VŠB – TECHNICAL UNIVERSITY OF OSTRAVA FACULTY OF ECONOMICS
DEPARTMENT OF FINANCE
Assessment of the Financial Position of Selected Corporation Posouzení finanční pozice vybraného podniku
Student: Meiyan Qu
Supervisor of the bachelor thesis: Ing. Karolina Lisztwanová, Ph.D
Ostrava 2020
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Contents
1.Introduction ... 5
2. Main Aspects of Financial Analysis ... 7
2.1 The introduction Financial Statement ... 7
2.1.1 The Balance sheet ... 7
2.1.2 The Income statement ... 9
2.1.3 The Cash flow ... 11
2.2 Financial Analysis Methods ... 12
2.2.1 Common-size Analysis ... 12
2.2.2 Financial Ratios Analysis ... 13
2.2.3 Pyramidal Decomposition ... 20
2.2.4 Sensitivity analysis ... 22
3.Characteristics of Selected Corporation ... 23
3.1 Overview of Canon group ... 23
3.2 Corporate philosophy ... 24
3.3 development strategy ... 25
3.4Common-size analysis ... 26
3.4.1Horizontal common-size analysis ... 26
3.4.2 Vertical common-size analysis ... 40
4.Assessment of the Financial Performance of Selected Corporation ... 48
4.1 Financial ratio analysis of Canon ... 48
4.1.1 Profitability ratio ... 48
4.1.2 Liquidity ratio ... 50
4.1.3 Solvency ratio ... 52
4.1.4 Assets management ratio ... 55
4.2 Pyramidal Decomposition Analysis ... 57
4.3 Sensitivity analysis of ROE ... 64
5.Conclusion ... 70
Bibliography ... 72
List of Abbreviations ... 73 Declaration of Utilisation of Results from the Bachelor Thesis
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List of annexes Annexes
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1.Introduction
Financial analysis is of great benefit to the company and the external environment. Managers can find out the advantages and disadvantages of enterprise operation through analysis and provide strong financial information support for enterprise decision-making and management by combining the enterprise's overall strategy. Investors also need to understand the financial situation of the company, and no one wants to invest in a business that they don't understand.
Only by understanding itself can an enterprise win external investment.
Based on the financial statements of Canon group from 2014 to 2018, this paper analyzes the financial status of the company. The aim of bachelor thesis is to assess financial position of company Canon group through certain methods of financial analysis respecting selected period between years 2014 and 2018.Through this article, we can understand the profitability, asset status, debt status and equity of Canon group. We will introduce different information and some theories of Canon group from five parts.
The first part will introduce the whole paper, including the structure and purpose of the whole article, so that readers have a general understanding of the article.
The second part introduces the theoretical methods to be used in financial analysis, including financial statements, balance sheets, income statements, cash flow statements, common size analysis (horizontal and vertical analysis of financial statements), financial ratio analysis, pyramid analysis and sensitivity analysis.
The third part introduces the basic situation of Canon company, including the company's financial situation, operating philosophy, development strategy. Analysis and application of common-size analysis of financial statements of Canon Inc.
The fourth part, based on the theoretical method of the second part, selects the 2014-2018 financial statements of the company, analyzes each item in the financial statements with the methods of financial ratio analysis, and pyramid analysis and sensitivity analysis. Using the methods obtain the ratios, relevant tables and charts. Then by analyzing the results of the calculation, we can know what financial situation the company is facing and what items need to be added or removed to maximize profits.
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Finally, the fifth part will summarize the whole paper and put forward some Suggestions on the future development strategy of Canon group through the information obtained in the previous chapters.
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2. Main Aspects of Financial Analysis
In this part, we will introduce the method of financial analysis of a company, based on the balance sheet, income statement and cash flow statement, and turn the large amount of information it carries into the final result. According to the order of the financial statements, use the common-size analysis, financial ratios analysis, pyramid decomposition in charts and formulas to illustrate the problem.
2.1 The introduction Financial Statement
1Financial statements are the financial results of an organization and provide information about the performance, financial position, and changes in the financial position of the organization. Used to determine a business's ability to generate cash, its sources and uses, and determined the ability of the business to repay debt.
Owner and the manager through the analysis of financial statements, make the management of the company's financial situation has a more detailed understanding.
Investors analyze financial statements to make decisions about their investment, lending, and trading activities. Financial institutions use financial statements to decide whether to grant companies new working capital or expand debt securities to fund expansion and other large expenditures.
Financial statements are divided into three parts: balance sheet, income statement and cash flow statement.
2.1.1 The Balance sheet
The balance sheet is also called the statement of financial position. The main accounting statements representing the financial position of an enterprise in a certain date. Balance sheets use the accounting balance principle to divide the "assets" and "liabilities and equity"
transactions of assets, liabilities and shareholders' equity subject to accounting principles.
1 Source:DLUHOŠOVÁ (2014, P72)
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Assets are divided into long-term assets and current assets, while liabilities are divided into current liabilities and long-term liabilities.
Current assets mainly held for trading purposes and is expected to cash in a normal operating cycle, sold or consumed. Including cash or cash equivalents that are unrestricted in their ability to exchange other assets or pay off liabilities for a period of one year from the balance sheet date, accounts receivable, inventory and so on.
Long-term assets are the assets of an enterprise that are not used exclusively for business activities for the purpose of sale and have a long economic life. Including capital investment that is impossible or not prepared to be realized in one year; tangible assets in the form of concrete material products; non-monetary intangible assets without physical form.
Equity refers to the residual equity enjoyed by the owners after deducting liabilities from the assets of the enterprise. Capital contributed by owners refer capital owned by the owners and not converted into income. Share premium (paid-in capital) refer the amount of owners' equity actually invested by the owner within the scope of the registered capital of the enterprise.
Retained earnings refer to the owners' equity that is owned by the owners and formed by the conversion of earnings.
Current liabilities are items held primarily for trading purposes that are payable within one year of the balance sheet date. Including accounts payable, current borrowings and other shot- term liabilities. Long-term liabilities refer to debts whose repayment period is more than one year or one operating cycle, mainly including long-term bank loans, bonds issued. The balance sheet is prepared on the basis of:
Total assets = Total liabilities + Total equity, (2.1) Which reflects the distribution of all assets of the accounting entity at a certain point and their corresponding sources. The overall structure is shown in Table 2.1.
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Table2.1 Balance sheet structure
ASSETS EQUITY + LIABILITIES
Long-term assets Equity
-Tangible assets -Intangible assets -Financial investments
-Capital contributed by owners (par value)
-Share premium (paid- in capital)
-Retained earnings
Current assets Liabilities
-Cash and cash equivalents -Accounts receivable -Inventories
-Other current assets
a) current liabilities -Accounts payable -Current borrowings -Other short-term liabilities b) long-term liabilities -long-term bank loans -Bonds issued
Source: own processing
2.1.2 The Income statement
The income statement is the process of the company getting profits, is to reflect the enterprise certain accounting period of income realization, expenses consumption. The operating results of an enterprise during a certain accounting period may be shown as profit or loss. Therefore, it is also called dynamic report. The income statement is compiled according to the basic relationship of:
Net income/loss = Revenues – Costs – Expenses, (2.2) Its specific content depends on the accounting elements such as income, expense and profit and their contents.
An income statement is like a report card for a public company. It is used by the board of directors to assess the competence of the company's management and by investors to decide whether to invest in the company. When they get this report card, the first thing they pay attention to is net profit, because it reflects the overall profitability of the company.
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Gross profit is the profit a company earns after deducting costs associated with manufacturing and selling products or costs associated with providing services. For example, materials, sales staff commissions, credit card fees for customer purchases.
Operating income is the total income of a company and is used to measure the amount of profit a business earns from its operations after deducting operating expenses such as salaries, depreciation and cost of sales.
Earnings Before Interest and Taxes (EBIT) refers to the profit of an enterprise before the deduction of the interest on the enterprise's borrowing and the payment of the enterprise income tax.
Pretax income (EBT) is the amount of income less before tax after deducting all operating expenses, including interest and depreciation, from all sales or income.
Net income (NI) sales minus the cost of goods sold, sales, general and administrative expenses, operating expenses, depreciation, interest, taxes and other expenses. Is an indicator of a company's profitability.
Table2.2 Income statement structure Total sales
(-) Cost of sales Gross Profit
(-) Selling, general, and administrative expenses (-) Research and development
(-) Depreciation and amortization Operating Income
(+) Other incomes and expense (-)
Earnings Before Interest and Taxes (EBIT) (+) Interest income (expense) (-)
Pretax Income (-) Taxes Net Income
Earnings per share
Diluted earnings per share Source: Owe processing
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2.1.3 The Cash flow
2As a supplement to the balance sheet and income statement, the cash flow statement is one of the three basic reports in the financial report of an enterprise. Reflects the purchase and payment capacity of the enterprise. According to its purpose, it can be divided into the cash flow of operation activities, investment activities and financing activities.
The first part is the cash flow generated by the operation activities related to the daily operation of the enterprise, which can reflect the financial status of the enterprise.
It mainly records the cash flow of the enterprise in selling commodities, providing labor services, purchasing commodities, receiving labor services, paying taxes and other activities.
The second part refers to the purchase and construction of fixed assets, projects under construction, intangible assets, other assets and assets with a holding period of one year or more than one operating cycle, investment not included in cash equivalents and the disposal of investment activities.
The third part refers to the enterprise as the main body of financing activities according to its production and operation, foreign investment and capital structure adjustment needs, through the financing channels and financial markets, direct or indirect financing behavior, that is, the inflow and outflow generated by the enterprise borrow money and repay money. Basic formula:
Net cash flow = CF from operating activities + CF from investing activities +CF from financing activities, (2.3)
2 Sour: Dluhosova (2014, P55)
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Table2.2 The statement of cash flows structure Operating balance of cash
Operating activities Net income
Depreciation and amortization Other non-cash items
Cash effect of changes in Accounts receivable Accounts payable Inventory
Cash from operating activities Investment activities
Capital expenditures
Acquisitions and other investing activity Cash from investing activities
Financing activities Dividends paid
Sale (or purchase) of stock Increase in borrowing
Cash from financing activities Change in cash and cash equivalents Finance balance operating
Source: Corporate Finance (2017, p65) 2.2 Financial Analysis Methods
This part mainly introduces financial analysis methods, based on financial statements, using Common-size analysis, Financial ratio analysis, Pyramidal decomposition analysis.
2.2.1 Common-size Analysis
Common-size analysis is the analysis of financial statement data and their changes over the time. The common-size analysis can be divided into two type: horizontal common-size analysis and vertical common-size analysis.
Vertical common-size analysis converts each line of financial statement data into a generic size amount (in percentage terms) that can be easily compared. Analyze the internal items of the statement and make a longitudinal analysis of the current income statement or balance sheet.
All items in the income statement are expressed as a percentage of operating income, while
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items in the balance sheet are expressed as a percentage of total assets. Methods: First calculate the proportion of each item in the table in the total; Second judge the position and importance of the item in the report through this proportion; Third compare the ratio with the ratio data of the base period or the previous year and observe the change trend.
Through the analysis can determine the company's annual results and compared with the competitors. Can view each order items on the company's total revenue, the influence of the cash flow or asset number. Basic formula:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑏𝑎𝑠𝑒 =𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙 𝑖𝑡𝑒𝑚
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑏𝑎𝑠𝑒 ∙ 10. (2.4)
Horizontal common-size analysis method refers to a financial analysis method that compares the information reflecting the financial status of an enterprise during the reporting period with the information reflecting the financial status of the enterprise in the previous period or a certain historical period, and studies the development and change of the enterprise's operating performance or financial status.
There are two ways of the horizontal analysis: Absolutely and relative comparison. Basic formula:
𝐴𝑏𝑠𝑜𝑙𝑢𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 = 𝐼𝑎𝑝− 𝐼𝑎𝑝−1 = ∆𝐼𝑎𝑝 , (2.5)
𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 =𝐼𝑎𝑝−𝐼𝑎𝑝−1
𝐼𝑎𝑝 = ∆𝐼𝑎𝑝
𝐼𝑎𝑝−1 . (2.6)
2.2.2 Financial Ratios Analysis
Financial ratios analysis can be used to evaluate the changes in the returns of an investment from year to year and calculate the ratios based on the relationship between two or more items in the financial statements of the same period to evaluate the financial status and operating results of the enterprise. Financial ratio analysis can eliminate the effect of size and compare the benefits and risks of different companies, thus helping investors and creditors to make
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rational decisions. There are different group of ratio, such as profitability ratios, liquidity ratios, solvency ratios, asset management ratios and market ratios.
Profitability ratio
The yield rate is a type of financial indicator used by analysts and investors to assess a company's long-term ability to generate revenue relative to its revenues, operating costs, balance sheet assets and shareholders' equity, using data from a specific point in time. The rate of return also shows how companies can use existing assets to create profits and value for shareholders.
Most companies typically seek higher ratios or values because this usually means that the business is performing well by generating revenue, profits, and cash flow. Ratios are most useful when compared with comparable companies or with previous periods. Here are the most common rates:
Operating profit margin
The ratio of operating profit to operating income of an enterprise. It is a measure of business efficiency indicators. Companies with higher operating margins are generally better able to pay fixed costs and interest on debt, have a better chance of weathering the recession and are able to offer lower prices than their lower-margin rivals. Operating margins are often used to assess the strength of a company's management.
𝑂𝑃𝑀 = 𝐸𝐵𝐼𝑇
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 . (2.7) Net profit margin
It looks at a company's net income and divides it into total revenue. It provides a final picture of a company's profitability after taking into account all expenses, including interest and taxes. The reason for using net profit margin to measure profitability is that it takes all factors into account. One disadvantage of this metric is that it contains many impediments, such as one-time expenses and benefits, which make it more difficult for compatibility reasons.
𝑁𝑃𝑀 = 𝐸𝐴𝑇
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 . (2.8)
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Return on assets
Shows earnings before interest and tax as a percentage of a company's total assets. It also measures the strength of a firm's assets. The lower the profit per dollar of assets, the higher the asset density of the company. Highly asset-intensive companies require large investments in machinery and equipment to generate revenue. Examples of industries that are often very asset intensive include telecommunications services, automakers, and railroads. Less capital- intensive companies include advertising agencies and software companies.
𝑅𝑂𝐴 = 𝐸𝐵𝐼𝑇
𝐴𝑠𝑠𝑒𝑡𝑠 . (2.9) Return on equity
Represents the percentage of net income relative to shareholders' equity, or the return on capital invested by equity investors. Equity analysts and investors pay particular attention to return on equity. Higher return on equity is often cited as a reason to buy shares in companies.
Companies with high returns on equity are generally better able to generate cash internally and therefore rely less on debt financing.
𝑅𝑂𝐸 = 𝐸𝐴𝑇
𝐸𝑞𝑢𝑖𝑡𝑦 . (2.10) Return on capital employed
ROCE is the return on capital employed, a financial ratio that measures a company's profitability and the efficiency with which capital is used. ROCE ratio is regarded as an important profit ratio and is often used by investors to screen suitable investment objects. ROCE trends over the years are also an important performance indicator for a company. In general, investors tend to favor companies with stable and rising ROCE numbers over companies where ROCE is volatile and bounces around from one year to the next.
𝑅𝑂𝐶𝐸 = 𝐸𝐵𝐼𝑇
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑜𝑙𝑦𝑒𝑑 . (2.11)
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Liquidity ratios
Liquidity ratio is a measure used to examine an organization's ability to service short-term debt. Expected creditors and lenders usually use liquidity ratios to decide whether to extend credit or debt to a company, respectively.
These ratios compare various combinations of relatively liquid assets with the amount of current liabilities listed in the organization's latest balance sheet. The higher the ratio, the stronger the enterprise's ability to repay debt in time.
Current ratio
Current ratio is the financial performance indicator of a company's balance sheet liquidity.
The current ratio indicates the company's ability to meet its short-term debt obligations. The current ratio measures whether a company has enough resources to pay down debt over the next 12 months. Potential creditors use this ratio to determine whether to make short-term loans.
Liquidity ratios can also give insight into the efficiency of a company's operating cycle or its ability to turn its products into cash.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 . (2.12) Quick ratio
Quick ratio measures a company's ability to meet short-term obligations with its most liquid assets (near cash or fast assets). Quick assets include liquid assets that can be converted into cash at a rate close to their book value. Quick ratios are seen as a sign of a company's financial strength or weakness; It provides information about the company's short-term liquidity. The ratio tells creditors how much short-term debt a company can repay by selling all of its current assets in a short period of time.
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 =𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠−𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 𝑜𝑟 𝑐𝑎𝑠ℎ+𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 . (2.13) Cash ratio
Is the ratio of a company's cash and cash equivalent assets to its total liabilities. The cash ratio is an improvement on the quick ratio, which indicates the extent to which readily available
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funds can repay current liabilities. The ratio is used by potential creditors to measure a company's liquidity, as well as how easy it is for the company to repay debt and short-term debt.
The cash ratio is the most rigid and conservative of the three liquidity ratios. It looks only at the company's most liquid short-term assets, which can be most easily used to pay down current debt.
𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜 =𝑐𝑎𝑠ℎ+𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠+𝑛𝑒𝑡 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 . (2.14) Solvency ratios
3The solvency ratio is a comprehensive measure of solvency because it measures a company's actual cash flow by assessing its ability to continue operations by increasing depreciation and other non-cash expenses. It measures the cash flow capacity associated with all liabilities, not just short-term liabilities. Thus, solvency ratios assess the long-term health of a company by assessing its ability to repay long-term debt and the interest on that debt. The lower a company's solvency ratio, the more likely it is to default on its debt obligations. Lenders are expected to use this ratio most often to assess a company's creditworthiness. Examples of solvency ratios are:
Financial leverage
Financial leverage is an indirect analysis of a company's use of debt to finance its assets.
Most companies should use debt alongside equity for operations and growth. It is used to measure the total amount of assets supported by each equity unit. The higher the ratio, the less solvent the company.
𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = 𝐴𝑠𝑠𝑒𝑡𝑠
𝐸𝑞𝑢𝑖𝑡𝑦 . (2.15) Debt ratio
It is a solvency ratio that measures a company's total liabilities as a percentage of its total assets. In a sense, debt ratios indicate a company's ability to pay off debt with assets. In other
3 Source: HIGGINS Robert C (2012, P329)
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words, it shows how many assets a company must sell to pay off all its debts. This ratio measures a company's financial leverage. Companies with more debt than assets are considered highly leveraged and riskier for lenders. Generally speaking, in order to analyze corporate debt more clearly, the debt ratio is divided into long-term debt ratio and short-term debt ratio.
This helps investors and creditors analyze the company's overall debt burden and its ability to repay debt in uncertain economic times ahead.
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡(𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠)
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 . (2.16)
Debt-to-equity ratio
The debt-equity ratio is a financial liquidity ratio used to compare a company's total debt to total equity. The debt-equity ratio shows the percentage of company financing from creditors and investors. Higher debt-equity ratios indicate that more creditor financing (bank loans) is used than investor financing (shareholders). A lower debt-equity ratio usually means a more financially stable business. Companies with higher debt equity are considered riskier than creditors and investors. Unlike equity financing, debt must be repaid to the lender. Debt can be much more expensive than equity because debt financing also requires debt service or regular interest payments. Companies with lots of debt may not be able to make payments.
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 =𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡(𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠)
𝑒𝑞𝑢𝑖𝑡𝑦 . (2.17)
Interest coverage
Interest coverage is the ratio of debt to earnings used to determine how easily a company can repay interest on its outstanding debt. Interest coverage can be calculated by dividing a company's earnings before interest and tax (EBIT) over a given period by the interest payable by the company over the same period.
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Interest coverage is also called "earned interest multiple." Lenders, investors, and creditors often use this formula to determine a company's risk relative to its current debt or future borrowings.
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 = 𝐸𝐵𝐼𝑇
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑 . (2.18)
Assets management ratio
It compares a company's assets to its sales. Shows how the company has successfully used its assets to generate revenue. An analysis of the asset management ratio shows how efficiently a company uses its assets to generate revenue. They demonstrate a company's ability to turn its assets into sales. Examples of assets management ratios are:
Average collection period (ACP)
The average collection period is the time when a business receives accounts receivable owed to customers. The company calculates the average collection time to ensure that it has enough cash on hand to meet its financial obligations.
The average collection period is calculated by dividing the average balance of accounts receivable by the total net credit sales for the period and multiplying by the number of days during the period.
𝐴𝐶𝑃 =𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 ∙ 360 . (2.19)
Accounts receivable turnover (ART)
Accounts receivable turnover is the number of times a business collects its average accounts receivable each year. This rate is used to assess a company's ability to effectively extend credit to its customers and collect funds from them in a timely manner. High turnover rates indicate a combination of conservative credit policies and aggressive collection departments with many high quality customers. A low turnover rate means that you can collect too many old receivables and use working capital unnecessarily.
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𝐴𝑅𝑇 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 . (2.20)
Inventory turnover (IT)
Inventory turnover is a ratio that shows the number of times a company has sold and replaced inventory during a given period. The company can then divide the number of days in the period by the inventory turnover formula to calculate the number of days needed to sell existing inventory. Calculating inventory turnover can help businesses make better decisions about pricing, manufacturing, marketing, and buying new inventory.
𝐼𝑇 = 𝑐𝑜𝑠𝑡𝑠 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑟 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 . (2.21)
Total assets turnover (TAT)
It measures the value of a company's sales or revenues relative to the value of its assets. Total asset turnover can be used as an indicator of how efficiently a company generates revenue from its assets. This indicator helps investors understand how effectively a company uses its assets to generate sales. Investors use total asset turnover to compare similar companies in the same industry or group. The higher the turnover, the more efficient the company. Conversely, a company with a low turnover of assets is not using its assets effectively to generate sales.
𝑇𝐴𝑇 = 𝑟𝑒𝑣𝑒𝑛𝑢𝑒𝑠
𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 . (2.22) 2.2.3 Pyramidal Decomposition
Pyramidal decomposition enables to analyze what drives the value of financial ratios which factors have impact on its value or evolution. One of the basic tasks of financial analysis is to look for the main causes of changes in financial ratios. The fundamental example of the pyramidal decomposition is the DuPont analysis.
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4The Dupont analysis method uses the relationship between several major financial ratios to comprehensively analyze the financial status of enterprises. It is used to evaluate the profitability of a company and the level of return on shareholders' equity. The basic idea is the name of the way to break down the Rate of Return on Common Stockholders' Equity into three parts for analysis: net profit margin, asset turnover and financial leverage.
The Dupont analysis method helps the management of enterprises to clearly see the determinants of the basic rate of return on equity, as well as the correlation between the net profit on sales, the turnover ratio of total assets and the debt ratio.
It provides management with a clear picture of the efficiency of the company's asset management and whether it maximizes the return on shareholders' investment
The basic formula:
𝑅𝑂𝐸 = 𝐸𝐴𝑇
𝐸𝑞𝑢𝑖𝑡𝑦= 𝐸𝐴𝑇
𝐸𝐵𝑇∙ 𝐸𝐵𝑇
𝐸𝐵𝐼𝑇∙ 𝐸𝐵𝐼𝑇
𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠∙ 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠∙𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝐸𝑞𝑢𝑖𝑡𝑦 . (2.23)
Dupont analysis shows that ROE is affected by three types of factors: Net profit margin, as measured by the net profit margin on sales, indicating the profitability of the enterprise; Asset turnover, as measured by asset turnover, indicating the operating capacity of the enterprise;
Financial leverage, as measured by the equity multiplier, indicates the capital structure of an enterprise.
Methods of logarithmic
Influence quantification can analyze the index whose change leads to the change of the basic ratio. It analyzes how the component ratio affects the change of the basic ratio. There are four ways to influence quantification, including methods of gradual changes, methods of decomposition with surplus, logarithmic decomposition method, functional decomposition method, integral method. In this paper, in order to more accurately analyze the results, we use the logarithmic decomposition method.
4 Source: DLUHOŠOVÁ (2014, P90)
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The advantage of logarithmic theory is that we only need a formula to quantify the impact, no matter how many component ratios we have
Impact of the i-th component ration on the change in the basic ratio is calculated As follows:
Δ𝑋𝑎𝑖 = ln 𝐼𝑎𝑖
ln 𝐼𝑥 ∙ Δ𝑋 , (2.24)
where x-basic ratio, x-absolute change in the basic ratio, 𝐼𝑥 =𝑋1
𝑋0 - index of change in basic ratio,𝐼𝑎 =𝑎𝑖,1
𝑎𝑖,0 - index of change in component ratio.
2.2.4 Sensitivity analysis
Sensitivity analysis is one of the commonly used methods to analyze uncertainty in economic evaluation. The sensitivity factors that have important influences on the ratio are found out one by one from multiple uncertainty factors, and the influence degree and sensitivity degree of these factors on the ratio are analyzed and calculated, so as to determine the risk bearing capacity of the project. If a small amplitude change of a parameter can lead to a large change of economic benefit index, the parameter is called a sensitive factor, otherwise it is called a non-sensitive factor.
By calculating the range of ratio changes caused by the change of major variables, the decision-makers can have a comprehensive understanding of the possible economic benefit changes in the company's finance, so as to reduce and avoid the influence of adverse factors and improve and improve the company's financial structure. Through the contrast of sensitivity, the items with high sensitivity or high sensitivity can be distinguished, and the factors affecting ROE can be obtained.
This method will be used in the analysis of the influencing factors of ROE in chapter four.
The elements of ROE are revenue, assets, equity, earnings after tax, earnings before tax and Under the condition that other conditions remain unchanged, change one of the six elements to find out the influencing factors of Roe and the sensitivity of the project.
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3.Characteristics of Selected Corporation
This part mainly introduces the basic information of Canon company, company philosophy, development strategy. And use common-size analysis to analyze Canon's financial statements.
3.1 Overview of Canon group
Canon is a global leader in the production of imaging and information products in Japan.
Founded in 1937 with its optical technology, Canon aims to make world-class cameras. Since then, Canon has continued to develop new technology, and in the early 1970s developed Japan's first ordinary paper copier. In the 1980s, Canon developed the first successful bubble inkjet printing technology and introduced its products to the world. The emphasis and investment in technology research and development have enabled Canon to continue to grow over the decades and become a leader in the industry. Canon ranks third in the number of U.S. patent registrations in 2012, according to the U.S. patent and trademark office.
Since founded in 1937, after years of unremitting efforts, Canon has its own business globalization and extended to various fields. Canon is headquartered in Tokyo, Japan, and has four regional sales headquarters in the Americas, Europe, Asia and Japan. On March 9, 2016, the board of directors of Toshiba held a meeting and finally decided to sell its Toshiba medical system company to Canon, which offered to buy it for 700 billion yen.
Canon has been constantly improving itself. Under the guidance of the corporate concept of
"symbiosis", Canon is determined to become a truly excellent company, one that is widely trusted and respected in the world. With Canon's products, users can enjoy a more convenient and happier life more easily and safely. In addition, by choosing Canon, users support the company's efforts in environmental protection. Day after day, Canon continues to pursue innovation and strive for a better tomorrow.
Canon ranks no. 317 on the 2018 fortune global 500 list released in July 2018. On September 5, 2018, Canon officially released the EOS R system, EOS R full-frame special micro and RF lens. In October, the 2019 Forbes global digital economy 100 list ranked 41st.
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3.2 Corporate philosophy
Canon's corporate philosophy is "symbiosis". Symbiosis refers to the effort to build a society in which all mankind can live, work and live a happy life together, regardless of differences in culture, habits, language and nationality. As a truly global enterprise, it not only establishes good relations with customers and local society, but also with various countries, regions, and the natural environment of the earth, while taking social responsibilities. Canon is making continuous efforts to "promote world prosperity and realize human happiness".
Technological innovation,
Since its establishment, Canon has actively contributed to the society by virtue of its original technology in the pioneering era. The development history of Canon is a history of technological innovation. For a long time, Canon launched a large number of new products with epoch-making significance, which greatly improved the convenience of life and created a new value for the society.
Environmental management
To protect the earth's environment is to protect all life on earth. Accordingly, Canon formulated the "Canon group environmental charter" as the general program of environmental management. At the same time, in order to protect the reproduction of life on earth, Canon pursues "maximization of resource utilization", in order to create more value with less resources.
Cultivation of talents
As constant enterprise DNA, Canon has always been adhering to the "people-oriented",
"technology first", "indomitable enterprising", and as a group action pointer "three-autonomy spirit", vigorously promote the talent training, actively implemented in combination with the practical situation of personal diversification of employment forms, efforts to build a fair, equitable personnel appraisal system.
Social public welfare
To be a trusted and respected enterprise in the world is the goal of Canon. To this end, while taking tax payment as the guide to fulfill social obligations, Canon vigorously supports various social and cultural undertakings based on local characteristics around the world according to
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the concept of "symbiosis". Through these activities, Canon will establish a strong trust relationship with all stakeholders and combine social needs and issues to carry out activities from a medium - to long-term perspective.
Company compliance
Canon believes that strengthening enterprise management and abiding by the law is the premise of all enterprise activities. Corporate scandals, violations of laws and regulations, and quality problems will not only cause the loss of credit, but more importantly, will bring serious confusion and bad effects to customers and the market.
3.3 development strategy
In order to become the world's people, love and respect, the true global good enterprise group, Canon since 1996 to promote the medium - and long-term business plan "global good enterprise group concept." The first, second, third and fourth phases have been implemented steadily, and the fifth phase will start in 2016. Canon has developed seven major strategies, taking various steps to challenge this year's goals.
1996-2000 to promote the overall excellence and profit priority as the goal, the implementation of cash flow operation, the implementation of business selection and concentration. At the same time began production innovation, development innovation and many other business innovation activities.
2001-2005 strive for all the main business world leading, conform to the trend of The Times, promote product digitization, further enhance product competitiveness. Groups throughout the world have carried out a variety of business innovations to further improve their business systems.
2006-2010 further consolidate existing business, expand new business and promote new growth strategy. Strengthening supply chain management and IT innovation in order to realize real-time management that can timely respond to the drastic change of business environment.
From 2011 to 2015, the business policy is to expand the business scale. At the same time of optimizing the financial situation, we will take merger and acquisition measures to build a business foundation for future leap development.
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2016-2020 Canon has completed the four phases of the global enterprise group vision over the past 20 years. In the fifth stage, we laid down the basic principles for achieving strategic transformation and challenging new development and formulated seven major strategies. First, set up a new production system with a cost rate of 45%. Second, we need to strengthen and expand new undertakings and create future ones. Third, seize market changes to rebuild the global sales network. Fourth, we should enhance our research and development capacity through open innovation. Fifth, we should establish a dynamic world three-tier system that is adaptable to global development. Sixth, cultivate international talents with global vision.
Seventh, further carry forward Canon enterprise spirit, make it become the foundation of new development.
3.4Common-size analysis
In this section, we will analyze the common size of Canon's financial statements for five years, analyze the changes of each financial item and the proportion of each item. Discuss it vertically and horizontally.
3.4.1Horizontal common-size analysis
In this part, the financial data of Canon company will be analyzed by horizontal method. In order to display the changes of data more intuitively, the relative changes and absolute changes will be used, and the line chart of the absolute changes will be obtained for analysis.
Horizontal common-size analysis of balance sheet
Table 3.1 Absolute changes in balance sheet of current assets (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018 Cash and cash equivalents -210,967 -3,420 91,621 -201,169
Short-term investment -51,212 -17,445 -1,241 -1,009
Trade receivables, net -37,674 53,457 9,414 -37,919
Inventories -26,272 58,841 9,297 41,248
Prepaid expenses and other
current assets -8,629 -48,864 23,810 16,381
Total current assets -334,754 42,569 132,901 -182,468
Source: Own processing
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Table 3.1 describes the absolute change of current assets. It can be seen from the table that Canon's short-term investment is negative every time, and its value is declining every year. In the period from 2014 to 2015, all financial items showed negative values, and the impact was not improved until 2017.
Table 3.2 Relative changes in balance sheet of current assets (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Cash and cash equivalents -24.98% -0.54% 14.54% -27.87%
Short-term investment -71.26% -84.48% -38.71% -51.35%
Trade receivables, net -6.02% 9.09% 1.47% -5.83%
Inventories -4.97% 11.72% 1.66% 7.24%
Prepaid expenses and other
current assets -2.68% -15.61% 9.01% 5.69%
Total current assets -14.00% 2.07% 6.33% -8.17%
Source: Own processing
As can be seen from table 3.1 and figure 3.2, the amount of the data of each component of the current assets varies greatly from 2014 to 2018. Current assets decreased 14% in 2015 and increased another 2.07% in 2016. It also increased in 2017. But decreased by 8.17 %in 2018.
According to the annual report, the biggest change in the data for 2014-2105 was in short- term investment, which decreased by 71.26% compared with last year, due to increased investment in development to strengthen new businesses and next-generation technologies.
Cash and cash equivalents decreased by 210,976 million yen from the previous year, mainly due to the acquisition of Axis and TMSC shares. Inventory was reduced by 4.97% due to management's initiative to reduce inventory in order to get more cash.
Cash and cash equivalents decreased by 0.54% in 2015-2016 as Canon borrowed from Banks.
Trade receivables, net increased 9.09%, as Canon worked to reduce inventory levels and received many orders from customers.
2016-2017 was a year of overall growth compared to the previous year, which was related to the recovery of the global economy and the increase in Canon sales.
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In 2017-2018, liquidity declined again, by 8.17%, due to loan repayments and an increase in income tax paid.
Graph 3.1 Absolute change in balance sheet of current assets (2014-2018)
Source: Own processing
According to the analysis in table 3.1 and 3.2 and graph 3.1 above, Canon company is developing rapidly. By acquiring companies in other technology areas, Canon company can enhance its own strength and expand its market areas to become a well-developed company.
Table 3.3 Absolute changes in balance sheet of non-current assets (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Non-current receivables -309 -179 6,147 -17,214
Investments 2,686 5,818 -25,360 -5,764
Property, plant and
equipment, net -49,877 -24,676 -68,356 -35,628
Intangible assets, net 63,920 205,060 -25,296 -29,951
Goodwill 267,607 457,481 298 -28,211
Other assets 17,882 24,683 39,428 410
Total non-current assets 301,909 668,187 -73,139 -116,358
Source: Own processing -400,000
-300,000 -200,000 -100,000 0 100,000 200,000
2014-2015 2015-2016 2016-2017 2017-2018
Cash and cash equivalents Short-term investment
Trade receivables, net Inventories
Prepaid expenses and other current assets Total current assets
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Table 3.3 describes the absolute change of non-current assets. It can be seen from the table that the annual difference of non-current receivables of Canon company gradually increases and reaches the maximum value in 2018. And the most important property,plant and equipment in fixed asset, is negative every year. Overall, financial items did not perform well in 2018.
Table 3.4 Relative changes in balance sheet of non-current assets (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Non-current receivables -1.04% -0.61% 20.98% -48.57%
Investments 4.12% 8.57% -34.42% -11.93%
Property, plant and
equipment, net -3.93% -2.02% -5.72% -3.16%
Intangible assets, net 36.05% 85.01% -5.67% -7.11%
Goodwill 126.63% 95.52% 0.03% -3.01%
Other assets 5.67% 7.40% 11.01% 0.10%
Total non-current assets 14.59% 28.19% -2.41% -3.92%
Source: Own processing
As can be seen from table3.3 and 3.4, the non-current assets are in decline from 2014 to 2018, especially in 2017 and 2018, with a significant decline. 2016 was the highest in five years.
From 2014 to 2018, the property, plant and equipment are in a relatively stable state. A stable state of fixed assets is important for manufacturing firms. The annual decrease is due to the depreciation expense of the equipment. Sometimes, equipment is leased depending on the situation.
The other biggest change in the table is intangible assets and goodwill, which show a declining trend each year. The increase of 267,607 million yen in 2015 was due to Canon's acquisition this year of Axis, whose main business is Internet surveillance cameras, which brought in not only goodwill but also revenue from patents and technology development. The decline in the following years was due to the fact that the fair value of the business was reduced due to the unfavorable overall operating profit of several companies acquired by Canon for the purpose of developing new fields.
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Generally speaking, although the non-current assets of Canon have been reduced, but this is only temporary, after adapting to the acquisition business, Canon will not only increase its turnover in the future, but also achieve good results in new areas.
Graph 3.2 Absolute change in balance sheet of non-current assets (2014-2018)
Source: Own processing
According to the analysis in table 3.3 and 3.4 and graph 3.2 above, Canon's non-current assets are in a relatively stable state, making continuous efforts in the business it is good at, and developing new technologies at the same time.
Table 3.5 Absolute changes in balance sheet of current liabilities (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Short-term loans and current portion of long-term debt
-330 1,162 37,478 -801
Trade payables -31,959 94,014 8,385 -28,165
Accrued income taxes -9,781 -16,917 46,987 -36,237
Accrued expenses -27,584 -12,752 25,287 -9,051
Other current liabilities -36,396 102,533 7,974 -5,572
Total current liabilities -106,050 168,040 126,111 -79,826
Source: Own processing -200,000
-100,000 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000
2014-2015 2015-2016 2016-2017 2017-2018
Noncurrent receivables Investments Property, plant and equipment, net
Intangible assets, net Goodwill Other assets
Total non-assets
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Table 3.5 describes the absolute change of current liabilities. It can be seen from the table that Canon is in a better position in 2017. Its financial items mainly experienced a decline in 2015, an increase in 2016, a further decline in 2017 and a rise in 2018.
Table 3.6 Relative changes in balance sheet of current liabilities (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Short-term loans and current portion of long-term debt
-32.42% 168.90% 2025.84% -2.04%
Trade payables -10.30% 33.79% 2.25% -7.40%
Accrued income taxes -17.10% -35.67% 153.99% -46.76%
Accrued expenses -7.99% -4.01% 8.29% -2.74%
Other current liabilities -17.52% 59.86% 2.91% -1.98%
Total current liabilities -11.51% 20.61% 12.82% -7.19%
Source: Own processing
As can be seen from table 3.5 and 3.6, current liabilities are reduced in 2015 and 2018, with decreases of 11.51% and 7.19% respectively. Trade payment due is the same.
It can be seen from the table that short-term loans and current portion of long-term debt vary greatly. Canon company has conducted short-term borrowing in 2014 and 2015.
The increase in 2016 was due to bank loans to buy shares. The increase of 37,478 million yen was due to the debt arising from the merger of the subsidiary and the refinancing of the bank term loan due in 2017. As of December 31, 2017, Canon has no unused credit facility.
In 2018, short-term loans and current portion of long-term debt decrease by 2.04%, little changed from 2017. Canon also repaid the loan. Outstanding short-term borrowing has a weighted average interest rate.
Other values did not change much, resulting in a 7.19% reduction in current liabilities over the five-year period
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Graph 3.3 Absolute change in balance sheet of current liabilities (2014-2018)
Source: Own processing
According to the analysis in table 3.5 and 3.6 and graph 3.3 above, it can be seen that the change of current liabilities of Canon company is mainly caused by the change of short-term loans and current portion of long-term debt, from which it can be seen that Canon company relies on external funds to meet its working capital and capital needs to a certain extent.
Table 3.7 Absolute changes in balance sheet of non-current liabilities (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Long-term debt, excluding
current installments -267 610,408 -118,051 -131,276
Accrued pension and
severance cost 15,334 110,938 -41,618 17,207
Other noncurrent liabilities 14,433 11,211 -8,233 -26,669 Total non-current liabilities 29,500 732,557 -167,902 -140,738 Source: Own processing
Table 3.5 describes the absolute change of non-current liabilities. For non-current liabilities, the change is not very obvious and a small trend change is made every year. Long-term debt declined in the last two years, and the company's debt profile changed.
-200,000 -100,000 0 100,000 200,000
2014-2015 2015-2016 2016-2017 2017-2018
Short-term loans and current portion of long-term debt Trade payables
Accrued income taxes Accrued expenses Other current liabilities Total current liabilities
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Table 3.8 Relative changes in balance sheet of non-current liabilities (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Long-term debt, excluding
current installments -23.26% 69285.81% -19.31% -26.62%
Accrued pension and
severance cost 5.46% 37.45% -10.22% 4.71%
Other noncurrent liabilities 12.40% 8.57% -5.80% -19.93%
Total non-current liabilities 7.40% 171.17% -14.47% -14.18%
Source: Own processing
As can be seen from table 3.7 and 3.8, Canon's non-current liabilities are on a downward trend, with a decrease of 14.18% in 2018.
The biggest change is in long-term debt. In particular, the change in 2016 was the most obvious, and the increase in 2016 was due to Canon entering into a temporary loan agreement with a bank on March 15, 2016, which expires in 2017, to acquire TMSC.
On January 31, 2017, Canon refinanced the unsecured loan through a credit facility due December 2021. The amount under the credit line is 610 billion yen. In the same year, the company repaid a long-term loan of 1,265.78 million yen. After 2016, long-term debt has changed less dramatically, showing a relatively stable state.
Regarding pensions, Canon has a benefit pension plan that covers all employees. The increase of 5.46% in 2015 was due to the abolition of pension plans of certain subsidiaries in the Netherlands and the transfer of assets and liabilities of related plans to pension plans of other companies.
Generally speaking, among the changes of non-current liabilities, the changes of other items are small except for the big change of long-term debt.
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Graph 3.4 Absolute change in balance sheet of non-current liabilities (2014-2018)
Source: Own processing
According to the analysis in table 3.7 and 3.8 and graph 3.4 above, it can be seen that Canon's non-current liabilities have been decreasing and reached the highest value in 2016, mainly caused by the project of long-term borrowing. To acquire companies in new areas, Canon has borrowed money many times, with the result that it will not be able to see in the future.
Table 3.9 Absolute changes in balance sheet of equity (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Authorized 0 0 0 0
Additional paid-in capital -205 27 1 3,003
Legal reserve 690 1,269 321 237
Retained earnings 44,766 -14,430 78,584 79,596
Accumulated other
comprehensive income(loss) -58,028 -170,139 56,653 -125,843
Treasury stock, at cost; 1,008 -13 -48,058 -21
Total Canon Inc. stockholder’s
equity -11,769 -183,286 87,501 -43,028
Noncontrolling interests 55,474 -6,555 14,052 -35,234
Total equity 43,705 -189,841 101,553 -78,262
Source: Own processing -300,000
-200,000 -100,000 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000
2014-2015 2015-2016 2016-2017 2017-2018
Long-term debt, excluding current installments Accrued pension and severance cost Other noncurrent liabilities Total non-current liabilities
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Table 3.9 describes the absolute changes in equity. From the table, we can see that the overall trend has declined in 2016 compared to 2015. But then Canon adjusted its overall strategy, and in 2017, its trend improved
Table 3.10 Relative changes in balance sheet of equity (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Authorized shares 0.00% 0.00% 0.00% 0.00%
Additional paid-in capital -0.05% 0.01% 0.00% 0.75%
Legal reserve 1.07% 1.94% 0.48% 0.35%
Retained earnings 1.35% -0.43% 2.35% 2.32%
Accumulated other
comprehensive income(loss) -205.15% 572.05% -28.34% 87.86%
Treasury stock, at cost;
241,931,637 shares in 2014 -0.10% 0.00% 4.76% 0.00%
Total Canon Inc. stockholder’s
equity -0.40% -6.18% 3.14% -1.50%
Noncontrolling interests 34.12% -3.01% 6.64% -15.62%
Total equity 1.39% -5.96% 3.39% -2.53%
Source: Own processing
As can be seen from table 3.9 and 3.10 that the equity is in a relatively stable state, with a small increase and decrease each year, and basically stays at the same level. This also means that there is not much variation between projects.
Under Japanese company law, 10 per cent of the undistributed profits paid by the company and its Japanese subsidiaries are set aside as statutory reserves. No further appropriation is required when the total amount of additional paid-in capital and statutory reserves is equal to 25% of their respective required capital.
As for shareholders' equity, according to the development strategy of Canon in the fifth stage, it plans to achieve a shareholder equity ratio of more than 70% in 2020. Thus, the development trend of Canon company is stable.
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Graph 3.5 Absolute change in balance sheet of equity (2014-2018)
Source: Own processing
According to the analysis in table 3.9 and 3.10 and graph 3.5 above, it can be seen that the change range of equity is not big. In 2015, it is the lowest value in five years, while in 2016, it reaches the highest value in five years.
Horizontal common-size analysis of income statement
Table 3.11 Absolute changes in income statement (Unit:JPY million)
2014-2015 2015-2016 2016-2017 2017-2018
Revenues 73,019 -398,784 678,528 -128,078
Gross profit 72,912 -262,386 318,556 -155,000
Operating profit -8,279 -138,785 105,180 21,347
EBIT -35,717 -102,310 108,990 8,987
Income taxes -1,895 -33,424 15,343 -1,874
Pretax Income -35,801 -102,787 109,233 9,008
Net Income -33,906 -69,363 93,890 10,882
Source: Own processing
Table 3.9 describes the absolute changes in the income statement. From the table we can see that the financial situation in 2016 was relatively poor. In the following two years, Canon's projects have increased. The best performer was 2017.
-400,000 -200,000 0 200,000
2014-2015 2015-2016 2016-2017 2017-2018
Authorized 3,000,000,000 shares Additional paid-in capital
Legal reserve Retained earnings
Accumulated other comprehensive income(loss) Treasury stock, at cost; 241,931,637 shares in 2014 Total Canon Inc. stockholder’s equity Noncontrolling interests
