How to Measure Financial Performance

Abstract

Financial ratios are metrics that help assess the financial performance of a company. Using data from an entity’s financial statements, it is possible to evaluate the Financial ratios are an important measure of different financial aspects of a firm. This report provides a financial ratio analysis on Samsung Group. The ratios analyzed are from profitability , liquidity, debt level, efficiency, and market ratios categories. The analysis shows that Samsung has a relatively low profitability. Samsung has a very large share of current assets compared to current liabilities indicating high liquidity level. Efficiency ratios show that Samsung is very efficient in its operations. The market perception of the firm is very high hence the high EPS in both years. Samsung’s capital structure is comprised more of equity than liabilities or debt. 

Financial Ratio Analysis: Samsung Group

Financial analysis is a key metric to determine the financial performance of a firm through assessing and evaluating the financial information of a firm. Many techniques help analyze the financial performance of a firm – among them are the financial ratios. Financial ratios are metrics that help evaluate the profitability, liquidity, debt level, efficiency, and market performance of a firm. These ratios, in different categories, have different financial metrics that they evaluate.

This paper provides a financial ratio analysis on Samsung Group. The evaluated financial ratios include the profitability, liquidity, debt level, efficiency, and market with a number of ratios in each category. Samsung is a multinational conglomerate from South Korea with numerous businesses and operating segments most in the Samsung brand. The company, founded in 1983, started as a trading company but later diversified into different areas of business. The company has many affiliates including Samsung Electronics, Samsung Heavy Industries, Samsung Engineering, and Samsung C&T. The company’s subsidiaries include Samsung Life Insurance, Samsung Everland, and Cheil Worldwide. 

Profitability Ratios 

Profitability ratios assess a company’s ability to generate profits from its operation by comparing income statement accounts. These ratios determine a company’s efficiency in making profits from its operations. Investors and other users of financial statements can use these ratios to evaluate the return on investment of the company by comparing profits and assets levels (Kajananthan & Velnampy, 2014) . These ratios relate to efficiency ratios as they show how well a company uses its assets to make a profit . 

Table 1 shows Samsung’s profitability ratios. The profit margin indicates how well the entity is able to generate a return on its sales. It compares the net profit of the firm and its net sales to determine the amount of profit made per dollar sales. The profit margin indicates the proportion of sales that a firm retains after its meets its expenses. According to Table 1, Samsung converted 11.26% of its sales into profit in FY 2016 and 9.5% in FY 2015. This ratio is quite low adding to the fact that the firm is among the largest electronic companies in the world.

PROFITABILITY RATIOS		2016	2015	CHANGE (%)
Profit Margin	Net Profit/Net Sales	11.26	9.50	0.19
Return on Assets	Net Income/Average Total Assets	9.01	7.97	0.13
Return on Equity	Net Income/Average Shareholders’ Equity	12.218	10.849	0.13

Table 1 : Samsung Profitability Ratios 

Source: (Samsung, 2017) (Samsung, 2016) 

Return on assets (ROA) determines the level of net income that a firm is able to generate from its assets in a particular financial year. This ratio is especially important due to its use by management and investors in determining how well the company is able to maximize profit from a proportion of the company assets. In FY 2016, the company generated 9% profit from its assets and 7.9% in 2015. This shows a very low efficiency in generating profit from the company’s assets.

The return on equity (ROE) measures the ability of a firm to generate profits from its shareholders’ investments. ROE is an important ratio for investors as it determines the expected returns that investors will get from their investment in the company. In 2016, the company was able to offer 12% return to its shareholders. Samsung generated 12% of profits from equity in 2016 and 10.8% in 2015. 

Liquidity Ratios 

Liquidity ratios assess a firm’s ability in meeting its financial obligations when they fall due. The liquidity ratios show the ability of a firm to change its assets into cash to meet its liabilities when they fall due (Kajananthan & Velnampy, 2014). Table 2 shows the current ratio and Acid-test ratio of the firm. In 2016, Samsung has a current ratio of 2.59 and 2.47 in 2015. The current ratio is the proportion of current assets against current liabilities of a firm. Samsung has a current ratio of 2.59 and 2.47 showing that the firm can meet twice its current liabilities using its current assets. This level of liquidity is very high.

		2016	2015	CHANGE (%)
LIQUIDITY RATIOS
Current Ratio	Current Assets/Current Liabilities	2.59	2.47	4.61
Acid-Test	Current Assets - (Inventories + Prepayments)/Current Liabilities	2.86	2.78	2.72

Table 2 : Samsung Liquidity Ratios 

Source: (Samsung, 2017) (Samsung, 2016) 

The acid-test ratio is a more advanced liquidity ratio than the current ratio. The acid-test assumes that inventory and prepayments are not highly liquid assets hence they are deducted from the total current assets of a particular financial year. Samsung has an acid-test ratio of 2.86 in 2016 and 2.78 in 2015. In comparison with the current ratio, Samsung is highly liquid as it can meet almost thrice its current liabilities with its most liquid assets. 

Efficiency Ratios 

Efficiency ratios assess the ability of a firm to minimize the use of its resources and maximize revenue or profit. These ratios assess the ability of a firm to generate income using its assets and resources. These ratios also assess how fast a firm is at generating profit from its assets (Tracy, 2012). Asset turnover ratio compares the net sales and average total sales of a firm to show the ability of a firm to generate profits from its assets. Samsung had an asset turnover of 0.77 times in 2016 and 0.83 in 2015. This ratio shows that in 2016, Samsung generated 0.77cents from every dollar of its assets and 0.83cents in 2015. This is a downward trend of 7.07% between the two years.

EFFICIENCY RATIOS		2016	2015	CHANGE (%)
Asset Turnover	Net Sales/Total Assets	0.77	0.83	(7.07)
Inventory Turnover	Cost of Goods Sold/Average Inventory	6.47	6.67	(2.92)

Table 3 : Samsung Efficiency Ratios 

Source: (Samsung, 2017) (Samsung, 2016) 

The inventory turnover ratio shows how effective a firm is in converting its inventory to sales. It also shows how well the inventory is managed by assessing the level of cost of goods sold against average inventory. In 2016, Samsung had an inventory turnover of 6.47times and 6.67times in 2015. These ratios show that Samsung managed to sell 6.47times its inventory in 2016 and 6.67times in 2015. These ratios show that Samsung is very effective in selling its inventory to generate sales. It shows that Samsung manages to sell its entire inventory in any financial year – this is a sign of effective inventory control. 

Debt Ratios 

Capital structure is an important issue in company management as it shows the amount of debt and equity that a firm uses to finance its operations. Debt ratios assess the capital structure of a firm by comparing debt to equity levels in each financial year. These ratios also show the solvency of a firm by comparing company assets against its liabilities. Debt ratios also help assess the ability of a firm to meet its liabilities using its assets – level of solvency (Tracy, 2012). 

The debt ratio is the proportion of total liabilities to total assets. Samsung has a large asset base compared to its liabilities. In 2016, the company had a debt ratio of 0.26 indicating that the firm has approximately four times as many assets as liabilities. In 2015, the debt ratio was also 0.26 indicating that the firm has maintained a decent proportion of assets to liabilities in the two years. The debt to equity ratio measures the proportion of liabilities to shareholders’ equity in a firm. In 2016, Samsung had a debt to equity ratio of 0.36 indicating that the firm has twice more equity than liabilities. The ratio has not changed much in both years – only 1.75% change between the two years. 

From the two debt ratios, Samsung is a very solvent company as it has a higher proportion of assets than liabilities. The company also uses more equity than debt to finance its operations – this indicates that is has a low financial leverage.

DEBT RATIOS		2016	2015	CHANGE (%)
Debt Ratio	Total Liabilities/Total Assets	0.26	0.26	1.29
Debt-Equity Ratio	Total Liabilities/Shareholders' Equity	0.36	0.35	1.75

Table 4 : Samsung Debt Ratios 

Source: (Samsung, 2017) 

Market Ratios 

Market ratios evaluate the performance of a company’s shares in the market. These ratios assess the response or attitude of an investor to a company’s shares or securities and the cost. The response is dependent on the returns and value of an investment in the company shares (Tracy, 2012). In this category, EPS is a great measure of the market response. EPS is the portion of profits that a firm allocates to each share of common stock. EPS is the measure of net income that each share in the company earns in a particular financial period. In 2016, Samsung has an EPS of $136.20 meaning that each share in the company earned $136.20 in return in 2016 and $108.90 in 2015. This increase of 25.07% between the two years is because of the increased net income of the company in the two years.

MARKET RATIOS		2016	2015	CHANGE (%)
EPS	as per the annual report	136.20	108.90	25.07

Table 5 : Samsung Market Ratios 

Source: (Samsung, 2017) 

Conclusion 

Financial ratios are an important measure of different financial aspects of a firm. From the paper, the financial ratios have helped assess the financial performance of Samsung based on the profitability, liquidity, debt level, efficiency, and market ratios. Samsung is not very profitable as the profit margin, ROE, and ROA are very low in both years. However, Samsung is highly liquid and very efficient in its operations. The market perception of the firm is very high hence the high EPS in both years. Samsung’s capital structure is comprised more of equity than liabilities or debt.

References

Kajananthan, R., & Velnampy, T. (2014). Liquidity, Solvency and Profitability Analysis using Cash Flow Ratios and Traditional Ratios: The Telecommunication Sector in Sri Lanka. Research Journal of Finance and Accounting, 5 (23), 163-170. 

Samsung. (2016, December 31). Investor Relations: Reports & Disclosures . Retrieved May 5, 2018, from Samsung Website: http://images.samsung.com/is/content/samsung/p5/global/ir/docs/2016-Samsung-sustainability-report.pdf 

Samsung. (2017, December 31). Investor Relations: Report & Disclosures . Retrieved May 5, 2018, from Samsung Website: http://images.samsung.com/is/content/samsung/p5/global/ir/docs/Samsung_Electronics_Sustainability_Report_2017.pdf 

Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios can Allow you to Analyse any Business on the Planet. RatioAnalysis.Net.