Financial Analysis Of The South Korean Leader Finance Essay - Free Essay Example

Ratio analysis provides a very quick and effective way of obtaining an insight into a companys operations and performance. When ratios for several consecutive years are graphically presented, a moving picture of a companys performance can be established. (Edum-fotwe F., Price A. and Thorpe A., 1996) Thus, this paper examines the business performance analysis of NHN Corporation according to Financial Ratio. Fiscal year ending in South Korea is December 31 and currency and banking the unit of currency in South Korea is the won (1,074.0 won equal U.S.$1; 14th Dec, 2012). This paper proceeds as follows, Reveal the major changes in the financial performance of the company over the last three years using suitable ratios Look for limitations on the above ratio analysis Forecast the solvency of the company using current ratio Major changes in the financial performance Business Summary NHN Corporation operates Internet search portals primarily in South Korea and Japan. NHN Corporation provides Internet site with web portal services, such as search engine, online game and content development (Yahoo finance). The Company also offers marketing service through text and banner advertisement (Bloomberg). In addition, its products and services consist of Naver Japan, a search engine; LINE, a mobile messenger service; Naver Mobile, a mobile Web service that enables mobile users to access a range of Naver services on mobile devices, such as smartphones and tablet PCs. Further, it operates as a sales agency specializing in search advertising; offers operation and security services for infrastructure; and provides information systems and shopping services. The company was founded in 1999 and is headquartered in Seongnam-si, South Korea (Bloomberg Businessweek). Internet Information Home Page: https://www.nhncorp.com News Releases: https://www.nhncorp.com/nhnen/pr/pressRelease.nhn Investor Relations: https://www.nhncorp.com/nhnen/ir/shareholderComposition.nhn Financial Information: https://www.nhncorp.com/nhnen/ir/financialStatements.nhn Corporate History/Profile: https://www.nhncorp.com/nhnen/company/companyInfo.nhn Executives: https://www.nhncorp.com/nhnen/ir/directorate.nhn Products/Services: https://www.nhncorp.com/nhnen/service/naver.nhn Business Performance Analysis Over The Triennium 2.2.1 Profitability Gross Margin shows the amount of revenue left over after deducting direct costs of producing the goods or services. Operating Profit and Operating Margin trace the progress revenue down to another important level. From gross profit, we now subtract indirect costs, often referred to as overhead e.g. facilities and salaries associated with headquarters operations. Profit Margin shows how much of each revenue dollar is left after all costs, of any kind, are subtracted. These other costs include such items as interest on corporate debt and income taxes. These ratios realize overall profitability, or the bottom-line. FY2009 FY2010 FY2011 3 Year Average Gross Margin (%) 56.29 100.00 100.00 85.43 Operating Margin (%) 37.52 33.07 29.25 33.28 Net Profit Margin (%) 27.54 25.04 21.05 24.54 Note. Figure from DART: https://englishdart.fss.or.kr/dsbb001/main.do Gross Margin: This value measures the percent of revenue left after paying all direct production expenses. It is calculated as Revenue minus the Cost of Goods Sold divided by the Revenue and multiplied by 100. Gross Margin = Gross Profit x 100 / Revenue FY2011 Gross Margin = 2,121 billion KRW x100 / 2,121 billion KRW = 100 % Operating Margin: This value measures the percent of revenues remaining after paying all operating expenses. It is calculated as Operating Income divided by the Total Revenue, multiplied by100. Operation Margin = Operating Income x 100 / Total Revenue FY2011 Operation Margin = 620 billion KRW x 100 / 2,121 billion KRW = 29.25 % Net Profit Margin: Also known as Return on Sales, this value is the Income After Taxes divided by Total Revenue for the same period and is expressed as a percentage. Net Profit Margin = Net Income x 100 / Operation Revenues FY2011 Net Profit Margin = 452 billion KRW x 100 / 2,147 billion KRW = 21.05 % 2.2.2 Efficiency and Profitability Return On Capital Employed is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes the same profit. It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities. FY2009 FY2010 FY2011 3 Year Average ROCE % 52.44 37.65 33.72 41.27 ROCE is calculated using this formula: = Operating Profit (EBIT) x 100 / Equity Shareholders Funds (Total Assets Current Liabilities) = EBIT x 100 / Capital Employed = EBIT x 100 / (Equity + Non-current Liabilities) = EBIT x 100 / (Total Assets Current Liabilities) FY2011 ROCE = 620 billion KRW x 100 / (2,372-532) billion KRW = 33.72 % 2.2.3 Financial Strength Financial Strength looks at business risk. The stronger a company is from a financial standpoint, the less risky it is. The Quick Ratio compares cash and short-term investments (investments that could be converted to cash very quickly) to the financial liabilities they expect to incur within a years time. The Current Ratio compares year-ahead liabilities to cash on hand now plus other inflows (e.g. Accounts Receivable) the company is likely to realize over that same twelve-month period. The Long Term Debt/Equity Ratio looks at the companys capital base. A ratio of 1.00 means the companys long-term debt and equity are equal. FY2009 FY2010 FY2011 3 Year Average Quick Ratio 2.11 2.70 2.57 2.46 Current Ratio 2.29 2.82 2.69 2.60 LT Debt / Equity 0.02 0.14 0.09 0.08 Note. Figure from DART: https://englishdart.fss.or.kr/dsbb001/main.do Quick Ratio: Cash plus Short Term Investments plus Accounts Receivable divided by the Total Current Liabilities for the same period. Quick Ratio = (Current Assets Inventories) / Current Liabilities FY2011 Quick Ratio = (1,431 63) billion KRW / 532 billion KRW = 2.57 Current Ratio: Total Current Assets divided by Total Current Liabilities for the same period. Current Ratio = Total Current Assets / Total Current Liabilities FY2011 Current Ratio = 1,431 billion KRW / 532 billion KRW = 2.69 Long Term Debt To Total Equity: Total Long Term Debt divided by Total Shareholder Equity. Long Term Debt To Total Equity = Total Long Term Debt / Total Shareholder Equity FY2011 LT Debt / Equity = 147 billion KRW / 1,577 billion KRW = 0.09 2.2.4 Management Effectiveness (%) A companys ability to operate profitably can be measured directly by measuring its return on assets. ROA (Return On Assets) is the ratio of a companys net profit to its total assets, expressed as a percentage. ROA measures how well a companys management uses its assets to generate profits. It is a better measure of operating efficiency than ROE, which only measures how much profit is generated on the shareholders equity but ignores debt funding. This ratio is particularly relevant for banks which typically have huge assets. FY2009 FY2010 FY2011 3 Year Average Return on Assets % 29.67 25.10 20.84 25.20 Return on Investments % 40.96 32.98 26.53 33.49 Note. Figure from DART: https://englishdart.fss.or.kr/dsbb001/main.do Return on Assets: This value is the Income After Taxes divided by the Average Total Assets, expressed as a percentage. Return on Asssets = Income After Taxes x 100 / Average Total Assets FY2011 Return on Assets = 452 billion KRW x 100 / 2169 = 20.84 % 3. Limitation First, financial ration analysis is one way of focusing on areas of the business which may need investigation and comparing one thing with another (FeB Note, 2012). The thing could be comparison of one type of expense with another, however, remember this is only the starting point for further analysis as needed. Financial ratio analysis is useless without comparisons. In doing industry analysis, most business use benchmark companies. Benchmark companies are those considered most accurate and most important and are those used for comparison regarding industry average ratios. Companies even benchmark different divisions of their company against the same division of other benchmark companies (About.com-Business fiancne, 2012). Therefore, it is needed to compare results with expected result (e.g. budgets with actual results, one business with another, and one sector with another) (FeB Note, 2012) to use this financial ratio to advantage. Second, anyone investing, or thinking of investing, in a business will want to know several things about that business. Firstly an investor might want to know what sort of return they would get on any investment made. This is known as the Return on Capital employed (ROCE) and is fundamental to analyzing a set of accounts. Having established ROCE, interested parties would look at further ratios to decide whether the business was a worthwhile investment. A more accurate variation of Return On Capital Employed Ratio is return on average capital employed (ROACE), which takes the average of opening and closing capital employed for the time period. One limitation of ROCE is the fact that it does not account for the depreciation and amortization of the capital employed. Because capital employed is in the denominator, a company with depreciated assets may find its ROCE increases without an actual increase in profit. Furthermore, by definition, ROCE should identify how well a company is using capital to generate revenue and the profitability ratio, ROCE has been decreased over the last three years. However, a profitable business can have either rising or declining ROCE. The direction indicates whether the decrease in business additional revenue is losing a return at, below [declining], or higher [climbing] on incremental capital investment. Capital employed is a good measure of the total resources that a business has available to it, although it is not perfect. For example, a business might lease or hire many of its production capacity (machinery, buildings etc) which would not be included as assets in the balance sheet. Therefore, it is needed to compare the ROCE number to borrowing rate to see how effective the ratio is. Operating Profit ratio uncovers situations where companies are relying on actions other than operations to generate an income. Investing activities and sales of assets generate revenue, but these actions are not usually sustainable and regular as maintaining a steady flow of sales. A high, or increasing Operating Profit Percentage is usually a positive sign, showing the company is increasingly able to generate sales from its operations. Because the numerator (Net Income) is an unreliable corporate performance measurement, the outcome of the formula for Return On Equity (ROE) must also be unreliable to determine success or corporate value. However, the formula keeps showing up in many annual reports still. 4. Outlook for 2012 and future Current Financial Information Fiscal year ending in South Korea is December 31 and currency and banking the unit of currency in South Korea is the won (1,074.0 won equal U.S.$1; 14th Dec, 2012). Based on K-IFRS consolidated financial statements, Operating Revenue in 3Q 2012 was 1,746,365 million KRW and that is 12.1% increase from the same period a year ago, Operating Income has decreased by 0.2% (467,931 million KRW) and consolidated Net Income has risen to 376,794 million KRW and that has swelled by 11.2%, year-on-year. The following table is the sales break down by business units. (Units: Billions of KRW, %) Item Consolidated financial statements 3Q 2012 FY 2011 Amount Proportion Amount Proportion Operation Revenues 1,746.3 100.0% 2,147.4 100.0% 1. Sales 1,737.3 99.5% 2,121.3 98.8% Search Advertisement 891.2 51.1% 1,081.7 50.4% Display Advertisement 251.8 14.4% 298.6 13.9% Online Game 459.5 26.3% 640.6 29.8% Others 134.6 7.7% 100.1 4.7% 2. Other Operating Revenues 8.9 0.5% 26.0 1.2% Note. Figure from DART: https://englishdart.fss.or.kr/dsbb001/main.do In 2012, search and display ads are expected to outperform the overall advertising markets growth, due to product improvements and rising Internet use. In the area of mobile advertising, NHN will increase its revenue to over KRW 100 billion and enhance its advertisers convenience by revamping its products and services. This will also help it to generate new business opportunities and hone its competitive edge. Navers Knowledge Shopping will enhance the companys competitiveness in product information search results when it launches the ShopN open market service. It will be upgraded to an e-commerce platform, with enhanced user convenience. 4.2 Current Ratio Current ratio is the ratio of current assets of a business to its current liabilities. It is the most important and widely used test of liquidity of a business. The concept behind this ratio is to ascertain whether a companys short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better (Investopedia.com, 2012). Formula Current Ratio (expressed as a factor) is calculated using this formula: = Current Assets / Current Liabilities Statement of Financial Position (Unit: billion KRW) 3Q11 4Q11 1Q12 2Q12 3Q12 Current Asset 1,380 1,431 1,528 1,697 1,782 Current Liabilities 468 532 545 502 590 Current Ratio (factor) 3.0 2.7 2.8 3.4 3.0 Note. DART: https://englishdart.fss.or.kr/dsbb001/main.do A current ratio of around 1.7-2.0 is pretty encouraging for a business. It suggests that the business has enough cash to be able to pay its debts, but not too much finance tied up in current assets which could be reinvested or distributed to shareholders (Tutor2u, 2012). General rule is that higher the current ratio better it is but there is a limit to this. A current ratio higher than 2.5 (AccountingExplained, 2012) might indicate existence of idle or underutilized resources in the company. However, NHN is expected to have a current ratio over 3.0 in Q412 although the company continues to invest and grow its new mobile business and overseas operations in 2012 and 2013. NHN will also strengthen its overseas businesses. Its main goal will be to rank first in Japans Internet portal service and smartphone game markets. In order to improve its operating efficiency in that country, the company merged the management of Hangame Japan, Naver Japan, and livedoor in January 2012. It will also widen the user base of the Naver Japan search portal mainly by revitalizing its Matome user participation information service, improving the search quality, and launching new mobile services. The company also intends to increase its number of global users by upgrading the quality of its LINE SNS service, and seek added synergy effects with its services. Reference Edum-fotwe F., Price A. and Thorpe A., (1996). 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Investopedia.com, (2012). Liquidity Measurement Ratios: Current Ratio.[online] Available at: lt; https://www.investopedia.com/university/ratios/liquidity-measurement/ratio1.asp#ixzz2FFamqrA8 gt;[Accessed 11 December 2012]. Tutor2u, (2012). How is the current ratio calculated and interpreted?.[online] Available at: lt; https://www.tutor2u.net/blog/index.php/business-studies/comments/qa-how-is-the-current-ratio-calculated-and-interpreted gt;[Accessed 11 December 2012]. AccountingExplained, (2012). Current Ratio.[online] Available at: lt; https://accountingexplained.com/financial/ratios/current-ratiogt;[Accessed 13 December 2012]. DART, (2012). Korea Financial Supervisory Service .[online] Available at: lt; https://englishdart.fss.or.kr/dsbb001/main.dogt;[Accessed 10 December 2012]. Appendix 1 Appendix 2