Financial Performance of Samsung Electronics - Case Study Example

Economic analysis of Samsung Electronics Student’s Name Institution Affiliation 7th August 2014 Executive summary The aim of this paper is to analyze the financial performance of Samsung Electronics which is a multinational company that deals in mobile communication and information technology; consumer electronics, and device solution. By year 2010, HTC was the leading Smartphone maker in the world but it has recently been overtaken by Samsung Electronics. Currently, the Smartphone market is dominated by Samsung androids. Therefore, it is necessary to analyze the past financial performance of the company to help understand whether there was a trend suggesting a possible improvement in its profits to attain a level that is commanding a large share of the electronics equipment market. Comparison is done for different years for period 2006 to 2013 and also a comparative analysis with other market players in the Smartphone market to establish how the company fairs in relation to HTC and Nokia which are its main competitors. The paper will also show that the business strategy adopted at Samsung Electronics has been effective especially in 2009 and in year 2012 when there was a major fall in GDP growth. Furthermore, the analysis will assess the capacity of Samsung Electronics to overcome the slowdown in GDP in its market. Table of Contents Executive summary 2 Table of Contents 3 Introduction 4 Background of Samsung Electronics 4 Financial performance of Samsung Electronics 5 Macroeconomic exposure 6 Non-economic macro exposure 6 Market exposure 7 Vulnerability and costs 8 Business conduct and strategy 10 Conclusion 11 Appendices 13 Appendix A: Key ratios 13 Appendix B: Changes in revenue and costs 14 References 15 Introduction According to Block & Hirt (2008), the objective of a company is to maximize the wealth of the shareholders. McCrary (2010) notes that when shares of a company are being traded and the markets are very efficient it is equated to share price maximization. According to Kothari and Barone (2006), value is what someone is ready to pay. This means that the worth of a company is what the buyer or investor is willing to pay for the shares of the company. The economic analysis of Samsung Electronics will evaluate whether the company is a profitable investment. Background of Samsung Electronics Samsung Electronics was incorporated in 1969 in accordance with the republic of Korea laws and its shares were first listed in stock exchange of Korea in 1975. It is an international company that deals in electronics and is one of the largest manufacturers of semiconductors in the world. It is in the consumer goods sector and in electronics equipment industry. Apart from selling consumer electronics the company is engaged in mobile communications and information technology and also offers device solutions business globally. Some of the consumer goods that the company makes include mobile phones, televisions, tablets, digital still cameras, digital TVs and DVD players. It also manufactures computers, printers, LCD panels and colour monitors. The company has three divisions dealing in mobile communication and information technology; consumer electronics, and device solution (YAHOO! FINANCE, 2014). It has its global headquarter in Seoul, Korea. It has several regional headquarters in North America, Latin America, Europe, South East Asia, china, Japan, middle East, Africa, Southwest Asia and CIS in Moscow, Russia. Its principal auditor is the Price water house Coopers. Financial performance of Samsung Electronics It is a requirement by accounting regulation for companies to prepare their end of year financial statements in an acceptable manner so that they can be compared with the previous year’s statement and with the statements of other companies. According to Stolowym & Lebas (2006), this is the accurate way of comparing performance of two or more companies since they play on a level ground. Financial statement analysis has been used as the most appropriate evaluation method to evaluate financial performance of Samsung Electronics and other companies in the same industry, which are HTC and Nokia. The calculation of ratios is based on the latest annual reports of the respective companies. It is possible to use ratio analysis in the evaluation of performance of the three companies since they have all prepared the general purpose financial statements for the same periods. The comparison of the three companies has been based on ratio analysis as computed from consolidated financial data of the respective companies. For the purposes of evaluation of financial statement, the analysis has been broken down into five major categories namely; profitability, liquidity, efficiency, gearing and investors’ ratios. The table in appendix A is a summary of the key ratios under these categories for the Samsung, HTC and Nokia companies for the years 2009 – 2011. The ratio analysis shows that Samsung has been more profitable than Nokia as calculated by return on shareholders’ funds. For instance, in year 2011 Samsung Electronics 15.96% return on equity whereas Nokia reported a loss during that year. Madura (2006) explains that profitability ratios measure the operating efficiency of the company and include measuring the company’s capability to generate revenue income, which by extension translates to cash inflow to the company. This shows that Samsung Electronics is efficient in its operations. Macroeconomic exposure This exposure is beyond the direct control of the company since it is external to the entity (McGuigan, Moyer and Harris, 2011). All businesses operate under the laws and regulations of the country in which they are conducting their production activities. They have to comply with these laws failure to which they are fined heavily or even denied the licence to operate. For instance, a business is expected to respect the business ideas or not to duplicate anything patented by another person or a business entity. Therefore, the legal environment exposes the company to uncertainty with respect to litigation in the future. In fact, there is an ongoing case where Samsung Electronics has been sued by Apple Inc because the company infringed the design and utility pattern of Apple Inc. This and other claims lodged against the company will significantly reduce its profit if court awards damages. There are also cases of inflation in some of the countries in which the company has an operating entity. This reduces the profit of the company since it is mostly unexpected inflation fuelled by political instability. For instance, in Kenya during the post election violence in 2008 the levels of inflation rose to 2 digits. Handerson (1987) points out that an entity cannot immediately adjust its price to cushion against the rising inflation hence affecting the financial performance of the company. Non-economic macro exposure In some countries the authorities are reluctant to issue licence to operate in their country in order to protect their infant industries. Generally, the licence is issued under strict regulation and high payment. These preliminary expenses reduce the profit for the company. Operating in some countries is sometimes difficult because of the lack of experts from the local country. The company is forced to hire expatriates from other countries who are very costly for the company. According to Needles, Powers and Crosson (2010), high interest rate charge on borrowed funds affects the profitability of the business because of the high interest payment. Samsung protects itself from fluctuations in interest rates by borrowing from international banks like the SMBC, Citibank and the World Bank. These banks have huge capacity to offer high loan at affordable rates compared to the local banks. Operating in different countries is seen by Boudt, Peterson and Croux (2008) as an effective way of risk management. Samsung Electronics produces and sells its products in many countries across the world and has also decentralised its functions to regional headquarters. This ensures that loss from some countries is offset by super normal profits in other countries. Market exposure There are many players in electronics equipment industry besides Samsung Electronics and the competition is stiff especially from the Nokia Corporation. However, Samsung Electronics has good knowledge and understanding of the market and the major attributes of its loyal and prospective customers. The company leverages this knowledge to improve its understanding of its marketing niche, its specific needs, and improvement of the market for future marketing needs. Samsung Electronics adapts an overall strategy in defining its market approach and profile. Furthermore, the company has defined its market penetration strategy in order to ensure it takes advantage of its unique value, which according to Pinto (2010) attracts various customers across the globe market. The company ensures that it develops a market growth strategy that is helpful in ensuring both current and future opportunities within the global markets are fully developed. These growth strategies include expanding services and products offerings, expansion through franchising as well as expanding into new economic sectors within the global market. In addition, the company has developed a market communication strategy, which includes the development of public relation, online marketing strategy, product marketing, and creating various tactical selling methods. Samsung Electronics has a well established sales network in Asia Pacific, Middle East and Africa, North America and Latin America. The financial statement items of the different entities of the company are measured using the functional currency of the country in which the entity operates. However, the functional and presentation currency of consolidated financial statements of the company is the Korean Won. When translating the foreign currency transactions into the company’s functional currency, it uses the prevailing exchange rate at the transaction date. According to Sloman and Jones (2011), this helps the company to hedge against foreign exchange risks. Vulnerability and costs In this paper vulnerability refers to the extent to which Samsung is exposed to risk of poor performance as a result of rise in costs that are significant and uncontrollable by the company. Samsung Electronics is type 1 vulnerable. From the table named appendix B in the appendix, it can be seen that fixed costs are changing in a higher percentage than the corresponding percentage change in total revenue. In 2012 when revenue changed by33.20% fixed costs changed by 35.54%. Similarly in year 2013, revenue changed by 13.72% when fixed costs changed by 19.40%. In contrast, when revenue changed by 33.20% in 2012, variable cost changed by 23.42% which is a lower percentage change. This shows that Samsung Electronics is type 1 vulnerable (Krugman & Obstfeld, 2009). The high rise in fixed costs places the company at a disadvantaged position since there is nothing much that the company can do to control these costs. However, the company has its operations in different parts of the world for instance; it operates in middle and East Africa, Latin America, Asia Pacific, Europe and North and South America. This helps the company to cut down on cost of production hence bringing down the level of fixed costs involved. The main fixed cost is selling and administrative expenses. This is mainly caused by the company’s policy to review the salary structure after every year. Therefore, the employees who have worked in the company for many years have huge salaries compared to new recruits. In addition, the company wants to retain best talent in the industry. However, the company has put up a strategy to protect itself from this vulnerability by developing new talent from within the company. The human resource development centre is tasked with the responsibility of overseeing the training programs. This is driven by the understanding that human capital is a very important asset for the company hence the spending of resources in nurturing its employees to their full potential. The individuals trained by the company have the requisite skills and do not demand for hefty salary compared to an expert hired from external sources. Business conduct and strategy A strategy is a long term plan towards the achievement of the goals of the company (Preve and Sarria-Allende, 2010). The main goal of Samsung Electronics is to use innovation and creativity to enrich people’s lives throughout the world. The company has lived to its vision and in most parts of the world a Samsung product is traded. Several strategies have been put in place to ensure that the company achieves its goals. These include; Strengthening key businesses while identifying new opportunities: the company spends substantial resources in research and development through which new ideas are nurtured and new products are launched in the market. In 2008 the company started an open innovation system in research and development with the aim of expanding its strategic partnership with other researchers in the UK, Korea and in North America. The introduction of new products in the market is in line with the zeal to solve the present problems affecting the society. This has helped the company to maintain a competitive edge against its competitors while remaining relevant in the market (Keown, 2003). In fact, the company has developed software that has improved medical services and biotechnology thus enriching human live. Creating brand that excites customers: Samsung Electronics has a well coordinated marketing team that collect and act on views from customers. This information is crucial in designing brands that customers love. Initially, Samsung Electronics was not producing Smartphone, but the response from the market pushed the company into creating the brand. Currently, it is one of the most sought after brand of the company. Its passion to meet customer satisfaction ensures continued growth in revenue and profitability. Encouraging creativity: the company has a reward system aimed at encouraging its human capital to be creative and also ensure quality life for its staffs. This motivation enables the staffs to work in an environment that emphasize productivity, creativity and innovativeness. Trust building: the company does not operate in isolation, it also depends on other industry players. The company ensures that it maintains good relationship with the suppliers. Supply chain is very vital in present economy where competition has become very stiff. In 2008, Samsung Electronics established partner collaboration and enhancement office which is an organization whose role is to innovative collaborations and cooperation with suppliers. The organization dedicates its effort to supporting suppliers and ensuring they remain productive and efficient. This move has enabled the company to improve its processes as well as save on costs and delivery time and there is significant reduction in inventory. Conclusion Samsung Electronics is a profitable company and it’s a market leader in electronic equipment industry. It has a well established sales network that helps it to distribute its products globally. This has ensured that there is continued growth of sales revenue and profits since new markets are entered over the years. The company has continued to ensure its presence and relevance through its creativity and innovation of brands that meet and exceed customer expectations. Moreover, the company prides in the good relationship it has with its suppliers and other market players. The future of the company is bright because it has created an enabling environment in which it operates by empowering the local country through its corporate social responsibility activities. In fact it is the major sponsor of Chelsea Football Club which is based in London. This has the effect of acceptability in the society and the desire to identify with the company thereby ensuring continued existence of the company. The revenue of the company rose by 13.72% in 2013 despite the GDP slowdown in 2012. Appendices Appendix A: Key ratios Category Key Ratio Computation Company 2009 2010 2011 Profitability Return on shareholders' funds Net Income/ Shareholders' equity HTC 34.45% 52.89% 60.83% Samsung 14.95% 19.36% 15.96% Nokia 1.76% 8.27% -10.69% Efficiency Stock Turnover period (Inventory/ credit purchase) *365 HTC 19 49 31 Samsung 91 94 109 Nokia 25 31 31 Liquidity Current ratio Current Assets/ Current Liabilities HTC 1.9524 1.4580 1.2715 Samsung 1.7052 0.4440 0.0460 Nokia 1.5547 1.5476 1.4592 Gearing Interest Cover ratio Operating Profit/ interest payable HTC 11,192 12,390 2,220 Samsung 20 30 29 Nokia 5 8 -4 Debt-Asset ratio Total Liabilities/Total Assets HTC 0.4501 0.6380 0.6986 Samsung 0.1369 0.3346 0.3456 Nokia 0.5873 0.5851 0.6156 Investors' Ratio Dividend Payout ratio Dividends/ Net earnings HTC 67% 46% 41% Samsung - - - Nokia - - - ROCE Operating profit/ (Share capital and reserves +Non-current liabilities) HTC 37.48% 59.05% 67.13% Samsung 14.26% 19.22% 15.40% Nokia 5.82% 9.59% -5.72% Appendix B: Changes in revenue and costs Year Total Revenue $”000” Change (%) Variable costs $”000” Change (%) Fixed costs $”000” Change (%) 2006 91,508,107 - 64,025,507 - 17,750,164 - 2007 105,018,995 14.76% 75,566,005 18.02% 19,886,857 12.04% 2008 103,936,863 -1.03% 76,917,185 1.79% 21,850,986 9.88% 2009 119,103,403 14.59% 84,785,803 10.23% 24,396,734 11.65% 2010 134,076,414 12.57% 89,020,051 4.99% 30,058,933 23.21% 2011 143,069,254 6.71% 97,239,463 9.23% 31,741,034 5.60% 2012 190,565,349 33.20% 120,015,095 23.42% 43,023,163 35.54% 2013 216,708,677 13.72% 130,480,725 8.72% 51,370,553 19.40% References McGuigan, J. 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