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INTRODUCTION
RATIO ANALYSIS
A sustainable business and mission requires effective planning and financial management.
Ratio analysis is a useful management tool that will improve your understanding of financial
results and trends over time, and provide key indicators of organizational performance.
Managers will use ratio analysis to pinpoint strengths and weaknesses from which strategies
and initiatives can be formed. Funders may use ratio analysis to measure your results against
other organizations or make judgments concerning management effectiveness and mission
impact.
Ratio analysis is the process of determining and interpreting numerical relationships based on
financial statements. A ratio is a statistical yardstick that provides a measure of the
relationship between two variables or figures.
This relationship can be expressed as a percent or as a quotient. Ratios are simple to calculate
and easy to understand. The persons interested in the analysis of financial statements can be
grouped under three heads,
i) Owners or Investors
ii) Creditors and
iii) Financial Executives.
Although all these three groups are interested in the financial conditions and operating
results, of an enterprise, the primary information that each seeks to obtain from these
statements differ materially, reflecting the purpose that the statement is to serve.
Investors desire primarily a basis for estimating earning capacity. Creditors are concerned
primarily with liquidity and ability to pay interest and redeem loan within a specified period.
Management is interested in evolving analytical tools that will measure costs, efficiency,
liquidity and profitability with a view to make intelligent decisions.
For ratios to be useful and meaningful, they must be:
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Calculated using reliable, accurate financial information (does your financial information
reflect your true cost picture?)
Calculated consistently from period to period
Used in comparison to internal benchmarks and goals
Used in comparison to other companies in your industry
Viewed both at a single point in time and as an indication of broad trends and issues over
time
Carefully interpreted in the proper context, considering there are many other important
factors and indicators involved in assessing performance.
Ratios can be divided into four major categories:
Profitability Sustainability
Operational Efficiency
Liquidity
Leverage (Funding – Debt, Equity, Grants)
DEFINITION
Single most important technique of financial analysis in which quantities are converted into
ratios for meaningful comparisons, with past ratios and ratios of other firms in the same or
different industries. Ratio analysis determines trends and exposes strengths or weaknesses of
a firm.
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HISTORICAL BACKGROUND
There is majority of evidence prove that ratio analysis since the late1800s has been widely
used in the analysis and valuation of published financial data such as security analysis firms
(e.g., Dun & Bradstreet) have published, and presumably have profited from publishing,
listings of annual financial ratio values for various firms and industries. In addition, the use of
ratio analysis is emphasizes in the literature on financial statement analysis.
The historical development of ratio analysis can be divided broadly into four phases. In the
first phase beginning approximately in 1870 we see a spurt in the development of ratios for
managerial and credit analysis. During this period, current ratio is the most important ratio
that had been developed which continues to draw the attention of the analysts even today.
However, the proliferation of ratios created problems for discerning the right kind of ratios
for business analysis. Attempts were made to resolve the problem by developing a coherent
system of ratios. In 1919, the du Pont RoI chart developed by bliss is the first such attempt
and during the same period the emergence of industry-wise ratios also been found. Well-
known business schools and credit agencies began publishing these ratios on a regular basis.
In the second phase, beginning 1930, attempts were made to understand the statistical nature
and empirical basis of financial ratios. A considerable volume of literature was produced on
the subject but the empirical findings of major researchers were found to be more
contradictory than corroborative. The statistical approach to ratio analysis also led to the
development of ratio models for predicting corporate bankruptcy. Most important among
those works are those of Merwin (1942) and Beaver (1967), Altman (1968) and Ohlson
(1980). While emphasis on empirical research enriched the discipline of ratio analysis it
retarded the development of a comprehensive theory of ratios.
In the third phase, beginning in the later part of the 1960s, rigorous scientific investigation
being made into the information content of financial ratios with the help of Entropy Law and
decomposition theory. The problem of aggregation and consequent information loss was
investigated with the help of sophisticated mathematical tools but the findings remained
inconclusive. However, these studies revealed for the first time that accounting does not
really have a satisfactory conceptual framework. The research on understanding the statistical
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nature of ratios, particularly for the purpose of predicting the health of a business, continued
unabated during this period and is also being carried forward to the present.
Since 1980 the discipline has entered into its fourth logical phase where the search of a theory
of financial ratios has begun. Serious attempts are being made to find a comprehensive
testable theory of financial ratios. This discipline is now ripe enough to give birth to its own
theory.
The first attempt to present a historical review of ratio analysis was made by Horrigan (1968)
followed by Barnes (1987) and Salmi and Martikainen (1994). The present review, though
following in their footsteps, differs from them in the sense that here, the logical development
of ratio analysis is traced to its present stage from a managerial perspective.
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WHAT IS A RATIO
In general, a ratio is a way of concisely showing the relationship between two quantities of
something. The most formal way of stating a ratio is by separating the two quantities with a
colon (:) although sometimes a division sign (/) is used in place of the colon.
For a ratio to have meaning, both numbers must be nonzero.
In mathematics, a ratio is a quotient used to compare quantities of the same units of measure.
In mathematics, a ratio is a relationship between two numbers indicating how many times the
first number contains the second. a ratio can be a fraction as opposed to a whole number.
The numbers compared in a ratio can be any quantities of a comparable kind, such as objects,
persons, lengths, or spoonfuls. A ratio is written "a to b" or a:b, or sometimes expressed
arithmetically as a quotient of the two. When the two quantities have the same units, as is
often the case, their ratio is a dimensionless number. A rate is a quotient of variables having
different units. But in many applications, the word ratio is often used instead for this more
general notion as well.
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DIFFERENT MODES OF EXPRESSING AN
ACCOUNTING RATIO
Ratio may be expressed in different ways. They are as follows:
a) Simple or Pure Ratios,
b) Percentages,
c) Rate.
A) SIMPLE OR PURE RATIOS
Simple or pure ratio is merely a quotient arrived by simple division of one number by
another.
Example:
When the current assets of a business organisation are Rs. 60,000 and current liabilities are
Rs. 15,000 the ratio is derived by dividing Rs. 60,000 by Rs. 15,000.
It will be expressed as (
60000
15000
)4 or as 4:1
B) PERCENTAGES
Ratios are expressed as percentage relations when the simple or ratios are multiplied by 100.
The resulting ratios are known as percentage ratios.
Example:
Thus, the current ratio in the above example — expressed in percentage by multiplying 4 by
100. The ratio will be as 400%.
i.e,
60000
15000
× 100= 400%
C) RATE
Sometimes, ratios are expressed as rates which refer to ratios over a period of time.
Example: Stock has turned over 6 times a year’.
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NATURE OF RATIO ANALYSIS
Though ratio analysis is ‘all the rage’ among the users of accounting information, it is better
to understand the nature of ratios so that they can be employed judiciously under appropriate
conditions.
The relation between two or more financial data brought out by an accounting ratio is not
an end in itself. They are means to get to know the financial position of an organisation.
An Individual ratio may not be capable of providing the answers required for the various
problems facing an executive.
Industrial ratios may provide valuable information only when they are studied and
compared with several other related ratios.
Ratio analysis will tend to be more meaningful when certain standards and norms are laid
down so that what the ratios indicate can be compared with the said standards. This
provides a base for decision-making and assists in taking measures to rectify any
drawback or deficiency.
COMPARISONS BY RATIOS
Accounting ratios are very useful in assessing the financial position and profitability of a
business enterprise. this can be achieved through comparison by ratios. such a comparison
may take any of the under-mentioned forms:
a) For the same enterprise over a number of years (horizontal analysis).
b) For one enterprise against another in the same industry (third-dimensional analysis).
c) For one enterprise against the industry as a whole.
d) For one enterprise against the pre-determined standards.
d) For inter-departmental comparisons within an organisation.
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OBJECTIVES OF RATIOS
Ratios are worked out to analyse the following aspects of a business organisation:
a. Solvency:
i. Long-term.
ii. Short-term.
iii. Immediate.
b. Stability.
c. Profitability.
d. Operational Efficiency.
e. Credit Standing.
f. Structural Standing.
g. Effective Utilisation of Resources.
h. Leverage or External Financing.
STANDARDS FOR COMPARISON
A number of financial tools have come into existence for the analysis of financial statements.
Financial statement analysis means a meaningful study of the financial statements, the
balance sheet and the profit and loss account, relating to a period of an industry, to ascertain
the prevailing state of affairs and reasons there for. It is not enough to say that firm A is more
profitable than firm B; one must also be able to say the causes and factors that are probably
responsible for this. The object of the financial statement analysis is of great importance; for
example, one’s approach to comparison of two firms will be different from the approach of
assessing profitability of investment in a firm.
Standards are creatures of experiences, which are modified from time to time to meet
changing conditions; they are an ideal or an average or normal results to be attained under
certain conditions. Because of the changing nature of standards, constant acquaintance with
the conditions under which they are set up is essential so that causes of variations from the
standard can be intelligently appreciated. Standard ratios provide a bench – mark against
which actual ratios can be compared. The significance of a ratio calculated can be grasped
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only after it is compared with the ratio. For this purpose four types of standards are
employed:-
(A) ABSOLUTE STANDARDS:
These ratios are determined by the rule of thumb. For example, in the case of current ratio 2:1
is considered to be desirable. This type of standards are those which become generally
recognised as being desirable regardless of the company, its type, the time, stage of the
business cycles, or the objectives of the analyst. “The absolute standard is the weakest of all,
for it suggests the existence of some inherent trait common to all business, which is generally
far from the case,”
(B) HISTORICAL STANDARDS:
These are the past ratios of the company. Present performance can be judged on the basis of
past performance and the persons concerned can draw inferences about the improvement or
otherwise of the particular aspect. Comparison with historical standards is also known as
“Trend Analysis”. For this purpose, the trends rather than the actual ratios are important.
Hence the behaviour of the ratios over a period is observed. By presenting a picture of
operations over an extended time, trend – analysis of ratios becomes a valuable tool for the
financial manager. The trend of the ratios indicates whether the concern has been moving in
the direction in which it is tending to go, e. g., for measuring the rate of turnover, the ratio
may be computed weekly or monthly and the points plotted on a graph to show the trend of
the rate of turnover. However, it is not satisfactory from the standard point of view. It can
merely compare the present efficiency with the efficiency of the past.
(C) HORIZONTAL STANDARDS:
These are the average ratios calculated for the entire industry or the ratios of some other firm
engaged in the same line, i.e., Inter–Firm Comparison “Comparison can also be made against
the achievements of other business where available. It is difficult to be sure that such
comparison are on a like for like basis, even if operating in a similar market or industry,
partly as to the comparison of profit, but more particularly concerning the scope of the
business under comparison.”
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However, the difficulty in using such ratios is that no two firms are similar in size, accounting
policies and corporate objectives. So, naturally there will be significant difference between
the standard opted and the actual ratio. The ratios calculated for the industry as a whole
provide a satisfactory standard to judge and interpret the ratios of the individual firm.
(D) BUDGETED STANDARDS:
These standards are based on budgeted figures. The actual ratios are compared with budgeted
ratios and are, therefore, useful for the internal management as a tool of performance and
evaluation and control. The utility even for the internal analyst depends much upon the care
with which budgets are drawn up. Sometimes the assumptions made at the time of preparing
the budget may go wrong because of abnormal developments. External analysts usually look
to historical and / or horizontal standards.
It can be concluded that ratios themselves do not directly answer the important questions
about the firm. Instead they simply are relationship that, when compared to a standard of
performance, identify difference or variations. Such difference can lead to understanding that
brings forth changed performance. “Again as a matter of perspective, remember that the
manager uses financial statements mainly to locate problems and issues that need managerial
attention. And the alert manager is interested in developing and establishing valuable and
realistic standards against which ratios can be measured”.
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SIGNIFICANCE AND USEFULNESS OF RATIO
ANALYSIS
Ratios as a tool of financial analysis provide symptoms with the help of which any analyst is
in a position to diagnose the financial health of the unit. Financial analysis may be compared
with biopsy conducted by the doctor on the patient in order to diagnose the causes of illness
so that treatment may be prescribed to the patient to help him recover. As, already hinted
different groups of persons are interested in the affairs of any business entity, therefore,
significance of ratio analysis for various groups is different and may be discussed as follows:
USEFULNESS TO THE MANAGEMENT:
1. Decision Making:
Mass of information contained in the financial statements may be unintelligible a confusing.
Ratios help in highlighting the areas deserving attention and corrective action facilitating
decision making.
2. Financial Forecasting and Planning:
Planning and forecasting can be done only by knowing the past and the present. Ratio help
the management in understanding the past and the present of the unit. These also provide
useful idea about the existing strength and weaknesses of the unit. This knowledge is vital for
the management to plan and forecast the future of the unit.
3. Communication:
Ratios have the capability of communicating the desired information to the relevant persons
in a manner easily understood by them to enable them to take stock of the existing situation:
4. Co-ordination is Facilitated:
Being precise, brief and pointing to the specific areas the ratios are likely to attract immediate
grasping and attention of all concerned and is likely to result in improved coordination from
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all quarters of management.
5. Control is more Effective:
System of planning and forecasting establishes budgets, develops forecast statements and lays
down standards. Ratios provide actual basis. Actual can be compared with the standards.
Variances to be computed an analyzed by reasons and individuals. So it is great help in
administering an effective system of control.
USEFULNESS TO THE OWNERS/SHAREHOLDERS:
Existing as well as prospective owners or shareholders are fundamentally interested in the (a)
long-term solvency and (b) profitability of the unit. Ratio analysis can help them by
analyzing and interpreting both the aspects of their unit.
USEFULNESS TO THE CREDITORS
Creditors may broadly be classified into short-term and long term. Short-term creditors are
trade creditors, bills payables, creditors for expenses etc., they are interested in analyzing the
liquidity of the unit. Long-term creditors are financial institutions, debenture holders,
mortgage creditors etc., they are interested in analyzing the capacity of the unit to repay
periodical interest and repayment of loans on schedule. Ratio analysis provides, both type of
creditors, answers to their questions.
USEFULNESS TO EMPLOYEES
Employees are interested in fair wages: adequate fringe benefits and bonus linked with
productivity/profitability. Ratio analysis provides them adequate information regarding
efficiency and profitability of the unit. This knowledge helps them to bargain with the
management regarding their demands for improved wages, bonus etc.
USEFULNESS TO THE GOVERNMENT
Govt. is interested in the financial information of the units both at macro as well as micro
levels. Individual unit's information regarding production, sales and profit is required for
excise duty, sales tax and income tax purposes. Group information for the industry is required
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for formulating national policies and planning. In the absence of dependable information,
Govt. plans and policies may not achieve desired results.
IMPORTANT FACTORS FOR UNDERSTANDING
RATIOS ANALYSIS
QUALITY OF FINANCIAL STATEMENTS:
The reliability of ratios is linked with the quality of financial statements. Financial statements
which have been prepared by faithful adherence to generally accepted accounting principles
(GAAP). Generally accepted accounting principles are likely to contain reliable data.
Calculation of ratios from such financial statements is bound to be more useful and
trustworthy.
PURPOSE OF ANALYSIS:
Users of accounting information are different such as short-term and long-term creditors;
owners and would be investors; trade unions; tax authorities; competitors etc., object of each
group of interested parties is also different such as liquidity or solvency or profitability, etc.
So, before undertaking the analysis, one should be clear about the object of analysis. It is the
object of analysis which determines the area (liquidity, solvency, profitability, leverage,
activity etc.) to be studied, analyzed and interpreted.
SELECTION OF RATIOS:
There is no end to the number of ratios which can be calculated. In 1919, Alexander Wall
developed an elaborated system of ratio analysis. The same has been extended and modified
over the period of time. So the ratios to be calculated should be selected judiciously taking
into consideration the object of analysis. The ratios selected should serve the purpose of
analysis. For example, short term creditors 'purpose is liquidity whereas owners' purpose may
be served by solvency.
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STANDARDS TO BE APPLIED:
Any ratio in itself i.e. in isolation is meaningless. It must be compared with some standard to
arrive at any logical conclusion. The analyst can choose the comparing standard from (a)
Rule of thumb (b) past ratios (c) projected standards or (d) industry standards. Selection of
standards for the purpose of interpretation will also depend upon the object of the analysis
and the capacity of the analyst. For example, management (being the insider) can opt. for
project standards whereas any outsider's choice shall be limited to the published information
of the unit.
CAPABILITY OF THE ANALYST:
Analysis is a tool in the hands of the analyst. Knife (as a tool) in the hands of a criminal may
take the life but the knife (as a tool) in the hands of a surgeon may give new life to a patient.
Interpretation depends on the educational background; professional skill; experience and
intuition of the professional conducting it.
RATIOS TO BE USED ONLY AS GUIDE:
Ratios can provide, at the best, the starting point. The analyst, before arriving at the
conclusion, should take into consideration all other relevant factors financial and non-
financial; macro and micro. For example, general condition of economy; values of society;
priorities of the government etc., are the important factors.
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INTERPRETATION OF ACCOUNTING RATIOS
Calculation of ratios is comparatively simple, routine clerical in nature but interpretation of
ratios is highly sophisticated and intricate phenomenon. The benefit of ratio analysis depends
a great deal upon the correct interpretation. It needs skill, intelligence, training, farsightedness
and intuition of high order on the part of the analyst. The following are different ways in
which ratios may be interpreted:
INDIVIDUAL RATIO:
Individual ratio may have significance of its own. For example, if the current ratio unit
continuously falls, it may indicate probable insolvency. But generally single ratio may not
convey any sense. However single ratio may be studied with reference to certain popular
rules of thumb which can only give approximations. Care must be exercised because such
comparison may be erroneous or unrealistic.
GROUP RATIOS:
Ratios may be interpreted by considering group of several related ratios. Such interpretation
may be more meaningful. For example, current ratio may be studied along with liquid ratio.
Similarly profitability ratios may be studied along with return on investment.
COMPARISON WITH PAST:
Ratios may be interpreted by making comparison over a period of time i.e. the same ratio be
studied over a period of years of the same unit. It will highlight the significant trend revealing
use, decline or stability of the phenomenon. Average value of the ratio for the past number of
years can serve as a standard against which current performance may be measured. While
interpreting ratios from comparison over a period of time one should be careful about the
changes which might have taken place during the time. For example, price index; changes in
managerial policies or changes in accounting practices etc.
COMPARISON WITH PROJECTIONS:
In a business unit where system of budgetary control and forecast is in existence, projected
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financial statements are usually drawn. Ratios calculated based on such projected financial
statements shall act as the standards with which the ratios calculated from the present
financial statements shall be compared. Variances shall be calculated and analyzed by
reasons and persons. It shall enable to take corrective action wherever required.
INTER-FIRM OR INTER-INDUSTRY COMPARISON:
Ratios of one unit may be compared with the ratios of another identical unit or with the
industry average at the same point of time. Such comparison is useful for evaluating relative
financial position of the unit vis-à-vis other units or industry. While making such comparison,
care must be taken regarding the difference of accounting methods, policies, procedures and
terminology being followed by different units.
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ADVANTAGES AND LIMITATIONS OF RATIO
ANALYSIS
Financial ratio analysis is a useful tool for users of financial statement. It has following
advantages:
ADVANTAGES
It simplifies the financial statements.
It helps in comparing companies of different size with each other.
It helps in trend analysis which involves comparing a single company over a period.
It highlights important information in simple form quickly. A user can judge a
company by just looking at few numbers instead of reading the whole financial
statements.
LIMITATIONS
Despite usefulness, financial ratio analysis has some disadvantages. Some key
demerits of financial ratio analysis are:
Different companies operate in different industries each having different
environmental conditions such as regulation, market structure, etc. Such factors are so
significant that a comparison of two companies from different industries might be
misleading.
Financial accounting information is affected by estimates and assumptions.
Accounting standards allow different accounting policies, which impairs
comparability and hence ratio analysis is less useful in such situations.
Ratio analysis explains relationships between past information while users are more
concerned about current and future information.
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CLASSIFICATION OF RATIOS
Financial ratios have been classified in several ways. A number of standpoints may be used
as base for classifying the ratios. It is a matter of great surprise that no uniformity has been
achieved in this regard. Different authors have classified the ratios in varying groups. To
illustrate, the short-term creditors main interest in the long-term solvency and profitability
analysis of the firm’s financial conditions; management is interested in evaluating every
activity of the firm because they have to protect the interests of all parties. Thus accounting
ratios may be classified on the following bases leading to somewhat overlapping categories.
CLASSIFICATION BY STATEMENTS
The traditional classification is based on those statements from which information is
obtained for calculating the ratios. The ratios are classified as follows:
CLASSIFICATION
BY STATEMENTS
BALANCE
SHEET RATIOS
(FINANCIAL
RATIOS)
REVENUE
STATEMENT
RATIOS
(OPERATING
RATIOS)
COMBINED
RATIOS
(COMPOSITE/
MIXED RATIOS)
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BALANCE SHEET RATIOS:
Financial ratios quantify many aspects of a business and are an integral part of financial
statement analysis. Financial ratios are categorized according to the financial aspect of the
business which the ratio measures. Liquidity ratios measure the availability of cash to pay
debt.
Activity ratios measure how quickly a firm converts non-cash assets to cash assets. Debt
ratios measure the firm's ability to repay long-term debt.
Profitability ratios measure the firm's use of its assets and control of its expenses to generate
an acceptable rate of return. Market ratios measure investor response to owning a company's
stock and also the cost of issuing stock. Financial ratios allow for comparisons
•between companies
•between industries
•between different time periods for one company
•between a single company and its industry average
The ratios of firms in different industries, which face different risks, capital requirements, and
competition, are not usually comparable.
REVENUE STATEMENT RATIOS:
Profit earning is the main objective of each business concern. A company should earn profits
to survive and to grow overlong period. A measure of profitability is the overall measure of
efficiency. Profitability and profits are two different elements. Profit refers to the absolute
quantum of profit whereas profitability refers to the ability to earn profits. It is a test of
efficiency and a measure of control to the management. It is a measure of the worth of
owner’s investment. It is the margin of safety to creditors. It is a source of fringe benefits to
employees. Profit is a measure of taxpaying capacity to the government. To customers, it is a
hint to demand for better quality and price cuts. Operation ratios and activity ratios or
efficiency ratios are calculated to measure the profitability of an enterprise. There are two
types of profitability ratios. They are profit margin ratios and rate of return ratios. Profit
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margin ratios show relationship between profit and sales. Rate of return ratios reflect the
relationship between profit and investments.
COMBINED RATIOS:
This category of ratios includes those ratios, which highlight upon the activity and
operational efficiency of the business concern. The funds of creditor and owners are invested
in various kinds of assets to generate sales and profits. The better the management of assets,
the larger the amount of sales. This category ratios use elements of both balance sheet as well
as revenue statements for computation of ratios. These ratios are always expressed as
turnover or in number of times i.e. rate of turning over or rotation.
CLASSIFICATION BY USERS:
This classification is based on the parties who are interested in making the use of ratios.
CLASSIFICATION
BY USERS
RATIOS FOR
MANAGEMENTS
RATIOS FOR
CREDITORS
RATIOS FOR
SHAREHOLDERS
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CLASSIFICATION ACCORDING TO IMPORTANCE:
This basis of classification of ratios has been recommended by the British Institute of
management. They are of two types:
CLASSIFICATION BY PURPOSE/ FUNCTION
This is a classification based on the purpose for which an analyst computes these ratios. The
modern approach of classifying the ratios is according to purpose or object of analysis.
Normally, ratios are used for the purpose of assessing the profitability and sound financial
position. Thus, ratios according to the purpose are more meaningful. There can be several
purposes which can be listed. For analysis, it is customary to group the purpose into broad
headings. The following are the broad categories of accounting ratios from financial point of
view:
CLASSIFICATIONBY
IMPORTANCE
PRIMARY RATIOS SECONDARY RATIOS
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COMPILATION OF RATIOS
Ratio analysis is rightly considered as an invaluable tool of analysis. However, one has to
exercise considerable degree of caution while analyzing the financial statements with the aid
of ratios.
The precautions one has to take in ratio analysis are listed below:
a) It is essential to ensure that the persons who use the ratios understand the terminology and
the component figures employed for compiling.
b) Secondly, the ratios to be compared should be capable of being compared validly. in other
words, the data found in financial statements have to be horizontally consistent over a period
of time.
c) Thirdly, compilation of ratios has to be done speedily. They have to be worked out
supplied to the different users in time for further action.
d) Fourthly, ratios have to be presented in an appropriate manner. It is a usual practice to set
out the major ratios first followed by less important ratios and then finish with the least
important ones.
e) Fifthly, a complete record of ratios is essential.
CLASSIFICATION
BY PURPOSE
SOLVENCY
SHORT-TERM LONG-TERM
ACTIVITY PROFITABILITY EARNINGS
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SAMSUNG ELECTRONICS Co. Ltd.
Samsung Electronics Co., Ltd. is a South Korean multinational electronics company
headquartered in Suwon, South Korea. It is the flagship subsidiary of the Samsung Group,
accounting for 70% of the group's revenue in 2012, and has been the world's largest
information technology company by revenue since 2009. Samsung Electronics has assembly
plants and sales networks in 80 countries and employs around 370,000 people. Since 2012,
the CEO is Kwon Oh-Hyun.
Samsung has long been a major manufacturer of electronic components such as lithium-ion
batteries, semiconductors, chips, flash memory and hard drive devices for clients such as
Apple, Sony, HTC and Nokia.
In recent years, the company has diversified into consumer electronics. It is the world's
largest manufacturer of mobile phones and smartphones fueled by the popularity of its
Samsung Galaxy line of devices. The company is also a major vendor of tablet computers,
particularly its Android-powered Samsung Galaxy Tab collection, and is generally regarded
as pioneering the phablet market through the Samsung Galaxy Note family of devices.
Samsung has been the world's largest manufacturer of LCD panels since 2002, the world's
largest television manufacturer since 2006, and world's largest manufacturer of mobile
phones since 2011. Samsung Electronics displaced Apple Inc. as the world's largest
technology company in 2011 and is a major part of the South Korean economy. In June 2014
Samsung published the Tizen OS with the new Samsung Z.
For over 70 years, Samsung has been dedicated to making a better world through diverse
businesses that today span advanced technology, semiconductors, skyscraper and plant
construction, petrochemicals, fashion, medicine, finance, hotels, and more. Our flagship
company, Samsung Electronics, leads the global market in high-tech electronics
manufacturing and digital media.
Through innovative, reliable products and services; talented people; a responsible approach to
business and global citizenship; and collaboration with our partners and customers, Samsung
is taking the world in imaginative new directions.
24. 24
HISTORY
Samsung Group, based in Seoul, is South Korea's largest business group. The multinational
conglomerate contains numerous subsidiaries and affiliated businesses, most of them under
the Samsung brand.
Here are key dates in the company's history:
1938: Samsung is founded by Lee Byung-chull as a trading company.
1953: After the Korean War, Lee forms profitable Cheil Sugar, which is followed by textile,
banking and insurance enterprises.
1961: Despite a political coup, charges against Lee of illegal profiteering and a 1966 family
scandal of smuggling, the company grows by diversifying into paper products, department
stores and publishing.
1969: Lee, with the help of Sanyo, establishes Samsung Electronics. It produces inexpensive
TVs, microwave ovens and other consumer products for Western companies such as Sears
and General Electric.
1970s: Under a government policy of rapid industrialization, Samsung launches a number of
enterprises in ship building, petrochemicals and aircraft engines.
1980s: The Company is exporting electronics under its own name.
1983: Samsung begins production of personal computers.
1987: Lee's son, Lee Kun-hee, assumes control of Samsung.
1988: Samsung Semiconductor and Telecommunications merges with Samsung Electronics.
Its core business focus is home appliances, telecommunications and semiconductors.
1990: Samsung becomes a world leader in chip production.
1994: Samsung Motors is formed.
1996: Lee Kun-hee is involved in a corruption scandal and gets a suspended sentence for
bribery.
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1998: Samsung completes the development of flat-screen televisions and begins the first mass
production of digital TVs. Samsung Motors delivers its first cars.
2005: Samsung develops the first speech-recognition phone.
2007: Samsung Group is accused of political bribery and influence-peddling throughout the
South Korean government, judicial branch and the media.
2012: Samsung Electronics becomes world's largest mobile phone-maker by unit sales,
overtaking Nokia, the market leader. U.S. jurors rule Samsung must pay Apple (AAPL) $1.05
billion in damages for violating six Apple patents on smartphone technology.
26. 26
BUSINESS DESCRIPTION
Samsung Electronics, Co., Ltd., a part of Samsung Group, is the world’s largest technology
company by revenues. The company produces consumer electronics, telecoms equipment,
semiconductors and home appliances. Samsung Electronics business is divided into three
divisions:
Consumer electronics. Visual Display Business, Digital Appliances Business,
Printing Solutions Business and Health & Medical Equipment Business.
IT and Mobile communications. Mobile Communications Business and Networks
Business.
Device solutions. Memory Business, System LSI Business and LED Business.
The company is the world’s largest mobile phones and smartphones vendor. It is the largest
memory chip maker and the largest TV manufacturer. Company operates in 80 countries,
where it sells more than 100 products.
PRODUCTS
Mobile
Phones
Tablet PC
Laptops
and
Chrome
Devices
LCD and
LED
Televisions
Cameras
Home
Appliances
And
Accessories
27. 27
FINANCIAL STATEMENTS
REVENUE STATEMENT
Currency in
Millions of South
Korean Wons and
USD
As of: Dec 31
2013
KRW
Dec 31
2014
KRW
Dec 31
2013
USD
Dec 31
2014
USD
Revenues 228,692,667.0 206,205,987.0 191,713.1 172,862.5
TOTAL REVENUES 228,692,667.0 206,205,987.0 191,713.1 172,862.5
Cost of Goods Sold 137,696,309.0 128,278,800.0 115,430.8 107,536.1
GROSS PROFIT 90,996,358.0 77,927,187.0 76,282.2 65,326.4
Selling General & Admin Expenses,
Total 38,934,012.0 37,446,184.0 32,638.4 31,391.1
R&D Expenses 14,319,402.0 14,385,506.0 12,004.0 12,059.4
Depreciation & Amortization, Total 957,931.0 1,070,426.0 803.0 897.3
OTHER OPERATING
EXPENSES, TOTAL 54,211,345.0 52,902,116.0 45,445.4 44,347.8
OPERATING INCOME 36,785,013.0 25,025,071.0 30,836.9 20,978.5
Interest Expense -509,658.0 -592,940.0 -427.2 -497.1
Interest and Investment Income 1,463,768.0 3,269,596.0 1,227.1 2,740.9
NET INTEREST EXPENSE 954,110.0 2,676,656.0 799.8 2,243.8
Income (Loss) on Equity
Investments 504,063.0 342,516.0 422.6 287.1
Currency Exchange Gains (Loss) -330,105.0 -250,088.0 -276.7 -209.6
Other Non-Operating Income
(Expenses)
-588,606.0 646,942.0 -493.4 542.3
28. 28
EBT, EXCLUDING UNUSUAL
ITEMS 37,324,475.0 28,441,097.0 31,289.1 23,842.2
Impairment of Goodwill -- -- -- --
Gain (Loss) on Sale of Investments 1,117,029.0 -571,588.0 936.4 -479.2
Gain (Loss) on Sale of Assets -77,225.0 5,525.0 -64.7 4.6
Other Unusual Items, Total -- -- -- --
EBT, INCLUDING UNUSUAL
ITEMS 38,364,279.0 27,875,034.0 32,160.8 23,367.6
Income Tax Expense 7,889,515.0 4,480,676.0 6,613.8 3,756.2
Minority Interest in Earnings -653,549.0 -311,859.0 -547.9 -261.4
Earnings from Continuing
Operations 30,474,764.0 23,394,358.0 25,547.0 19,611.5
NET INCOME 29,821,215.0 23,082,499.0 24,999.1 19,350.1
NET INCOME TO COMMON
INCLUDING EXTRA ITEMS 29,821,215.0 23,082,499.0 24,999.1 19,350.1
NET INCOME TO COMMON
EXCLUDING EXTRA ITEMS 29,821,215.0 23,082,499.0 24,999.1 19,350.1
29. 29
BALANCE SHEET
Currency in
Millions of South
Korean Wons
As of: Dec 31
2013
KRW
Dec 31
2014
KRW
Dec 31
2013
USD
Dec 31
2014
USD
Assets
Cash and Equivalents 16,284,780.0 16,840,766.0 13,651.5 14,117.6
Short-Term Investments 38,171,930.0 44,911,895.0 31,999.5 37,649.6
TOTAL CASH AND SHORT
TERM INVESTMENTS 54,456,710.0 61,752,661.0 45,651.1 51,767.3
Accounts Receivable 24,988,532.0 24,694,610.0 20,947.9 20,701.5
Notes Receivable 15,449.0 50,760.0 13.0 42.6
Other Receivables 2,887,402.0 3,539,875.0 2,420.5 2,967.5
TOTAL RECEIVABLES 27,891,383.0 28,285,245.0 23,381.3 23,711.5
Inventory 19,134,868.0 17,317,504.0 16,040.8 14,517.3
Prepaid Expenses 2,472,950.0 3,346,593.0 2,073.1 2,805.4
Other Current Assets 6,804,360.0 4,444,023.0 5,704.1 3,725.4
TOTAL CURRENT ASSETS 110,760,271.0 115,146,026.0 92,850.3 96,526.9
Gross Property Plant and
Equipment 168,784,544.0 183,286,006.0 141,492.1 153,648.7
Accumulated Depreciation -93,288,156.0 -102,413,056.0 -78,203.5 -85,852.9
NET PROPERTY PLANT AND
EQUIPMENT 75,496,388.0 80,872,950.0 63,288.6 67,795.8
Goodwill 560,534.0 739,576.0 469.9 620.0
Long-Term Investments 12,654,995.0 17,894,293.0 10,608.7 15,000.8
30. 30
Deferred Tax Assets, Long Term 4,621,780.0 4,526,595.0 3,874.4 3,794.6
Deferred Charges, Long Term 752,669.0 1,239,933.0 631.0 1,039.4
Other Intangibles 2,667,397.0 2,805,964.0 2,236.1 2,352.2
Other Long-Term Assets 6,560,984.0 7,197,621.0 5,500.1 6,033.8
TOTAL ASSETS 214,075,018.0 230,422,958.0 179,459.1 193,163.6
LIABILITIES & EQUITY
Accounts Payable 8,437,139.0 7,914,704.0 7,072.9 6,634.9
Accrued Expenses 11,344,530.0 12,876,777.0 9,510.1 10,794.6
Short-Term Borrowings 6,438,517.0 8,029,299.0 5,397.4 6,731.0
Current Portion of Long-Term
Debt/Capital Lease 2,425,831.0 1,778,667.0 2,033.6 1,491.1
Current Portion of Capital Lease
Obligations 19,811.0 14,807.0 16.6 12.4
Current Income Taxes Payable 3,386,018.0 2,161,109.0 2,838.5 1,811.7
Other Current Liabilities, Total 19,283,374.0 19,253,357.0 16,165.3 16,140.1
TOTAL CURRENT
LIABILITIES 51,315,409.0 52,013,913.0 43,017.7 43,603.3
Long-Term Debt 2,213,783.0 1,379,871.0 1,855.8 1,156.7
Capital Leases 82,402.0 77,682.0 69.1 65.1
Minority Interest 5,573,394.0 5,906,463.0 4,672.2 4,951.4
Pension & Other Post-Retirement
Benefits 1,854,902.0 201,342.0 1,555.0 168.8
Deferred Tax Liability Non-Current 6,012,371.0 4,097,811.0 5,040.2 3,435.2
31. 31
Other Non-Current Liabilities 2,580,141.0 4,564,151.0 2,162.9 3,826.1
TOTAL LIABILITIES 64,059,008.0 62,334,770.0 53,700.7 52,255.2
Common Stock 897,514.0 897,514.0 752.4 752.4
Additional Paid in Capital 4,403,893.0 4,403,893.0 3,691.8 3,691.8
Retained Earnings 148,600,282.0 169,529,604.0 124,571.6 142,116.7
Treasury Stock -7,323,432.0 -8,429,313.0 -6,139.2 -7,066.3
Comprehensive Income and Other -2,135,641.0 -4,219,973.0 -1,790.3 -3,537.6
TOTAL COMMON EQUITY 144,442,616.0 162,181,725.0 121,086.2 135,956.9
TOTAL EQUITY 150,016,010.0 168,088,188.0 125,758.4 140,908.3
TOTAL LIABILITIES AND
EQUITY 214,075,018.0 230,422,958.0 179,459.1 193,163.6
32. 32
RATIOS
A] BALANCE SHEET RATIOS
1. CURRENT RATIO =
CURRENT ASSETS
CURRENT LIABILITIES
For 2013,
CURRENT RATIO =
110760271
51315409
= 2.16
For 2014,
CURRENT RATIO =
115146026
52013913
= 2.21
2. QUICK RATIO/ LIQUID RATIO =
QUICK ASSETS
QUICK LIABILITIES
Quick Assets = Current Assets- Stock- Prepaid Expenses
Quick Liabilities = Current Liabilities- Bank Overdraft- Advance Income
For 2013,
QUICK RATIO =
89152453
51315409
= 1.74
For 2014,
QUICK RATO =
94481929
52013913
= 1.82
33. 33
3. DEBT EQUITY RATIO =
LONG−TERM DEBTS
SHAREHOLDERS FUNDS
For 2013,
DEBT EQUITY RATIO =
2213783
150016010
= 0.015
For 2014,
DEBT EQUITY RATIO =
1379871
168088188
= 0.008
4. STOCK TO WORKING CAPITAL RATIO =
STOCK
WORKING CAPITAL
Working Capital = Current Assets – Current Liabilities
For 2013,
STOCK TO WORKING CAPITAL RATIO =
19134868
59444862
= 0.33
For 2014,
STOCK TO WORKING CAPITAL RATIO =
17317504
63132113
= 0.27
34. 34
5. PROPRIETARY RATIO =
PROPRIETORS FUNDS
TOTAL ASSETS
× 100
For 2013,
PROPRIETARY RATIO =
150016010
214075018
× 100
= 70%
For 2014,
PROPRIETARY RATIO =
168088188
230422958
× 100
= 72.94% i.e. 73%
B] REVENUE STATEMENT RATIOS
1. GROSS PROFIT RATIO =
GROSS PROFIT
SALES
× 100
FOR 2013,
GROSS PROFIT RATIO =
90996358
228692667
× 100
= 39.78% i.e. 40%
FOR 2014,
GROSS PROFIT RATIO =
77927187
206205987
× 100
= 37.79% i.e. 38%
35. 35
2. OPERATING RATIO =
OPERATING COST
NET SALES
× 100
For 2013,
OPERATING RATIO =
54211345
228692667
× 100
= 23.70%
For 2014,
OPERATING RATIO =
52902116
206205987
× 100
= 25.65%
3. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO =
SELLING,GENERAL AND ADMINISTRATIVE EXPENSES
𝑁𝐸𝑇 𝑆𝐴𝐿𝐸𝑆
× 100
For 2013,
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO=
38934012
228692667
× 100
= 17.02%
For 2014,
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO=
37446184
206205987
× 100
= 18.16%
36. 36
4. RESEARCH AND DEVELOPMENT EXPENSE RATIO =
RESEARCH AND DEVELOPMENT EXPENSES
NET SALES
× 100
For 2013,
RESEARCH AND DEVELOPMENT EXPENSE RATIO =
14319402
228692667
× 100
= 6.26%
For 2014,
RESEARCH AND DEVELOPMENT EXPENSE RATIO =
14385506
206205987
× 100
= 6.98%
5. NET PROFIT BEFORE TAX RATIO =
NET PROFIT BEFORE TAX
NET SALES
× 100
For 2013,
NET PROFIT BEFORE TAX RATIO =
38364279
228692667
× 100
= 16.78%
For 2014,
NET PROFIT BEFORE TAX RATIO =
27875034
206205987
× 100
= 13.52%
37. 37
6. NET PROFIT AFTER TAX RATIO =
NET PROFIT AFTER TAX
NET SALES
× 100
For 2013,
NET PROFIT AFTER TAX RATIO =
29821215
228692667
× 100
= 13.04%
For 2014,
NET PROFIT AFTER TAX RATIO =
23082499
206205987
× 100
= 11.19%
7. NET OPERATING PROFIT RATIO =
NET OPERATING PROFIT
NET SALES
× 100
For 2013,
NET OPERATING PROFIT RATIO =
36785013
228692667
× 100
= 16.08%
For 2014,
NET OPERATING PROFIT RATIO =
25025071
206205987
× 100
= 12.14%
38. 38
8. STOCK TURNOVER RATIO =
COST OF GOODS SOLD
AVERAGE STOCK
Average Stock = Opening Stock + Closing Stock
For 2013,
STOCK TURNOVER RATIO =
137696309
18441140
= 7.47 times
For 2014,
STOCK TURNOVER RATIO =
128278800
18226186
= 7.04 times
C] COMBINED RATIOS
1. FIXED ASSTES TURNOVER RATIO =
SALES
FIXED ASSETS
For 2013,
FIXED ASSTES TURNOVER RATIO =
228692667
76056922
= 3.01 times
For 2014,
FIXED ASSTES TURNOVER RATIO =
206205987
81612526
= 2.53 times
39. 39
2. TOTAL ASSETS TURNOVER RATIO =
SALES
TOTAL ASSETS
For 2013,
TOTAL ASSTES TURNOVER RATIO =
228692667
214075018
= 1.07 times
For 2014,
TOTAL ASSTES TURNOVER RATIO =
206205987
230422958
= 0.89 times
3. CAPITAL TURNOVER RATIO =
SALES
CAPITAL EMPLOYED
For 2013,
CAPITAL TURNOVER RATIO =
228692667
152229793
= 1.50 times
For 2014,
CAPITAL TURNOVER RATIO =
206205987
169468057
= 1.22 times
40. 40
4. RETURN ON CAPITAL EMPLOYED =
NET PROFIT BEFORE INTEREST AND TAX
CAPITAL EMPLOYED
× 100
For 2013,
RETURN ON CAPITAL EMPLOYED =
36785013
152229793
× 100
= 24.16%
For 2014,
RETURN ON CAPIYAL EMPLOYED =
25025071
169468059
× 100
= 14.77%
5. RETURN ON PROPRIETORS FUNDS =
NPAT
PROPRIETORS FUNDS
× 100
For 2013,
RETURN ON PROPREITORS FUNDS =
29821215
150016010
× 100
= 19.88%
For 2014,
RETURN ON PROPREITORS FUNDS =
23082499
1680118118
× 100
= 13.73%
41. 41
6. DEBTORS TURNOVER RATIO =
CREDIT SALES
AVERAGE ACCOUNTS RECEIVABLE
For 2013,
DEBTORS TURNOVER RATIO =
228692667
24988532
= 9.15 times
For 2014,
DEBTORS TURNOVER RATIO =
206205987
24694610
= 8.35 times
(Assuming closing debtors as average debtors and net sales as credit sales)
42. 42
CONCLUSION
Samsung Electronics, Co., Ltd., a part of Samsung Group, is the world’s largest technology
company by revenues. The company produces consumer electronics, telecoms equipment,
semiconductors and home appliances. The company is the world’s largest mobile phones and
smartphones vendor. It is the largest memory chip maker and the largest TV manufacturer
The company’s overall position is at a very good position. The company achieves sufficient
profit in past four years. The long term solvency position of the company is very good. The
company maintains low liquidity to achieve the high profitability. The company distributes
dividends every year to its share holders.
