Financial Strategies - Essay Example

Financial Analysis Table of Content Introduction 3 Debt and Equity Levels 4 Recent/Current Undertaken Project 4 Financial Strategies 8 Maintaining Liquidity in an Efficient Market 9 Currency Volatility Impact 10 Financial Hedging Strategies 12 Capital Structure 12 Fundamental Analysis Review 13 Share Prices Trend 13 Retained Earnings 15 Asset Utilization Efficiency 16 Conclusion and Recommendations 17 References 18 Appendix 19 Financial Analysis Introduction Corporations in the contemporary market undertake critical financial strategies to ensure the investors’ capital is safe and maximisation of profit is optimally realised. The level of market risk and globalisation has increased significantly under the modern market that calls for investors to evaluate the attractiveness of diverse corporations in the global market in increasing their wealth through the capital invested. In evaluating the attractiveness of the diverse corporations in the global economy, investors should evaluate the financial strategies undertaken by the managements and the effectiveness of the financial strategies adopted. This implies that managers of modern corporations are judged by the level of the financial strategies they undertake in improving the commercial interests of the investors. In measuring the effectiveness of the financial strategies undertaken by the management, financial reviews of asset utilisation, dividend payout, profitability, solvency level, and liquidity are undertaken. This range of financial measures helps in demonstrating the attractiveness of given corporations in enhancing the wealth maximization of the investors. This is because the measures help in predicting the potential of the various firms in surviving and remaining profitable in the market to increase the wealth of the investors. This paper reviews the financial strategies undertaken in four public traded companies across different markets globally. The four corporations reviewed include 21Vianet Group Incorporation from China, Microsoft Corporation from America, Pearson Corporation from United Kingdom and Abakanvagonmash from the Russian market. Furthermore, the paper has undertaken a fundamental analysis of the effectiveness of the financial strategies that have been undertaken by the management of the various corporations reviewed in the research project. Debt and Equity Levels In financing their asset acquisition, the various corporations employ diverse financing strategies as illustrated in the table below. The financing of the capital structure of the various corporations is made up of debt and equity. 2013 financial year results have been employed in calculating the debt and equity proportion of the four firms. Corporations Debt Equity 21Vianet Group Incorporation 606,635/ 1,012,828  * 100 = 59.9% 406,193/ 1,012,828  * 100 = 40.1% Microsoft Corporation 63,487,000/ 142,431,000  * 100 = 44.57% 78,944,000/ 142,431,000  * 100 = 55.43% Pearson Corporation 8,664,000/ 18,105,000  * 100 = 47.85% 9,441,000/ 18,105,000  * 100 = 52.15% Abakanvagonmash 446/ 1,046 * 100 = 42.64% 601/ 1,046 * 100 = 57.46% The computations undertaken above implies majority of the corporations been analyzed employ equity in financing their asset acquisition. Only 21Vianet Group Incorporation employs debt financing more than equity as illustrated above. Recent/Current Undertaken Project The four companies analyzed in this project research have undertaken significant projects of late that have the potential of enhancing their earnings in future. Earnings improvement will increase investors’ earnings. Thus, it is essential to analyze the potential of the recent projects undertaken by the four corporations recently. 21Vianet Group Incorporation management has recently signed a strategic agreement partnership with Foxconn (Globe-Newswire, 2014). Foxconn Technology Group is the leading electronic manufacturer in the global market. The partnership agreement entered by the two firms illustrated that Foxconn will employ it strategic advantages of capabilities and human resource to come up with carrier-neutral internet data centers for 21Vianet (Globe-Newswire, 2014). Furthermore, the agreement implied that 21Vianet and Foxconn will cooperate jointly in developing an innovative cloud services that targets the Chinese market. The partnership agreement between the two firms will help 21Vianet Company to enhancing it technical capabilities of self built data centers that have high scale and speed. This will ensure 21Vianet Corporation is capable of responding to the growing cloud services and data centers demand in the global market. The project 21Vianet has undertaken is instrumental in enhancing the profitability and financial strength of the firm in future. This is because the strategic agreement will help the firm to compete effectively and efficiently in the lucrative internet market. Revenue generation will increase in future, which will ensure income earned by the firm is high enough to promote the earnings of the investors and expanding it investment. This implies that the recent project that 21Vianet Company has undertaken has high potential of enhancing the wealth maximization objective of business entities. The recent project that has been undertaken by the firm should be considered positively by potential investors in the global market since it has high potential of maximizing their wealth. The firm will be able to generate high revenues that will enhance its stock price in the stock market and dividend payout. Thus, investors will earn high capital gains and profit share generated by the firm in future (Brigham & Houston, 2009). Similarly, Microsoft Corporation has recently undertaken a significant project of acquiring the Nokia Mobile (TechEye.net, 2014). The management of Microsoft Corporation announced recently that the firm is in the final stages of acquiring Nokia services and devices and changing it brand name to Microsoft Mobile. This undertaking by management of Microsoft Corporation has the potential of enhancing the profitability of the firm in future. This is because the undertaking will allow the firm to compete effectively with competitors in the industry like Google and Apple in data transactions. Revenue generation will be enhanced through the effective and efficient competition strategy the firm is considering that will see the share prices and dividend payout increasing. This implies that the project the firm has recently undertaken will enhance the wealth of the investors through capital gains and dividend distribution. In addition, the management of Microsoft has recently announced that the firm will launch its new Surface Mini tablet (TechEye.net, 2014). The new buses will be 7 to 8 inch that will see content pushed to users and at subsidized offer. This will allow the firm to compete effectively in supplying Smartphone products in the growing market. Thus, the ability of the firm in generating revenue will increase immensely with the development and launching of the new mini tablet by Microsoft Corporation. Accordingly, the project the management of Microsoft Corporation in launching the new mini tablet will enhance revenue generation that is essential in promoting profitability of the firm in future. This will increase the earnings of the investors in future through high dividend payout and increased stock price in the capital market. The two projects that Microsoft Corporation management has undertaken will improve the earnings of the investor and allow the management to expand the investment of the firm in future due to the ability to retain high earnings in future (Ehrhardt & Brigham, 2010). Pearson Corporation has undertaken significant projects recently that will allow the firm to compete effectively in the new digital market. Pearson Corporation is one of the leading book publisher and education company in the global market. The advent of the of digital technologies has significantly affected the publishing operation of Pearson Corporation that has seen its profit level declining heavily in the past and downsizing of the employees. The management of Pearson has undertaken three major projects recently to enhance it profitability and growth in the market. The three projects been undertaken by Pearson Corporation are efficacy, research and learning, and affordable learning fund under the administration of Michael Barber through a new created department known as Chief Education Advisor (Radjou & Prabhu, 2013). The efficacy part of the project will involve demonstrating how the products produced by Pearson have measurable impact in life of the users through education. The efficacy dimension of the project will be focused on attracting students, parents and governments globally in considering purchasing the education materials produced by Pearson. This will help in increasing the demand of the Pearson products in the market. Revenue generation will be enhanced to increase profitability of the firm. The research and learning part of the project the firm is undertaking will involve building a research strategy globally that will demonstrate Pearson as a leading learning hub. Consequently, the strategy will help in shifting the preference of learners, governments and parents in the new era of digital learning to consider using Pearson learning materials. This will increase demand of the Pearson leaning products in the global market that is essential in increasing revenue and profit in future. The third part of the Pearson project of affordable learning fund will involve investing in low cost learning services and for profit schools in the emerging markets that have students from poor family background (Radjou & Prabhu, 2013). This strategy will help Pearson Corporation in exploiting the benefits of the emerging lucrative markets in the world. Revenue generation and profitability will increase in future by entering the new market through costs that are affordable. Consequently, the new project that Pearson has adopted has the potential of enabling the firm to increase its profitability in future. This will see the share prices of the firm increasing in the stock market, which will raise the investors’ dividend payout. The project Pearson Corporation has undertaken has the potential of increasing the wealth of the shareholders through increased dividend distribution and capital gain increments. Abakanvagonmash that is a machine diversified manufacturing firm has recently undertaken a new project that will increase the demand of its vehicle products in the global market. Abakanvagonmash through Gaza Group has recently launched new light commercial vehicles that will be fuelled through compressed natural gas (CNG). In addition, the firm is launching production of new buses measuring 7-18 meters (Basic-Element, 2014). This development idea the firm is undertaking in the market has potential of enhancing the profitability of the firm that is essential in improving the earnings of the investors. This is because development of the new light vehicles that are fuelled through compressed natural gas instead of the traditional fuel will attract high demand due to the high cost of the fossil fuel that is used by conventional vehicles. Thus, the firm will be able to generate more revenue that will enhance profitability of the firm. Similarly, the launching of the new design of buses will increase sales revenue due to the increasing demand of large buses in global cities to reduce congestion and environment pollution. Consequently, the profitability of the firm will increase significantly due to enhanced sales level. Furthermore, the firm will be able to expand its market share in the global economy that is essential in enhancing profitability. This will see the shareholders of the firm increasing their earnings due to higher dividend distribution and capital gains due to increment in stock prices in the capital market. Financial Strategies For the firms to remain profitable in the competitive market, the companies employ various financial strategies. The financial strategies employed by the firms are aimed at maintaining liquidity, low cost of capital, mitigating currency volatility, keeping better leverage and controlling frequency and levels of equity and debts. However, financial strategies employed the four companies analyzed differ relatively. Consequently, the financial strategies employed by the four companies have been analyzed below to evaluate the strategic passionate of the various companies management. Maintaining Liquidity in an Efficient Market The liquidity of the various firms analyzed is reflected by the financial statements of each firm. This is determined through current and quick financial ratios of the current financial assets and current financial liabilities. The four firms’ liquidity position has been computed for the last three as demonstrated in the table below. 2013 2012 2011 21Vianet Group Incorporation current ratio 595,369/ 175,318 = 3.4 202,744/ 130,033 = 1.6 246,460 / 73,489 = 3.4 Microsoft Corporation current ratio 101,466,000/ 37,417,000 = 2.7 85,084,000/ 32,688,000 = 2.6 74,918,000/ 28,774,000 = 2.6 Pearson Corporation current ratio 5,110,000/ 3,968,000 = 1.3 6,949,000/ 4,004,000 = 1.7 5,938,000/ 3,248,000  = 1.8 Abakanvagonmash current ratio 186/ 124 = 1.5 362/ 155 = 2.3 146/ 73 = 2 The liquidity ratios of the four firms reflect that the firms have been able to maintain a positive current ratio. This is because the current ratios are above one, which means that the firms are able to service their current financial obligations using current financial assets. However, the strategy of each firm in maintaining liquidity differs as demonstrated by financial ratios above. 21Vianet Group Incorporation strategy of maintaining liquidity as demonstrated in the ratios above has been increasing. This is because the firm has been able to increase the ability of servicing its current financial obligations from 1.6 in 2012 to 3.4 in 2013 financial year. The increase of the current ratio from 1.6 to 3.4 implies that the management of the firm has increased the proportion of current financial current assets in servicing its current financial obligations. The firm has enhanced the ability of acquiring raw materials in the market on credit since the suppliers have higher confidence of servicing it current financial obligations when they fall due. The current financial ratios computed above reflect that Microsoft Corporation has improved over the last three financial years. This is because the current ratio has improved from 2.6 in 2012 financial year to 2.7 in 2013 financial year. Thus, the firm has improved it liquidity level to service its current financial obligations effectively and efficiently when they fall due. However, the liquidity management of Pearson over the last three financial years has been declining as demonstrated by the current ratios above. This is because the current ratio over the last three financial years has declined from 1.8 to 1.3 in 2011 and 2013 financial years respectively. The financial strategy of Pearson in maintaining better financial liquidity to service current financial obligations when they fall due is reducing. Similarly, the liquidity capacity of Abakanvagonmash firm over the last three financial years has been declining as reflected in the current ratios computed above. The liquidity level of Abakanvagonmash has declined from 2 to 1.5 in 2011 to 2013 financial year. This implies that the ability of the firm in servicing its current financial obligations is poor (Brealey, Myers, & Allen, 2011). The liquidity maintenance of the firm is lowering down due to declining current ratio. Currency Volatility Impact The various firms supply their products in the global market that exposes the companies to foreign currency risks. This implies that sales made by the firms are denominated by diverse foreign currencies. Foreign currency fluctuation has the potential of affecting the financial statements of the firms. 21Vianet Group Corporation operations are wholly undertaken in China while their financial statements are incorporated in US. Consequently, changes in Chinese Renminbi exchange rate into US dollar will affect its financial returns when they are converted into US dollars. Owing to the depreciating against US dollar the Chinese Renminbi over the past financial years, the income reflected in the income statement of 21Vianet Company in US dollar has positive impact. This is because the conversion of Chinese Renminbi into US dollar increases the value of earnings. However, the debts interest that the firm incurs annually impacts negatively on the financial statements of the firm. This is because the conversion of the Chinese Renminbi interest amounts into US dollar is high. Microsoft Corporation also supplies its products in the global market, which exposes it to foreign exchange fluctuation risk. Owing to the wide global market coverage by Microsoft Corporation, the earnings of the firm has in the past been affected negatively s reflected in the graph below. Foreign exchange fluctuation in the global market impacts on the earnings of Microsoft firm significantly. Similarly, Pearson earnings are negatively impacted by global currency exchange rate fluctuation negatively. The appreciation of the emerging markets currency that Pearson highly targets has seen it revenue when converted to sterling pound decreasing that causes the earnings accumulated decline. Similarly, Abakanvagonmash earnings are negatively impacted by foreign exchange rate fluctuations. Financial Hedging Strategies Owing to the effect the foreign currency volatility causes on the financial statements of the firms, the management of the firms have undertaken hedging strategies to cushion the negative financial impact on their earnings. 21Vianet Group has undertaken a financial swap arrangement to cushion the effect of exchange rate fluctuation of Chinese currency against US dollar. This has been undertaken by entering into financial agreement with Chinese firms intending to expand their investment in US to access debt financing in US through 21Vianet credibility history in the market while the other firm assists 21Vianet to access debt finances in China at low interest rates. The firm is able to remit the debt interests through Chinese currency that protects it against foreign exchange exposure risk. Similarly, Microsoft, Abakanvagonmash and Pearson firm have undertaken a forward derivative to hedge against negative currency exchange rate volatility. The forward contracts the three firms have undertaken mean that the firms have secured exchange rate of the foreign currencies it receives from its global sales revenue (Ehrhardt & Brigham, 2010). The three firms have employed a critical financial strategy to mitigate financial losses due to foreign currency exchange rate volatility. Capital Structure The managements of the four firms also, have undertaken different financial strategies in maintaining the solvency of the firms. This is depicted by the capital structure of the two firms in acquiring assets through debt and equity. The table below reflects the capital structure financial strategy of the four firms. Corporations Debt Equity 21Vianet Group Incorporation 606,635/ 1,012,828  * 100 = 59.9% 406,193/ 1,012,828  * 100 = 40.1% Microsoft Corporation 63,487,000/ 142,431,000  * 100 = 44.57% 78,944,000/ 142,431,000  * 100 = 55.43% Pearson Corporation 8,664,000/ 18,105,000  * 100 = 47.85% 9,441,000/ 18,105,000  * 100 = 52.15% Abakanvagonmash 446/ 1,046 * 100 = 42.64% 601/ 1,046 * 100 = 57.46% The debt ratios and equity ratios of the four companies demonstrate that majority of the firms have a better leverage position. This is because the firms have a higher proportion of equity in financing asset acquisition. The firms are able to acquire debt from the market at a favorable condition due to their solvency position that lessens their potential of defaulting to honor their financial obligations in future. Fundamental Analysis Review Share Prices Trend The trend of the four firms below reflects the potential of the firms in expanding the wealth of the investors through capital gains. 21Vianet Group Share Prices Trend Microsoft Shares Prices Trend Pearson Corporation Share Price Trend Abakanvagonmash Corporation Share Price Trend The graphs above reflect that the share prices of 21Vianet and Microsoft have been increasing while the share prices of Pearson and Abakanvagonmash have been declining. This implies that investors investing through 21Vianet and Microsoft shares have high potential of earning higher capital gains while investors of Pearson and Abakanvagonmash will experience declining capital gains in future. Rational investors should consider investing in 21Vianet and Microsoft companies due to potential of earning high capital gains in future. Retained Earnings Retained earnings play significant role in a firm since it allows the firm in expanding its investment in future using it cheap internal resources (Damodaran, 2011). The table below depicts the retained earnings levels of the four firms in the last three financial years. Name of firm 2013 2012 2011 21Vianet Group Incorporation (236,114,000) (220,194,000) (225,320,000) Microsoft Corporation 9,895,000,000 (856,000,000) (6,332,000,000) Pearson Corporation 5,181,000,000 4,717,000,000  4,631,000,000 Abakanvagonmash (38,000,000) (101,000,000) (140,000,000) The retained earnings of the companies above reflect that Microsoft and Pearson firms have high potential of expanding their investment in future. This is due to the high positive retained earnings the firms have kept over the last three years that will allow investment expansion to be possible in future using internal funds that is cheaper compared to debt financing in the external market. Even though Abakanvagonmash retained earnings are negative, the analysis reflects the firm is reducing the negative value of the retained earnings. This implies that the firm will be able to realize positive retained earnings in future that will help the firm in expanding it investment using internal finances. Asset Utilization Efficiency Asset utilization efficiency is essential in demonstrating the potential of an organization in utilizing it assets optimally to expand the shareholders earnings in future (Brigham & Houston, 2009). This is because the organization that utilizes its assets efficiently is able to generate more revenue that is essential in enhancing the income contributable to the shareholders (Rappaport, 1999). Consequently, the table below depicts the asset turnover of the four firms in the last four years. Asset turnover = net sales/ total assets Name of firm 2013 2012 2011 21Vianet Group Incorporation 324,868/ 1,012,828 = 0.32  244,636/ 477,813 =  0.511 162,207/ 381,785 = 0.42 Microsoft Corporation 77,849,000/ 101,466,000 = 0.77 73,723,000/ 85,084,000 = 0.87 69,943,000/ 74,918,000 = 0.93 Pearson Corporation 8,396,000/ 18,105,000 = 0.46 8,061,000/ 18,446,000 =  0.44 7,348,000 / 17,475,000 = 0.42 Abakanvagonmash 706/ 1046 = 0.67 450/ 859 = 0.52 237/ 575 = 0.41 The analysis above illustrates that the efficiency of Pearson and Abakanvagonmash companies in utilizing their assets to generate revenue compared to other two firms. This implies that Pearson and Abakanvagonmash have high potential of increasing the earnings of the shareholders in future due to ability to generate more revenue from assets utilized. Conclusion and Recommendations The financial analysis that has been undertaken in the four firms above enables a rational investor to choose the organizations that have high potential of increasing his wealth. The analysis depicts the potential of the firms from their recent project undertakings, and financial results in generating income in future (Brigham & Houston, 2009). Owing to the financial analysis that has been undertaken for the four firms, a rational investor should consider investing in Microsoft and Pearson companies. The financial analyses reflect that the two firms’ financial positions are relatively good in allowing the firms to expand their income generation in future. The ability of the two firms in increasing their profitability in future is essential in increasing the shareholders earnings. Investors should consider investing in Microsoft and Pearson companies References Basic-Element. (2014). Development Strategy. Retrieved 2014, from http://www.basel.ru/en/machine-building/machinary/ Brealey, R. A., Myers, S. C., & Allen, F. (2011). Principles of corporate finance, concise edition. Boston: McGraw-Hill. Brigham, E. F., & Houston, J. F. (2009). Fundamentals of financial management. Mason, OH: South-Western Cengage Learning. Damodaran, A. (2011). Applied corporate finance. Hoboken, NJ: John Wiley & Sons. Ehrhardt, M. C., & Brigham, E. F. (2010). Corporate finance: A focused approach. New York: South-Western. Globe-Newswire. (2014, April 24). 21Vianet Signs Strategic Partnership Agreement With Foxconn. Retrieved 2014, from http://www.cnbc.com/id/101609949 Radjou, N., & Prabhu, J. (2013, October 25). How Pearson is Reninventing Global Education Retrieved 2014, from http://www.strategy-business.com/blog/How-Pearson-Is-Reinventing-Global-Education?gko=e47ca TechEye.net. (2014, April 11).Microsoft plans to launch Surface Mini later this year. Retrieved 2014, from http://news.techeye.net/mobile/microsoft-plans-to-launch-surface-mini-later-this-year TechEye.net. (2014, April 21). Microsoft to kill Nokia brand. Retrieved 2014, from http://news.techeye.net/mobile/microsoft-to-kill-nokia-brand Rappaport, A. (1999). Creating Shareholder Value: A Guide for Managers and Investors. New York, NY: The Free Press. Appendix 21Vianet Group Income Statement 21Vianet Group Balance Sheet Microsoft Income Statement Microsoft Balance Sheet Pearson Income Statement Pearson Balance Sheet Statement Abakanvagonmash Income Statement Abakanvagonmash Balance Sheet Statement Read More