Executive summary

Samsung was established in 1938 in Taegu, Korea by Byung-Chull with the initial amount of 30,000 won. Among the worlds renowned multinational companies, is the Samsung Group Nowadays, Samsung is one of the famous and leading companies in the electronics industry, especially in digital appliances and media, memory and system of integration It has several branches all over the world and has various lines of business. The Samsung Group has wide presence across the world and goes by brands such as Samsung electronic, Samsung heavy industries, Samsung engineering, Samsung C&T, Samsung life insurance, Samsung everland cheil worldwide. In the past few years, Samsungs response to customers needs has been characterized by quality and emphasized by the willingness to create unequalled availability of various products in the market. The company has been in the forefront in trying to achieve global competitiveness through the improvement of the financial structure and profitability. Samsung has been working towards great achievements through efforts to cut down production costs as well as working hard so as to improve and maintain an unrivalled brand image. In terms of global recognitions, Samsung has been recognized by S&Ps top rating. In this report, we are going to analyse the financial performance of Samsung. In our analysis, we are going to focus on KPIS for understanding of the areas of liquidity, profitability, solvency, and asset efficiency and working capital management. The Ratio analysis has helped us find a way to have a better look at the company as well as its competitors.

Table of Content Comparison of last year with previous year result............................4 Ratio analysis of 2010 and 2011 year

Profitability Analysis. 4 Working Capital Strength Analysis. ...4 Liquidity Analysis ...5 Solvency Analysis. ...5 Asset efficiency analysis. 5

Uses and measurement of KPIs in assessing Organization performance and measurement...6 Related party transaction.7 Advantages and Disadvantages of the analysis techniques used7 References.8 Appendices

Industrial average.13

ANALYSIS OF FINANCIAL STATEMENTS

Samsung Electronics Co., Ltd. and its subsidiaries

Horizontal analysis of Income Statement of Samsung

(In thousands of U.S. dollars) 2011 USD 143,069,254 2010 USD 134,076,414

Revenue Cost of sales Gross profit Research and development Expenses Selling, general and Administrative expenses Other operating income Other operating expenses Operating profit Share of profit or loss of Associates and joint ventures Finance income Finance expense Profit before income tax Income tax expense Profit for the year Profit attributable to owners of the parent Profit attributable to non Controlling interests Earnings per share for profit Attributable to the owners of the Parent (US dollars): Basic Diluted

97,238,463 89,020,051 45,830,791 8,653,291 23,776,910 2,099,981 1,410,814 14,089,757 1,213,209 6,419,427 6,844,204 14,878,189 2,969,694 11,908,495 11,583,449 325,046 45,056,363 7,889,840 22,754,810 1,522,104 936,387 . 14,997,430 1,965,743 6,472,841 6,676,579 16,759,435 2,759,153 14,000,282 13,698,981 301,301

77.23 77.16

91.90 91.63

The revenues of the company were $143,069,254 in 2010, which rose to $134,076,414 in 2011, which accounted to 6.70% increase all together. This has led to increase in gross profit from $ $14,997,430 in 2010 to $ 11,908,495 in 2011, which is a 14.95% loss. This was a result of increase in research and development, administrative and other operating expenses. Because of the slowdown in the global economy, there were rising cost of fuel and other commodities too, which has led to such losses. The operating profits of the company however, have also reduced from 14,997,430 in 2010 to 14,089,757 in 2011. This was a fall of 6.05 % as compared to 2010.

Talking about the shareholders, they have also been suffered due to loss in the profits as compared to last year. In the year 2010, earning per share i.e. EPS was $91.90, but it came down to $77.23 in the year 2011, which was a 15.96 fall in value for the shareholders worth in earnings.

Horizontal Analysis of Balance Sheet for Samsung

December 2011 USD Assets Current Assets Cash and cash equivalents Short-term financial instruments Available-for-sale financial assets Trade and other receivables Advances Prepaid expenses Inventories Other current assets Total current assets Non-current assets Available-for-sale financial assets Associates and joint ventures Property, plant and equipment Intangible assets Deposits Long-term prepaid expenses Deferred income tax assets Other non-current assets Total assets December 2010 USD

12,738,889 9,997,316 568,776 20,942,537 1,245,372 2,019,824 13,627,603 857,483 61,997,800

8,489,915 9,996,872 1,005,074 18,476,402 1,129,305 1,908,210 11,588,072 646,928 53,240,778

2,795,108 7,980,724 53,796,888 2,909,248 686,606 2,995,062 1,399,529 383,329 134,944,294 December 2011 USD

2,636,093 7,227,339 45,924,386 2,409,988 568,509 3,073,417 974,602 383,580 116,438,692 December 2010 USD

Liabilities and Equity Current liabilities Trade and other payables Short-term borrowings Advance received Withholdings Accrued expenses Income tax payables

16,049,155 8,370,521 1,257,897 1,487,098 6,783,775 1,094,943

13,916,414 7,309,218 766,136 912,646 6,158,352 1,778,767

Current portion of long-term Borrowings and debentures Provisions Other current liabilities Total current liabilities Non-current liabilities Debentures Long-term borrowings Long-term other payables Retirement benefit obligation Deferred income tax liabilities Provisions Other non-current liabilities Total liabilities

26,265 3,047,374 310,973 38,428,001

974,537 2,530,061 289,021 34,635,152

1,109,966 3,192,987 888,584 362,860 2,023,274 314,942 315,934 46,636,548 December 2011 USD

509,267 550,057 930,080 518,364 1,432,990 256,096 134,137 38,966,143 December 2010 USD

Equity attributable to owners Of the parent Preferred stock Common stock Share premium Retained earnings Other reserve Non-controlling interests Total equity Total liabilities and equity (In thousands of U.S. dollars)

103,587 674,627 3,818,515 84,576,888 (4,547,097) 3,681,226 88,307,746 134,944,294

103,587 674,627 3,818,515 73,714,168 (4,098,152) 3,259,804 77,472,549 116,438,692

The total Current Assets of the company has increased from $ 53,240,778 in 2010 to $61,997,800 in 2011. This means 16.44% increase in current assets. Cash, inventory and trade receivables were the main constituents of this. The profit of SAMSUNG was decrease from 2010 to 2011. Samsung spend more expense in their research and development. The revenue of selling their products was increase from 2010 to 2011. The asset of Samsung Company also increases from 116,438,692 to 134,944,294 which is a 13.71 % increase but the liabilities of the company also increase too. In the other way, the long-term borrowing is decrease much from 2010 to 2011. It is a good sign to show that the financial performance is quite good.

Profitability Analysis

2011 Profitability
ROCE
14.6 %

2010
18.33 %

Gross Profit Margin

32.03 %

33.60 %

Net Profit Margin

9.85 %

11.19 %

Asset Utilisation

106.02 %

115.15 %

Working Capital
Stock Turnover
34.77 days 31.55 days

Debtor Collector Period

53.43 days

50.3 days

Creditor Collector Period

60.24 days

57.06 days

The probability analysis is meant to give an insight on a companys profit behaviour over a given period of time and its effects to other units of measurement for company performance such as the return on capital employed. This is usually done by the comparisons of different periods of time. In the case of Samsung, the profit dropped from 33.6% in the year 2010 to 33.02% in the year 2011. This downward profit behaviour in the year 2011 went ahead and created a negative

effect to such units such as the return on capital. The drop in the profit led to the return on capital employed dropping to 14.6% in the year 2011 from the much better rate of 18.3% in the year 2010. Companys position in the industry was not threatened. It is evident that the companys return on capital employed was standing at 14.6% in the year 2011, which was higher than the industries average return on capital which stood at 10.11%. From the appendix C., we learn that the asset utilisation also went down. The management should dedicate more time in finding ways of pushing sales up for better profits (Phone Arena, 2012).

Working Capital Analysis The analysis of the working capital is aimed at establishing the way the funds required to drive the daily needs of the company have performed or to know their levels. The higher stock turnover ratio goes to the more money is tied on unnecessary stocks that are bad thing for a business. In the case of Samsung, the stock turnover is seen to have gone up to in the year 2011, from in the year 2010. The rise in the stock ratio shows that the business performance in terms of sales was not doing well or stock was holding funds hence creating idleness of money (Kumar 2001). Less product units were sold so return on capital was dropped. The management due to this revelation should take care of the marketing bit and also the product quality for better sales (Pricewaterhouse Coopers 2012). The creditor collector period for Samsung is seen to have gone high from 57.06 days in the year 2010 to 60.24 days. This is evidence that the companys ability to bargain for favourable credit terms had slightly improved. However, this can also be an indicator of poor cash flow status of the company. The debtor collection period raised to 53.43 days from 50.3 days in the year 2010 that is an indicator of poor negotiation skills by the company (Fried lob et al 2003).

2011 Liquidity
Current Ratio
1.61 times

2010
1.54 times

Quick Ratio

1.26 times

1.20 times

0.35 times

0.26 times

Cash Ratio

Solvency
Gearing Ratio
8.51 % 5.29 %

Debt to Equity

0.53 times

0.50 times

Asset Efficiency
Fixed Asset Turnover
1.96 times 2.12 times

Total Asset Turnover

1.06 times

1.15 times

Inventory Turnover

7.14 times

7.68 times

Liquidity Analysis Liquidity analysis usually focuses on the ability of a company to convert its assets into cash. Liquidity also refers to the capability of a company in settling its current obligations. In the case of Samsung, the liquidity of the company is seen to have improved slightly in 2011 as compared to the year 2010. This is evidenced by the current ratio that rose by 0.07 times to show an improvement. This shows that the companys cash flow improved. The management should work to ensure that the current ratio keeps the upward movement. This can be made possible by the management by reducing reliance on short-term liabilities. Looking at the industrys average ratio, Samsung is doing well since the ratios are better. For example the quick ratio stood at 1.26 times while that of the industry was 1.1 times in the year 2011. The quick ratio gives a better level of decisionmaking regarding liquidity since it does not consider the inventory part due to its

complexity in disposal. For more improvement, the management of Samsung should consider putting the inventory levels lower than those kept before. This will ensure that the effect is felt in areas such as an improved cash ratio, which is good for the companys liquidity (Pricewaterhouse Coopers 2012). Solvency Analysis The solvency analysis of a company usually refers to the examination of a companys status with regards to long-term debts or liabilities with their interests altogether. In the case of Samsung, the gearing ratio and debt to equity ratio is essential in the analysis. Samsungs gearing ratio increased from 5.29% in 2010 to 8.51% experienced in the year 2011. This is an indicator of increased debt that is an area that should be addressed by the management. This upward movement is also exhibited by the debt to equity ratio that shows an increased reliance on debt as per the rise from 0.50 times in 2010 t0 0.53 times in 2011. All these ratios show that the companys ability to pay debts is facing difficulties. To put the situation under control, the management can focus on shorter activities to avoid the huge reliance on debt and credit so that it may re-organise for the purposes of recovery (Brigham & Ehrhardt 2010). Asset Efficiency Analysis Efficiency when it comes to companys assets, refers to the extent which a company utilises its assets to generate revenue. In the asset efficiency analysis in the case of Samsung, the efficiency ratios will assist us. These include total asset turnover ratio, inventory ratio and the fixed asset turnover ratio. The inventory turnover ratio for Samsung in the year 2011 dropped from 7.68times in 2010 to 7.40 times. It therefore indicates that the companys selling efforts may have gone down. It is necessary for the management to ensure that this issue is not overlooked. The fact that this ratio was lower than the industries ratio 7.6 times ratio in 2011 is a major point of concern. Furthermore Samsungs fixed asset turnover dropped from 2.12 times experienced in 2010 to 1.96 in 2011. It was also lower than the industrys ratio that was 2.9 times. The total asset turnover also showed a decline of 0.16 times in the year 2011. The industrys ratio was also higher than that of the company in the year 2011; since it stood at 1.2 times against that of Samsung that was 1.06. The management can rely on this ratio to decide whether to act on current assets of the fixed assets for better results aimed at reducing the companys weakness against the industry (Moir 1997).

Measurement of KPIs in assessing organization performance The KPIs help us to break the complex organization performance standards into smaller and simpler performance measures which can be easily understood by us. Here, Samsungs KPI are analysed to compare Samsungs results of 2010 & 2011, which are although lower as compared to the year 2010. Some of the key performance indicators are:

Rate of earnings per share: Samsungs Electronics Co reported an increase in Earnings per Share of 24.9% in 2011 more than that in 2011. This shows that the companys selection of improving on the electronics products and services bared fruits. Samsung Made the total revenues go higher by 6.71% in 2011 than those in 2010. The number of intercompany transactions within related party circles: Samsungs intercompany sales transactions for the related parties went up by 87.01% in the year 2011 compared to the year 2011.The companies involved in the inter joint venture analysis include the Corning Precision Glass and Siltronic Samsung Wafer. And also the number of transactions among joint venture members (Moir 1997). The companys management should go ahead and set up new aggressive marketing and negotiation strategies to boost sales within the joint ventures as the KPI indicate a certain growth in sales, but the industry as a whole is growing at a much faster rate. KPIs show a rise in the payables which is an indicator of poor cash flow management or general cash flow problem. The management should be able to arrest this problem as soon as possible and encourage shortterm cash generating ventures (Buckham et al. 2010).

The Environmental KPIs reflect the companys engagement in environment sustainability measures. Samsung has been one of the organizations, who would want a greener and healthier planet. Samsung has set up targets to reduce the greenhouse gases (GHG), from 5.11 tons/million to 3.72 by the year 2013. The ratio of eco-product and eco-drive has been 91% and 72% respectively, the company wants to increase it to 100% by the year 2013. As an appraisable task, the company has been able to maintain 100% Safety certification rate as per the international environment. These environmental performance indexes provide the view that the company is not into the business for making profits out of eradicating the planet but keeping it sustainable and maintaining it too.

Advantages and Disadvantages of the analysis techniques used In the case of liquidity ratios, the quick ratios of Samsung show that there has not been proper performance with optimum levels of inventory. This is however not true with all the companies as they are having certain contracts where they do not need to keep raw materials with them and then ere these ratios show a false picture of performance of the company. On the other hand, the cash ratio is usually criticized for leaving out assets, which are not in cash form. It is a big flaw here, as it takes into account the deposits but leave aside the overdrafts. Asset efficiency ratios assist an organization in determining the levels of assets an organization needs to keep. The limitations of asset efficiency ratios have been exhibited through the fact that the level of assets requirement depends from a firm to another. For Samsung this means that these ratios are not the proper indicator of performance of company as they may lead to poor decisions about assets if the management is not careful. On the other hand, stock turnover ratio is one of the most effective ratios of all as it shows the average time taken to convert he stocks into sales. (Ainsworth & Dan 2010).

Profitability ratios on the other hand assist an organization in determining price levels and also the strategies to apply for pushing sales. For Samsung, the operating margin is a well guided ratio which can help the company in effective decision-making since it reveals the exact gains or negatives of the companys main activities. These ratios may lead to poor price setting due to ambitious decisions towards margins. Since the net profit margin ratio is not showing appropriate results as the revenues have increased but the ratio has declined. Solvency ratios help an organization in determining the levels of debt to keep. They are also advantageous to Samsung in that they give the extent to which the company is likely to last in the future thus giving chance for long term decision making.

References

Ainsworth, P. and Dan, D. (2010) Introduction to Accounting: An Integrated Approach. New York: McGraw-Hill. Brigham, E. and Ehrhardt, M. (2010) Financial Management Theory and Practice. New York: Cengage Learning. Buckham, D., Wahl, J., and Rose, S. (2010) Executives Guide to Solvency II. New York: John Wiley & Sons. Friedlob, T., Lancaster, L. and Schleifer, F. (2003) Esssentials of financial Analysis. New Jersey: John Wiley & Sons. Kumar, V. (2001) Working Capital Management Northern Book Centre. Moir, L. (1997) Managing Liquidity. England: Woodland Publishing Ltd. Phone Arena, 2012. http://www.phonearena.com/news/Apple-and-Samsunggrabbed-virtually-all-industry-profits-in-Q1-2012_id29621 [27 May 2012]. Pricewaterhouse Coopers (2012) Consolidated financial statements of Samsung Electronics Co., Ltd. and Subsidiaries-Index to financial statements. [online] available from <http://www.samsung.com/us/aboutsamsung/ir/financialinformation/auditedfin ancialstatements/downloads/consolidated/2011_Consolidated_quarter04_all.p df> [27 May 2012]

Appendices

Appendix A: Industrial Average

Samsungs Profitability Analysis Compared to the Industry Ratio Company Industry

Gross profit Margin

32.03

32.93

Return on Capital

14.6

10.11

The gross profit margin of the firm has been well in line with the industry average, which indicates firms efficiency to earn profits out of the stock sold. But talking about the Return on capital, it is much higher than the industry average, which is due to the effective management decision making and efficient management of employed capital resources. Samsungs Asset Efficiency Analysis Compared to the Industry Ratio Total Assets Turnover Fixed Assets Turnover Inventory Turnover Company 1.06 1.96 7.4 Industry 1.2 2.9 7.6

Here, Samsung can be seen performing little unsatisfactory, as compared to the industry. The industry total asset turnover ratio is almost 3 but Samsung has it around 2 only, which means that the company is not able to convert sales according to industry average. The stock turnover ratio is also is also little less than industry average, which indicates the firm inefficiency to make turnover in respect of stock.

Credit Ratio Analysis Compared to the Industry Ratio Credit Ratio Quick Ratio Company 1.61 1.26 Industry 1.6 1.1

Credit ratio analysis of the firm provides the analysis that the firm has been successfully getting the credit requirements and fulfilling its day to day working capital requirements. On Analysing the Quick ratio, we came to know that firm has higher ability as compared to the industry average, when compared with it.

Long term solvency Analysis Compared to the Industry Ratio Total Debt/Equity Company 0.53 Total Liabilities/Total Assets 1.26 Industry 0.50 34.1

Gearing Ratio

8.51

16.2

Balance Sheet And Income Statement % Chan ge

50.05 0.00 -43.41 13.35 10.28 5.85

Assets
Cash and cash equivalents Short-term financial instruments Available-for-sale financial assets Trade and other receivables Advances Prepaid expenses

2011
1,27,38,889 99,97,316 5,68,776 2,09,42,537

2010
84,89,915 99,96,872

Change
42,48,974 444 -4,36,298 24,66,135 1,16,067 1,11,614

10,05,074
1,84,76,402 11,29,305 19,08,210

12,45,372
20,19,824

Inventories Other current assets Total current assets Available-for-sale financial assets Associates and joint ventures Property, plant and equipment Intangible assets Deposits Long-term prepaid expenses Deferred income tax assets Other non-current assets Total assets

1,36,27,603 8,57,483 6,19,97,800

1,15,88,072

20,39,531 2,10,555 87,57,02 2

17.60 32.55 16.45

6,46,928
5,32,40,778

27,95,108 79,80,724 5,37,96,888 29,09,248 6,86,606 29,95,062 13,99,529 3,83,329 13,49,44,294

26,36,093 72,27,339 4,59,24,386 24,09,988 5,68,509 30,73,417 9,74,602 3,83,580 11,64,38,692

1,59,015 7,53,385 78,72,502 4,99,260 1,18,097 -78,355 4,24,927 -251 1,85,05,6 02

6.03 10.42 17.14 20.72 20.77 -2.55 43.60 -0.07 15.89

Liabilities
Trade and other payables Short-term borrowings Advance received Withholdings Accrued expenses Income tax payables Current portion of long-term Borrowings and debentures Provisions Other current liabilities Total current liabilities Non-current liabilities Debentures

1,60,49,155 83,70,521
12,57,897 14,87,098 67,83,775 10,94,943

1,39,16,414 73,09,218

21,32,741 10,61,303 4,91,761 5,74,452 6,25,423 -6,83,824

15.33 14.52 64.19 62.94 10.16 -38.44

7,66,136 9,12,646
61,58,352 17,78,767

26,265 30,47,374 3,10,973 3,84,28,001

9,74,537

-9,48,272 5,17,313 21,952 37,92,84 9

-97.30 20.45 7.60 10.95

25,30,061 2,89,021 3,46,35,152

11,09,966

5,09,267

6,00,699 117.9

5
Long-term borrowings Long-term other payables Retirement benefit obligation Deferred income tax liabilities Provisions Other non-current liabilities Total liabilities 31,92,987 8,88,584 3,62,860 20,23,274 3,14,942

5,50,057
9,30,080 5,18,364 14,32,990 2,56,096

26,42,930 -41,496 -1,55,504 5,90,284 58,846 1,81,797 76,70,40 5

480.4 8 -4.46 -30.00 41.19 22.98 135.5 3 19.68

3,15,934 4,66,36,548

1,34,137 3,89,66,143

Income Statement
Revenue 14,30,69,254

13,40,76,414

89,92,84 0 82,18,41 2

6.71

Cost of sales

9,72,38,463

8,90,20,051

9.23

Gross profit Research and development Expenses Selling, general and Administrative expenses Other operating income Other operating expenses

4,58,30,791

4,50,56,363 78,89,840

7,74,428 7,63,451 10,22,10 0 5,77,877 4,74,427

1.72 9.68

86,53,291

2,37,76,910

2,27,54,810
15,22,104 9,36,387

4.49 37.97 50.67

20,99,981
14,10,814

Operating profit Share of profit or loss of Associates and joint ventures Finance income Finance expense Profit before income tax

1,40,89,757

1,49,97,430

-9,07,673

-6.05

12,13,209 64,19,427 68,44,204

19,65,743 64,72,841 66,76,579

-7,52,534 -53,414 1,67,625 18,81,24 6

-38.2 8 -0.83 2.51 -11.2 2

1,48,78,189

1,67,59,435

Income tax expense

29,69,694

27,59,153

Profit for the year Profit attributable to owners of the parent Profit attributable to non Controlling interests

1,19,08,495

1,40,00,282

1,15,83,449

1,36,98,981

2,10,541 20,91,78 7 21,15,53 2

7.63 -14.9 4 -15.4 4

3,25,046

3,01,301

23,745

7.88