Samsung Electronic Financial Analysis - Case Study Example

Samsung Electronic Financial Analysis College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Introduction Samsung Electronics is among the leading electronic companies in the world. The company’s headquarters are in South Korea. The Middle and East Asia offer the largest market for Samsung Electronics’ product. The company principally engages in the manufacture of consumer electronic products. Its business operations are divided into three categories: (1) consumer electronics (CE) that covers visual displays (T.V), digital appliances (fridges), printing solutions (printers) and health and medical equipment; (2) information technology & mobile communications (IM) that covers mobile communications, networks and digital imaging (cameras), and; (3) device solutions (DS) that covers memory business, system large scale integrated circuits (LSI) and liquid electronic display (LED) business (Samsung, 2014). This report analyses the company’s various financial aspects. Corporate Governance, Legal and Regulatory Requirements Samsung Electronics changed its corporate governance (board-membership) in 2012. The board had 9 members in 2012 (7 in 2011 and 2010), constituting 5 outside directors (4 in 2011 and 2010). The outside directors are chosen to scrutinize as well as support the company's actions through checks and balances. As required by law, the board has set up and assigned authority to several committees under directors with the pertinent familiarity along with the qualified knowledge to carry out appropriate and competent decisions. The Management Committee guarantees professionalism as well as competence in management performance. The Audit Committee had 5 (6 in 2011) meetings in 2012. The Internal Transaction Committee was set up to boost transparency in management. The Outside Director Candidate Recommendation Committee guarantees fairness and autonomy. The Compensation Committee certifies impartiality and transparency in shaping directors’ compensation. In addition, Samsung Electronics acts in accordance with all laws along with the ethical standards that protect markets globally. These include: fair competition, safeguarding of personal data and anti-corruption. The company has also increased its social responsibility programs. Accountability for and Roles of Managers in Business Decision Making Managers are usually required to perform and account for four key roles in an organisation. First, they are required to plan. Planning involves scrutinising information and deciding what requires to be done. Second, they are required to organize. Organizing entails establishing the techniques needed to accomplish the plans most efficiently as well as arranging resources to get work done. Third, they are required to implement. Implementation means putting the plans into operation along with assisting employees to work efficiently. Lastly, they are required to control. Controlling involves the evaluation of results to find out if the company’s objectives have been met as designed (Weetman, 2011). Structure of Published Financial Statements Samsung Electronics prepares somewhat brief financial statements. The company’s annual report has the following components; Cover page; Year’s financial summary; Introductory note from Vice-Chairman & CEO; Board of directors; Business overview that covers the company’s varied business segments; Sustainability overview; Financial statements including Report of independent auditors and Notes to financial statements and lastly; Global network The financial statements are prepared in the following order with the formula used in bracket; I. Consolidated statement of financial position (Assets = Liabilities + Equity) II. Consolidated statement of income (Profit = Revenue – Expenses) III. Consolidated statement of comprehensive income (Comprehensive income = Profit – Items not to be reclassified + Items to be reclassified) IV. Consolidated statement of changes in equity V. Consolidated statement of cash flows (Closing cash = Profit for the year + Net cash from operating activities – Net cash from investing activities + Net cash from financing activities + Opening balance) Main Users of the Published Information Users of published information users are broadly classified into two groups; internal users and external users. Internal users include the owners, management and employees whereas external users include investors, creditors, suppliers, customers, the public, state institutions as well as other authorities. The internal users are interested in information regarding their business’s steadiness and profitability to carry their future decisions. The owners and the management are mainly interested in the business’s capacity to breed profits, whereas the employees are interested in the business’s capability to offer satisfactory remuneration, pensions along with other benefits, plus career openings (Steven, 2006). The investors (current or potential) are interested in the connection involving the business’s risks and benefits so as to make decisions as regards the purchase, sale or retention of stocks. They are too concerned about the business’s ability to pay dividends so as to calculate the approximate return on investment. The monetary creditors are concerned with the business’s ability to pay back their financial obligations in time so as to choose whether to boost, cut or maintain the level of credits as well as loans granted or to recover the credits and loans granted and end their dealings with that business. Suppliers as well as other trade creditors are concerned with the business’s liquidity to establish whether the outstanding amounts will be paid at maturity. They also need to decide whether to initiate trade links; maintain, increase or decrease trade relations; grant or cancel commercial services. Customers are concerned with the information regarding the continued existence of the business’s operations to settle on continued partnership with the business or seek other alternatives. The public are concerned with the information that will enable them to assess the economic and social impact of the business’s operations. State institutions plus other authorities require information to regulate the business’ activities, to establish taxation, to compute national income along with other macroeconomic indicators, and to inspect the impact of the business’s operations on the environment, among others (Martin & Fernando, 2002). Sources and Uses of Long-term and Short-term Finance The company has sourced for additional funds to finance its activities from various sources. The table below indicates the sources and uses of Samsung Electronics finances; Short-term Sources Use Trade and other payables (trade credit) Goods obtained on credit for sale or as production inputs Short-term borrowings (short-term loans, overdraft, e.t.c.) Used to finance short-term obligations such as paying salaries or purchasing stock Advance received (payments in advance) Can be used to finance company operations as determined by management Accrued expenses (accrued payments) Can be used to finance company operations as determined by management Long-term Sources Trade and other payables (Trade credit) Goods obtained on credit for sale or as production inputs Debentures Used to long-term finance capital projects Long-term borrowings (loans) Used to long-term finance capital projects Preferred stock Used to long-term finance capital projects Common stock (Ordinary shares) Used to finance usual company operations Retained earnings Used to finance company operations as decided by the management Calculation of Key Financial Ratios and Cash-flow Analysis Financial ratios form the toolbox used to perform the financial analysis of a company. Ratios are easy to understand and interpret considering that the final statements of accounts are not easy to interpret (Steven, 2006). Below are the key rations indicating the Samsung Electronics’ performance in 2012. Ratio Formula Working Result Current ratio 1.86 Quick ratio 1.48 Inventory turnover 7.13 Leverage 6.66% Debt/equity 15.51% Gross profit margin 37.02% Return on Assets 13.17% Different Methods Used for Appraising Capital Projects Capital projects are huge investment that a company puts money into. However, before investing in such projects, the company has got to evaluate a project to see whether the benefits of the project exceed the costs (Smith, 2007). There are around five methods used to evaluate capital projects. Below I discuss three of the methods used; Payback Period This is the amount of time a firm requires to recuperate the amount of money initially invested in a project based on projected annual cash inflows. Usually, the management determines the length of the maximum tolerable payback period. If the calculated payback period falls below the uppermost tolerable payback period, that project is accepted. However, if the calculated payback period is goes beyond the maximum tolerable period, that project is disallowed. This method broadly employed by big firms to appraise small projects. Also small firms exercise the method to appraise most projects, which are small in nature. The method is easy to work out. The method also gives inherent reflection to the timing of cash flows and so to the time value of money since it measures how fast a firm recuperates the funds invested (McLaney & Atrill, 2013). Net Present Value (NPV) The net present value is a more complicated method used to appraise capital projects. The net present value is arrived at after taking away a project’s invested amount from total the present value of the cash inflows obtained each year. The cash flows are as well marked down at a rate equivalent to the firm’s cost of capital. If the NPV is greater than zero, the project is accepted but if it is less than zero, that project is shelved. NPV = Present value of cash inflows – Initial investment NPV method measures the direct dollar contribution to the stockholders. The method considers all cash flows along with their risks and takes into account the time value of money. It therefore, provides an improved prediction (Drury, 2004). Internal Rate of Return (IRR) The Internal Rate of Return (IRR) is another method used to appraise capital projects. Just like the NPV method, the method is also quite difficult to use. The IRR is the discount rate at which the NPV of a capital projects equals to the amount of cash initially invested in the project. It is also the rate of return that the firm will receive if it invests in the project and receives the prearranged cash inflows. If the computed IRR is more than the cost of capital, the project is approved, however, if it falls below the cost of capital, the project is discarded. The IRR shows the return on the initial amount that is invested. The method does not require one to work out the cost of capital. It also indicates whether an investment increases firm value and can be used to compute the break-even point. Also, the IRR method offers an alternative cost of capital that includes a suitable risk premium (Deegan, 2009). Weaknesses of Published Financial Information Users of published financial information encounter several shortcomings due to the confines of the information enclosed in financial statements. First, entire financial statements enclose information covering the earlier periods, and the users make use of them to support future-oriented decisions. Also, financial statement structures are usually estimated on their historical cost, which is been found to have numerous shortcomings. Furthermore, the existence of several accounting options and the liberty to choose between them lead to inventive accounting that can produce the results desired by the preparers, and not the genuine information. Owing to the reality that some information cannot be measured monetarily (such as, human resource potential) means that they are not incorporated in the financial statements. Also there is no part of the financial statements that totally makes clear the capacity of a business to make profits or the potential risks they could face (Brealey et al, 2012). Conclusion Samsung Electronics is a leading electronic company in the world; it is located in South Korea. The company is managed by a 9-member board of directors who have set up various committees as required by law. The managers’ roles include planning, organising, controlling and implementing organisational resources. Samsung Electronics prepared its financial statements using the conventional standards. There are both internal and external users of published financial information. There are both short-term and long-term sources of finance. The company posted a good performance in 2012 with a moderate level of liquidity and high profitability. Various methods used to appraise capital projects include the payback period, NPV and IRR. Published financial information faces various shortcomings that dilute its usefulness (Edmonds et al, 2006). References Brealey, R.A., Stewart, C.M. and Marcus, A. Fundamentals of Corporate Finance, 9th edn. 2012. New York: McGraw Hill. Deegan, C, Financial accounting theory, 3rd edn, 2009, McGraw-Hill, North Ryde Drury, C, Management and Cost Accounting, 2004, London, Thompsons Learning Edmonds, C, Edmonds, T, Olds, P, and Schneider, N, Fundamental Managerial Accounting Concepts, 2006, New York, McGraw-Hill Irwin Martin, S.F and Fernando, A. Financial Statement Analysis:  A Practitioner's Guide, 3 edn, 2002, John Wiley & Sons McLaney, E and Atrill, P. Accounting and Finance for non-specialists 8th edn. 2013. Harlow: Financial Times/Prentice Hall. Samsung, 2014, About us, viewed 3 March 2014, Smith, J, Handbook of Management Accounting, 2007, Amsterdam, Boston Cima Publishing Steven, M.B, Financial Analysis: A Controller's Guide, 2nd edn, 2006, Wiley. Weetman, P. Financial and Management Accounting: An Introduction 5th edn. 2011. Harlow: Financial Times/Prentice Hall. Read More