter the period the better for the operations of the company. It is unfortunate that the average inventory processing period of Siemens AG was always below reported by the industry. This indicate that the company was not doing well it came to turning over its inventory. Operating Cycle The operating cycle is equal to the sum of average inventory processing period and average receivable collection period. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 Siemens AG A.I.P.P. 75 73 75 72 Siemens AG A.R.C.P. 62 62 65 66 Siemens AG Operating Cycle 137 135 140 138 Industry Operating Cycle - 119 119 112 The operating cycle for Siemens AG was inconsistent through the four year period. This has been contributed by the figures obtained average inventory processing period and average receivable collection period that reflected the same inconsistency. The operating cycle of the company is longer as compared to the industry operating cycle in the four year period. Payable Turnover This is an activity ratio which is calculated as revenue divided by payables. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 US$ ‘000,000’ US$ ‘000,000’ US$ ‘000,000’ US$ ‘000,000’ Revenue 104,564 103,238 95,375 100,820 Trade payables 10,471 10,596 9,960 10,482 Siemens AG P.T. 9.99 9.74 9.58 9.62 Industry P.T. - 9.84 9.45 9.83 Siemens AG payables turnover improved from the period 2011 to 2012 and from the period 2012 to 2013. In 2010 it was greater as compared to the following year. It surpassed the industry payable turnover in 2011 but stayed to it in 2010 and 2012. So long as the ratio is not so far from the industry ratio there is no cause of alarm. The increase in the ratio shows the increased ability of the company to generate revenue from services and goods from creditors. Working capital turnover Working capital turnover ratio is obtained by dividing revenue by working capital. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 US$ ‘000,000’ US$ ‘000,000’ US$ ‘000,000’ US$ ‘000,000’ Revenue 104,564 103,238 95,375 100,820 Current Assets 64,678 68,735 68,517 66,586 Less: Current liabilities 52,181 56,220 56,513 53,888 Working Capital 12,497 12,516 12,004 12,698 Siemens Ag W.C.T. 8.37 8.25 7.94 7.94 Industry W.C.T. - 8.63 10.43 8.26 Siemens working capital turnover increased from 2011 towards 2012 and from 2012 towards 2013. In 2010 and 2011 it stagnated before increasing in the subsequent years. Liquidity ratios Liquidity ratios are a group of financial metrics that is used to ascertain the ability of the company to pay off its debts obligations. It is the availability of cash to pay debt. The bigger the value of the ratio is the higher the margin of safety that the company has for covering short-term debts. Commonly used liquidity ratios comprise of quick ratio, current ratio, and operating cash flow ratio. They measure the capacity of the company to meet its short term debt obligations. Liquidity ratios are as a result of dividing cash as well as other liquid assets by short term borrowings and current liabilities (Chandra & Chandra, 2006). They indicate how many times the debt obligations have been covered by debt. Investors take a keen look at liquidity ratios when analyzing fundamental performance of the company. The ability of a firm to turn short-term assets into cash to cover debts is of most importance when creditors are seeking payment for goods and services. Current ratio The current ratio is the most fundamental liquidity test of any company. It shows the ability of the company to meet its short-term liabilities using its short-term assets. A current ratio that is equal or greater than one shows that the current assets are able to satisfy short term obligations of the company. A current ratio of less than one shows that the company has challenges when it comes to meeting its short term financial obligations (Gibson, 2012). Current ratio = Current Assets/Current Liabilities The ratio indicates how a company can use its assets to generate more profit and higher ratio portrays better performance. The best benchmark for the current ratio is 2:1. Current ratio which is below or above this level should not be acceptable by any company. if the current ratio is greater than the recommended standards it shows that there is over capitalization in the company hence much investment in current assets, therefore, reducing the company’s profitability. When the current ratio is below the benchmark it is an indicator of over trading that shows that a company is usually trying to expand its operations without having a strong cash base. Having over trading challenges is a indicator of liquidity problems and current ratio less than the benchmark limit indicate that the company will not effectively to pay off its liabilities on due date hence the danger of solvency. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 Current ratio 1.43 1.36 1.28 1.27 Siemens current ratio improved steadily over the four period from 2010 to 2013. Quick ratio Quick ratio is normally a tougher measure of liquidity than the current ratio. It removes certain current assets like inventory and prepaid expenses that may be challenging to convert into cash. Having a quick ratio that is above one shows the ability of the company to cover its short term financial obligations. Quick ratio is also referred to as Acid test ratio. Stock or inventory is excluded since it is the least liquid asset. The benchmark acceptable for quick ratio is 1:1(Brigham, 2007). The ratio measures the capacity of a company to use its near cash as well as quick assets for immediately extinguishing the current liabilities. Quick assets comprise those current assets that seemingly can be quickly converted to cash at close to book values. The ratio shows a capacity of a firm to maintain operations as usual with current cash or near cash reserves in the course of bad periods. The ratio shoes a liquidation approach and does not on the other hand acknowledge the revolving nature of current liabilities and assets. The ratio is used to compare the firm’s short-term and cash investments to the financial liabilities the firm is expected to incur in the course a year. Sep 30th 2013 Sep 30th 2012 Sep 30th 2011 Sep 30th 2010 Quick ratio 1.20 1.17 1.16 1.05 Siemens quick ratio improved steadily over the four year period from 2010 to 2013. The liquidity of the company was steady over the period. Conclusion Efficiency ratios indicate that Siemens is competing well globe safe for a few places like the operation cycle and average receivable collection period. The company has to improve on how it collects its debts. The gross profit margins are fair and stayed close in the four year period. This shows stability in the case of the company’s performance. Working capital turnover indicated improvement in the operations of the company over the four year period. The operating prowess of the company fell below the industry figures hence need for improvement. Generally the company has performed fairly when in the industry and other sectors. Limitations The world is obviously growing smaller. Unfettered and free competition, networked communications and open markets are enhancing chances of prosperity and growth. As firms gain access to larger markets, they are growingly exposed to pressure due to international competition. Global processes such as research and development, supply chain management to reproduction, as well as sales and marketing are placing increasing demands on companies; especially with regard to efficiency, cost and innovation. In order to survive in the face of global competition, companies have to produce high-quality; customized, affordable products cost-effectively and quickly while observing environmental standards as well as sustainability requirements. Only firms that continuous improve their products, flexibility and energy efficiency can successfully compete in the current world. Siemens being a diversified conglomerate has competitors from various fields. Some of the competitors that Siemens face in different fields include 3Com Corporation, Avic, Alstom, Eaton, Ericson, General Electric, Nokia, Philips, Rockwell Automation, Samsung and Toshiba. Analysis by ratios cannot reveal all the challenges that Siemens is going through, further scrutiny of the closing accounts, balance sheet, income statements and cash flows is required in order to understand the performance of the company. Some of the ratios may be misleading if they are not compared by peers within the same industry. Siemens being a conglomerate business cannot be fully understand using ratios since there are so many intricate issues in every sector that need to be analyze carefully. Recommendations Siemens AG has to improve its tactics when it comes to debt collection. It is usually safe to stay within the industry benchmark or be very close or even better. However, Siemens AG has recorded poor period of collection of debts from creditors. The money owed to the company has to be collected in due time to enhance the profitability of the enterprise. Delaying in collection of debts does not appreciate the inflation effect in the value of money and other challenges when it comes to preparation of final accounts. Revenue has to be collected in the period when it is earned in order to reflect correctly on the profitability of the company. The company can extend discounts to debtors who pay for services and goods in time in order to enhance early settlement of their accounts. With a good average receivable collection period, the company will be able to meet effectively its financial obligations in order to enhance daily operations. The company has to improve its average inventory processing period to be close that of the industry benchmark or better. Siemens did not report a good figure when it came to the determination of the average inventory processing period. The company took longer than the industry average when it came to inventory turnover. References Brigham E. F. (2007). Fundamental of Financial Management, New York: Cengage Learning Gibson, C. (2012). Financial Reporting and Analysis, New York: Cengage Learning Chandra, D. & Chandra, B. (2006). Fundamentals of Financial Management, Melbourne: PHI Learning Pvt. Ltd Bragg, S.M. (2012). Financial Analysis: A Controller's Guide, London: John Wiley & Sons. Adekunle, D. (2005). Accounting for Special Business, New Delhi: Trafford Publishing. Appendix Siemens Trend Read More