"Group AssignmentAnalysis of 2013 Annual Reports of Sony and Samsung1 Table of ContentsINTRODUCTION……………………………………………………………….…..3FINANCIAL POSITION…………………………………………………….………4INCOME STATEMENT ANALYSIS……………………………………….………7ANALYSIS OF STATEMENT OF CASH FLOWS…………………………….… 10SUMMARY AND RECOMMENDATIONS………………..………………………11APPENDICES………………………………………………………………………..12WORK CITED……………………………………………………………………….312 INTRODUCTIONSony CorporationSony Corporation was founded in 1946 in Japan and is one of the world’s most renowned brands. Itsmain business is in electronic goods like consumer electronics, semi conductors, computer hardware,telecom equipment and it also deals in entertainment through motion pictures, music and games andalso financial services like insurance and banking, credit finance etc. Its current President and CEOis Kazau Hirai. st Sony’s revenue for the year ended 31 march 2013 was 66.5 billion USD which is a 4.7 % increaseover fiscal year 2012. The company consolidated many of its operations in Japan and sold off itschemical products business and headquarters in US. The success of motion picture Skyfall and TheAmazing Spiderman added to Sony group’s profitability. Sony plans to reinforce its core business of electronics goods by focusing on developing productswith best of technology in mobiles and tablets, PC and Imaging business.Samsung GroupSamsung was first founded in 1938 as a trading concern and then diversified into various businessesover the next few decades. It entered the electronics segment in the late 1960s. Samsung isheadquartered in Seoul in South Korea. The main areas of business in which Samsung operates areelectronics, heavy industries like ship building, construction, aerospace defence and services like lifeinsurance, advertising etc.Samsung group’s consolidated revenue for the fiscal year 2013 was 216.7 billion USD which is morethan 10% improvement over previous year’s gross revenue. Samsung has the target of achievingglobal revenue of USD 400 billion by the year 2020. 3 FINANCIAL POSITIONBalance sheet analysis for the fiscal year 2013Sony and Samsung both enjoy a highly reputed brand name in the world electronics market and havesound profitability, liquidity and solvency situation. Although there is a vast gap in the value ofassets and liabilities for both the companies, their way of managing different elements of balancesheet is similar in many ways.Current Assets- Sony has USD 35 billion worth of current assets, whose 22%, roughly USD 8.1billionis kept in cash and cash equivalents and USD 6.8 billion in marketable securities. Approx.50% of currents assets are highly liquid for Sony Corporation. Samsung has USD 105 billion worthof current assets out of which 15.4 billion is cash, 34.6 billion is marketable securities and 1.4 billionis available for sale financial instruments. It shows a little over 50% of total current assets arecompletely liquid. Samsung has 18 billion worth of inventories which is 17% of total current assetswhereas Sony has 7 billion approx. worth of stock which is around 20% of total current assets. Sonyalso has deferred tax assets worth 437 million USD in its current assets whereas Samsung has showndeferred tax in its noncurrent assets only.Noncurrent Assets- Sony has total fixed assets worth USD 104 billion out of which investments inassociates is 2 billion. Samsung’s investment in associate companies is USD 6.1 billion out of totalof USD 97 billion fixed assets. Proportion of investments in associates is more in Samsung than inSony.Property plant and equipment- Samsung has invested majority of funds in property and plant andequipment i.e. 71 billion out of 97 billion. Property has increased over the past year for Samsung.While in Sony proportion of plant and property in total assets is much less at approx. 22% of totalfixed assets.Intangible assets- Samsung has intangible assets worth USD 3.7 billion and Sony has intangiblesvaluing USD 20.687 billion which is much higher than that of Samsung. However, major proportionof intangibles for both companies lies in goodwill.4 Liabilities- Current liabilitiesSamsung has current liabilities worth USD 48.6 billion out of which trade and other payables standat 34%, short term borrowings at 12%, accrued expenses at 22% and provisions at 13%. On the otherhand, Sony has current liabilities of USD 42.2 billion out of which maximum proportion is ofdeposits of customers in banking business at 43%, Accounts payable at 25%.Long term liabilities- Sony has total long term liabilities worth USD 70.6 billion out of which 50%goes to future insurance policy benefits payable and 13% in long term debt. Samsung has long termdebts amounting to USD 12 billion, out of which 10% amount is of debentures, 48% approx. pertainsto deferred tax liabilities.Equity- Sony has total equity of USD 26.27 billion out of which minority interest pertains to 4billion. However, Samsung has a minority interest of 5.2 billion out of USD 142 billion, which ismuch less in proportion.Methods of valuation of Assets and Liabilities- Sony group prepares its financials adhering to the Japanese GAAP and accounting policies whereasSamsung follows Korean International Financial Reporting Standards. Although there are no specificmethods mentioned in annual reports pertaining to the measurement of assets and liabilities, it can beinferred from the financial statements that commonly accepted principles have been used to measureassets and liabilities. For eg. Intangible fixed assets have been tested annually for any impairmentand their value is shown in balance sheet at historical cost less amortisation less impairment charges.Goodwill is not amortised by Samsung and is only impaired as and when circumstances arise. Samsung classifies Assets as held for sale if their sale is highly probable in near future and proceedsare to be recovered from such sale whereas there is no such classification done by Sony. Borrowingsare measured at fair value less transaction costs and then amortised. Financial liabilities are measuredat fair value, if specifically incurred for the purpose of repurchasing them in future. Due to verylimited information available, not much comparison can be made regarding valuation of assets andliabilities.Strengths and Weaknesses of Samsung and Sony based on their Balance sheetsFollowing is the analysis of different elements of balance sheet on year to year basis: (For figuresrefer Appendices)5 1) Current Assets- Both Sony and Samsung have decreased their cash balance in the currentyear as compared to the previous fiscal year 2012 but the quantum of decrease is more forSamsung. Short term financial instruments have increased on the other hand by almost 200%for Samsung, while there is only marginal increase of 2% for Sony.2) Investments in associates- For Sony it has increased by almost 5 times in current yearwhereas for Samsung it has decreased by 27%3) Liabilities – Long term debt has increased by 23% for Sony in 2013 whereas for Samsunglong term borrowings have subsided by 73%. It could be because of many repayments due inthe year 2013.4) Equity – The position of equity does not change for Sony much in the current year but forSamsung the total equity increased by 23% owing to an increase in retained earnings.Following is an assessment based on ratios-1) Working capital ratio –Samsung has a much better working capital ratio, it has employed asignificant amount of working capital and will be able to pay off its liabilities on time morelikely. Sony also has a positive working capital but its position is not as strong as Samsung.2) Current ratio – Samsung has a current ratio of 2 which is better in comparison to Sony whichhas a current ratio of 0.8. It signifies that Samsung has adequate working capital.3) Accounts receivable turnover – Here also, Samsung has a better position as its receivables areturning over 2 times where as Sony has receivables turnover at 0.67 times. It means Samsungis able to rotate and realise its debtors in better manner.4) Inventory turnover –Sony is able to rotate its inventories by 6 times and Samsung by a mere1.87 times. Here, Sony has a better position as its stocks of finished goods are turning over ata much faster rate.5) Debt to equity ratio – Sony has a debt equity ratio of 35%, which is quite healthy. Whereas,Samsung has debt equity ratio of 0.06% for current year which means Samsung is relyingonly on equity and is playing extremely safe. Although it has interest paying capabilities, it isnot using leverage offered by employing debt in capital structure. This extremely low debtratio could be because of repayment of a large amount of long term debts in the current year. 6 Income Statement AnalysisThe income statement of Sony Group shows revenue from three sources, sales of electronic andrelated goods, revenue from financial services and other small operating revenues like interestearned. Samsung also has revenue from Sale of goods, sale of services and operating interest income.Sony has gross revenue of USD 55.7 billion and Samsung has USD 216.7 billion which is 4 times inquantum.The next element is Cost and expenses comprising of Cost of sales, selling and administrativeexpenses, financial services expense and other operating expenses for Sony and Cost of Sales andselling and administrative expenses for Samsung. Both revenue and cost have shown increase overthe previous year for both the companies.Both the companies enjoy other non operating incomes from sources such as dividends, interest,forex gains etc. along with their corresponding expenses. The difference in quantum is on account ofdifference in the scale of operation of both the companies.The net income before tax of Sony comes up to be USD 2.407 billion which is an improvement of300% over last year 2012 in which it incurred a net loss of USD 815 million. The profit before tax ofSamsung for the year 2013 is USD36.3 billion which is an improvement of about 28% over last year.Income tax expense is 7.4 billion for Samsung which comes up to be 20% approx. of net profit. ForSony income tax expense is USD 1.3 billion which is approx. 54% of profit before tax.Both the companies show part of profit attributable to non- controlling joint associates.Methods used to recognise income and expensesRevenue is fair value of goods or services sold which is shown net of value added tax, discounts andrebates. Sale of goods is generally recognised on delivery of goods and acceptance by the customer.Sale of services is recorded on percentage of completion method. Expenses are recorded as and when they are incurred and provisions are made depending upon theirprobability of occurring. Samsung and Sony both follow similar revenue and cost recognitiontechniques being in the same industry. However, full comparison cannot be made because of limitedinformation available in this regard in the annual reports.7 Analysis of each company’s financial performance based on Income Statement 1) Sales and operating revenue- Gross revenue for Sony increased by about 4.7% in 2013 overthe year 2012 out of which major share of income comes from sale of goods amounting to83% of total revenue. For Samsung the increase in gross revenue is 13% in 2013 over 2012.2)Cost of sales - The cost of sales has increased by 8% for Samsung Whereas in case of Sony,cost of sales and financial services expenses rose in proportion to sales.3) Operating profit –Operating profit for both Samsung and Sony rose by 26% and 343%respectively. This high rise in case of Sony is because it set off huge amount of losses ofaffiliated companies in previous year.4) Other income – Earnings from other sources such as interest, dividends, sale of securities etc.increased for both the companies in current year.5) Net profit after tax- NPAT of Samsung increased by 27% in the year 2013 and for Sony, thisincrease is 126%.Analysis based on financial ratios 1) Gross Margin –It is the ratio of gross profit over net sales. Sony has a gross margin of 3.4%in the year 2013 and Samsung has gross profit ratio of 39.7%. This shows the dominance ofSamsung being in the same industry as Sony.2) Profit margin after tax – For Samsung it is 17% in 2013 and corresponding figure for Sony is1.5%.3) Times interest earned – It shows the strength of the company to pay its interest liabilities.Sony has the capacity to pay off its fixed interest liability 9.45 times whereas Samsung hasthe same ratio as 4.9 times. Although Samsung has very less debt in its capital, still itsinterest coverage ratio is low indicating insufficient profitability.4) Return on stockholders equity - This ratio shows the percentage of profit earned on averagebalance of stockholders funds during the year. Samsung has a return on equity of 22.4%during the year 2013 and Sony has the same figure as 4%.8 Analysis of Statement of Cash Flows Cash Flow from operating activities – These are the cash flows earned through operating activities ofthe company. Greater the proportion of cash flow from operating activities in total cash flows, thebetter it is for the company as it indicates that the core strength of the company lies in its operatingactivities and cash is being generated from those activities. Samsung’s cash flow from operatingactivities has increased by 23% in the year 2013 and it constitutes major part of cash generatedduring the year rather it is the only cash generating activity. Whereas for Sony, cash generated fromoperating activities has decreased by 8%. This decrease seems to be there due to payment of longstanding liabilities during the year. However, the operating activities of Sony group seem to be lesscash generating and are not its strength.Cash flow from investing activities – Sony’s cash flow from investing activities is negative i.e. it isusing cash in investing activities, primarily for the purpose of making investments in associatecompanies, for capital expenditure and for acquiring of Sony Ericsson. However this usage washigher in the year 2012.Samsung on the other hand, has increased this usage in current year by42%. This increase in cash outflow is majorly due to acquisition of long term for sale financialassets, investments in associates and purchase of intangibles.Cash Flow from financing activities –Cash flow from financing activities decreased for Sony in thecurrent year by 68% over 2012, mainly due to repayment of long term debt and acquisition of sharesfrom non-controlling interests. On the other hand, Samsung has got cash outflow in financingactivities also and the quantum has increased by 121% over last fiscal year, Reason being, hugepayment of dividends and repayment of large amount of debt. Free cash flow – Free cash flow is the measure of how much cash is left from operating activitiesafter the payment of capital expenses. Free cash flow for Samsung for the year2013 is USD22,315.79 million and for Sony it is USD 1,519.218 million. It shows Samsung has an advantageover Sony in this regard.SummarySamsung is the world leader in consumer electronics market and although Sony is one of the mostrecognised brands in the industry, its market share and profitability is very less as compared toSamsung. The major strength of Samsung lies in its innovations and the number of technologypatents it holds. We have seen in earlier sections, how the profitability of Samsung has increased9 over the last year and while Sony has managed to thrive well, yet its performance as measured byvarious ratios and cash flow analysis, has not been up to the mark and it will have to think of andimplement some serious steps to remain profitable in the coming years.RecommendationsIn times when it has become increasingly difficult to survive and sustain in Consumer electronicsmarket, due to short life of product innovations and decreasing demand trends, following suggestionsmight be considered by the two companies.1) Choose wisely- Detailed analysis should be undertaken and products with decliningprofitability and low future prospects should be dropped from the product line and profitableones should be pursued. 2) Controlled costs- It is seen that companies tend to spend too much on promotions than oninnovations. Controlling selling and administrative and other overheads can impactprofitability to a great extent. 3) Strategic alliances – We have seen that both the companies have invested huge amounts onacquisition of associates and joint ventures. These acquisitions should be strategically doneso as to gain entrance in new markets, to take advantage of technological developments andto avail economies of scale.4) Use of debt – We have seen that both the companies have employed debt very cautiously intheir capital structure. It shows a lack of ability to take risk. But it should be noted that debtprovides financial leverage, carrying fixed interest liability. Returns to shareholders can beincreased to great extent by using fixed interest bearing securities in capital. APPENDICESAppendix A: Balance Sheets and Changes in EquityConsolidated Balance SheetsSony Corporation and Consolidated10 "