Financial statement analysis Contents

Financialstatement analysis

Contents

Introduction 2

Industry Background 2

Company information 3

Financial analysis of the financial reports 4

Corporate governance, ownership structure, regulatory environment, cultural, political and sustainability analysis 6

Corporate governance 6

Ownership structure 7

Regulatory environment 7

Cultural analysis 8

Political analysis 8

Sustainability analysis 8

Conclusion 9

Works cited 10

Introduction

CanonInc. is a global manufacturing company in Japan with an extensivehistory. It was initiated in 1933, and incorporated in 1937. Canon isamong the prominent brands worldwide in manufacturing opticalelectronics. It is involved in the innovation and manufacture oflaser and bubble jet printers, facsimile machines, camcorders, andcameras. Also, they produce personal computers, calculators, wordprocessors, and electronic typewriters. After the turmoil of WorldWar II, Takeshi Mitarai, the primary founder of the company calledfor stocking of optical cameras in their ship’s and post’s stores(Kisselbachp56).It helped Canon be successful as an exporter since the US servicemenbrought their cameras to the US. The company, therefore, got aportion of the US market.

Anotherdevelopment for Canon happened after news photographers airinginternational occurrences discovered that Japanese lenses were asgood as German ones leading to a vast export market for Canon. It issegmented into three parts including business office part, consumerbusiness department, and industry unit(Hilz p120).It also offers services like equipment services, office resolutions,research, and financial services.

NikonCorporation is based in Japan and mainly involved in manufacturing,and selling of optical goods. It is engaged in the manufacture oflens digital cameras, microscopes, and focus lenses. It operates inNorth America, Middle East, Europe, and Asia-Pacific areas. It wasestablished in 1917 and with time it extended its operationsinternationally. Nikon AG was founded in 1961 in Switzerland, andslowly it opened offices globally. Leica Camera is a globallyoperating company manufacturing sport optic products and cameras.

IndustryBackground

Theoptical electronics industry includes parts, devices, equipment, andsystems that deliver data by controlling light. The technology ofcreating light begun in the 1960s and its utilization commenced in1980s. Sun rays are currently being used to expand the scope of theindustry. The policies and investment environments in this industryinclude establishing an optical industry integrated with the academicand industrial connection. Better infrastructure is developed inproduction and establishment of amenities that could be utilizedmutually. Manpower is being produced with more specialties in thisfield(Bernstein p150).The primary aim of this industry is to bring systems enabled byoptical electronics in people’s lives.

Opticalelectronics technology is combined with new systems like sensors,industrial lights, optical electronics devices and parts, andcommunication system. Infrared light technology is also developed inan optical lens, the chalcogen glass, and industrialization. Researchhas helped the growth of this industry in many universities, forexample, the Hong Kong Applied Science and Technology ResearchInstitute. It is well known for identifying photonics as their mainstrategic area.

Theindustry is highly competitive as Japan, South Korea, China,Singapore, and Taiwan are active participants and have strong supportfrom the government. They, therefore, have built a strong industry inthis area.

Companyinformation

Canon’shistory dates back to 1933 when Takeshi Mitarai, a gynecologist,worked with his technician friends and developed cameras. In 1940,they developed the Precision Optical, which was a significantcontribution to the medical imaging technology of Japan. Mitaraistruggled to keep the company going as it barely survived the WorldWar II (Kuipersp99).The capital was scarce, and raw materials were rationed. He urged theworkers to ensure they produced high-quality products and alsopersuaded the Allied occupation forces to help them stock thePrecision Optical cameras in their ships’ stores and postexchanges. Due to this, Canon became a successful exporter. In theearly 1950s, Canon got another breakthrough as the news photographersin Korean War found that the Japanese lenses were as good as Germanones hence enlarged its export market.

Thediversifications made the company change its name from “CameraCompany” to Canon Inc. despite all these successes faced thechallenge of poor marketing strategy as it could not differentiateitself from the competitors(Rees p98).Its technical advances were wasted because they failed to exploittheir sales potential before the rivals caught up with them. Itdoubted its marketing strength and feared the competitors wouldinvade on its patents. Therefore, they licensed the technology toother producers rather than selling the system to them hence wastedits earnings leading to failure to pay dividends in 1975. However,Kaku became the managing director and changed the sales andmanagement practices.

In1993, Hajime Mitarai took over as Canon’s president but died, andFujio Mitarai succeeded with a unique management style. It was acombination of US and Japanese practices including payment based onmerit, consensus decision-making, and job security. Revenues wereboosted six-fold to $ 2.6 billion that summed to 35% of global sales.Canon reduced its debt level by using its cash for capital investmentrather than borrowing. To revitalize the new product development,Mitarai planned to offset the decline in prices by improving theirsales hence reduce the price reduction of the existing products.Overall sales increased from $ 21.03 billion to $31.82 billionbetween 1995 and 2005.

Itsprincipal subsidiaries are Canon Sales Co. Inc.-51.1%, Canon FinetechInc.-58.5%, Canon Electronics Inc.-54.2%, Canon Software Inc.-57.7%,Nisca Corporation -51.1%, Canon Machinery Inc.-67.3%, Canon EuropaB.V. in Netherlands, and Canon U.S.A., Inc. The primary competitorsinclude Xerox Corporation, Seiko Epson Corporation, ToshibaCorporation, Sharp Corporation, Sony Corporation, OlympusCorporation, Nikon Corporation, Eastman Kodak Company, PentaxCorporation, Sigma Corporation, and Victor Company of Japan Ltd.

Financialanalysis of the financial reports

Thecurrent ratio of Canon in the year 2012 was 1.42, 1.38 in 2013, 1.24in 2014, and dropped to 0.97 in 2015. Since the benchmark range forcurrent ratios 1.5 to 2, the company has problems in meeting itsshort-term maturing obligations. However, they may have decided tohave their current ratio this low due to the high turnover ofinventory than accounts payable became due. Nikon had 1.78 in 2012,1.92 in 2013, 2.32 in 2014, and 2.39 in 2015 putting them in a betterposition to meet their current obligations all through. Leica, on theother hand, had 4.84 in 2012, 2.08 in 2013, 1.89 in 2014, and in2015, it had 3.08 implying that they are in a better position to meettheir obligations. Horizontally, Nikon and Leica are in goodpositions to meet their short-term liabilities as compared to Canon,which had very low current ratio figures.

Thegearing ratio of Canon had 34.51% in 2015, 28.0% in 2014, 23.26% in2013, and 17.65% in 2012 which means the company is in a position topay its debts and is considered of low risk by lenders and investors.The reason behind this is the low gearing ratio below 50%. Nikon had24.83% in 2015, 26.89% in 2014, 19.33% in 2013, and 24.24% in 2012which implies it has a low risk and greater financial stability(Kuipers p78).Finally, Leica had 359.86% in 2015, 228.37% in 2014, 234.42% in 2013,and 82.13% in 2012. It, therefore, implies the company possesses ahigh risk to the lenders and investors due to the extremely highratios beyond 50%. Horizontal analysis of this portrays that Canonand Nikon are well off regarding financial stability as compared toLeica with very high gearing ratio making it susceptible tobankruptcy.

Returnon equity for Canon using the net income included 14.28% in 2015,12.12% in 2014, 10.87% in 2013, and 9.89% in 2012. The average returnon equity is about 15-20% for a company to be at its best. It,therefore, means that there has been a gradual improvement in thereturns from the equity employed. Nikon had 3.21% in 2015, 8.56% in2014, 8.64% in 2013, and 13.68% in 2012. The company has experienceda decreasing return on equity until its lowest in 2015. Leica had 0in 2015, 2014, and 2013 and recorded 49.52% in 2012. It is very poorin utilizing the capital employed to produce good returns. Canon doesbest in its return on equity followed by Nikon and finally Leica,which performs very poorly.

Priceearnings ratio is used by investors to make investment decisions. Onaverage it is required to be 20-25 times. Canon recorded 20.1 in2015, 19.27 in 2014, 19.78 in 2013, and 18.24 in 2012 which wasslight below the standard but was quite fair. Nikon was at 35.15 in2015, 14.23 in 2014, 21.06 in 2013, and 16.98 in 2012. However, Leicadid not provide its price-earnings ratios. From these two it can beseen that on average they are good performing firms with highreturns.

Thesolvency ratios based on assets for Canon included 60.88% in 2015,62.5% in 2014, 65.68% in 2013, and 68.24% in 2012. A solvency ratiomore than 20% indicates financial soundness of a company as its cashflow is enough to meet its short and long-term liabilities. Nikon had58.81% in 2015, 57.59% in 2014, 56.8% in 2013, and 50.41% in 2012.Leica on the other hand, had 18.08% in 2015, 20.02% in 2014, 19.56%in 2013, and 46.76% in 2012. As seen, Canon is the best regardingsolvency, followed by Nikon and finally Leica with a very lowsolvency rate implying it faces difficulties in meeting its cash flowrequirements.

Corporategovernance, ownership structure, regulatory environment, cultural,political and sustainability analysisCorporategovernance

TheChief Executive Officer decides the management, policies, andstrategies of the company. The Chief Financial Officer controls thefinancial issues. At the headquarters quality management, accountingand finance, global environment and legal administration are managed.Board of Directors has 17 directors who make decisions based on theCompanies Act and policies on the internal control system. Canon hastwo Outside Directors who are independent and bring unbiasedperspectives to management.

TheCorporate Strategy Committee consists Executive Directors,Representative Directors, and Executive Officers(Kisselbach p200).It advises the CEO and undertakes negotiations on significant mattersconcerning Canon Group’s strategies. Outside Audit &ampSupervisory Board Members and directors join the Corporate StrategyCommittee meetings and give their views.

TheRisk Management Committee formulates actions and policy proposals toimprove risk management in the decisions of the Board of Directors.It has three units the Compliance Subcommittee which endorse the fullimplementation of corporate ethics and ensures compliance with thelegal system. The Financial Risk Management Subcommittee improves thecredibility of the financial reporting system. Business, RiskManagement Subcommittee, develops systems involved in the reductionof entire business risks.

TheAudit &amp Supervisory Board has five members of which three arefrom the outside and independent. They attend Corporate StrategyCommittee and Board of Directors meetings to examine reportsconcerning the financial state of the company. There exist theCorporate Audit Center, the internal audit division that evaluates,audits, and guides all sectors and operations on business efficiency.

Ownershipstructure

Thecommon stockholders with the largest holdings in Canon own 31.8%, andthey are mostly firms and not individuals. The Dai-Ichi LifeInsurance Company Limited owns 6% of total shares. The ownership isdispersed, and banks are the principal owners(Hilz p67).All the members of the board of directors are corporate officershence the low power of stockholders.

Regulatoryenvironment

Themanagement is required to protect consumers, provide excellentproducts, preserve the environment globally, practice faircompetition, and observe corporate ethics. The executives shouldappropriately interpret the company rules, regulations, andapplicable laws. A Legal Compliance Promotion System is in place toensure legal compliance and corporate ethics are followed. Thereexist Operation of Compliance Hotlines system that detects andresolves any problems so as to uphold respect for set rules. Need forsecurity and peace calls for the implementation of strict controls asper the agreements on the export of technologies and commodities.Therefore, such controls are implemented through the Foreign Exchangeand Foreign Trade Control Law.

Culturalanalysis

Thebusiness is founded on Japanese philosophy of Kyosei, which entailsworking and living together for people`s common good. They helptackle health and social issues hence create income and wealth. Itinvests in both local and regional projects and, therefore, supportsits social responsibility firmly. They get involved in sponsoringculture and art, sports, science and education, humanitarian, andconservation of the environment.

&nbspPoliticalanalysis

Theyfollow procedures and policies to protect employees and customerswhile building its business and meeting its economic targets(Bernstein p45).They engage in industry groups and associations to considerenvironmental regulation and safety of the product hence stay aheadin the development of legislature.

Sustainabilityanalysis

Canonis the world leader in solutions pertaining imaging. As a result, thecompany is positioned among the top five percent of sustainabilityperformance as rated by Eco Vadis. The analysis was based on theenvironment, fair practices in businesses, fairness in labor prices,and good supply chain. To support this Canon handed in data relatingto its corporate social responsibility acts. The commitment tosustainability across its business, the environment, and societyemanates from its desire to embrace the corporate philosophy ofKyosei that calls for working for the benefit of all. Environmentalassessment and monitoring are done continuously to enhance thesustainability performance in all its areas.

Conclusion

CanonInc. is an international company involved in the manufacture ofoptical electronics in Japan. Locally, it competes with NikonCorporation that also makes and sells optical goods. Its competitorin Germany is Leica Camera Company. The industry aims to incorporateoptical technology in various systems to improve people’s lives.Research also enables the growth of this industry. Canon was foundedby Takeshi Mitarai and has had many innovations leading todiversification in its operations. It also has many subsidiarycompanies in many regions. On the current ratio, Nikon and Leica dowell as compared to Canon. The gearing of Canon and Nikon are saferas compared to Leica that could face bankruptcy. Canon is best in itsreturns on equity employed followed by Nikon and lastly Leica.Regarding solvency, Canon is well performing then Nikon and finallyLeica. Canon’s Board of Directors has 17 directors. Commonstockholders are the largest owners in Canon and are mainly firms.The executives are involved in the implementation of company rulesand regulations. They are also actively involved in funding sports,culture, and art.

Workscited

Bernstein,Leopold A.&nbspFinancialStatement Analysis.Homewood, Ill.: R.D. Irwin, 2014. Print.

Hilz,Corey.&nbspNikonD90.Burlington, MA: Focal Press, 2013. Print.

Kisselbach,Theo.&nbspLeica.Hove: Hove Foto Books, 2013. Print.

Kuipers,Christopher.&nbspTheCanon.London: Routledge, 2011. Print.

Rees,Bill.&nbspFinancialAnalysis.London: Prentice Hall, 2012. Print.