Samsung Electronics Company's Financial Analysis

Samsung Electronics Company's Financial Analysis

A critical step in studying Samsung as a firm is to understand how they are performing financially. Annual reports from 2005 through 2009 were used to collect the data organized in Table 1. The high-level view of the company shows a growing company generally increasing total assets and sales from year to year. The cash flow and income has not grown as steadily.

Table 1. Samsung Electronics Reported Financial Performance

The data in Table 1 was used to calculate the ratios in Table 2. The PE ratio serves as a quick performance measure for investors but can be misleading. The profit margin, asset utilization, and leverage ratios culminated into the ROE values provides more insight especially when comparing the values to competitors.

Table 2. Samsung Electronics Calculated Financial Ratios

The Samsung PE ratio is plotted in Figure 1 but proved little information. The performance for years 2005-2007 is flat with an increase in 2008 and a low in 2009. While an increase in PE ratio can indicate an improvement in performance, in this case the increase reflected a drop in earnings for Samsung.

Figure 1. Price / Earnings Ratio

Plotting the cash flow over this time period shows growth over the 5 years but with the largest increase in 2007 followed by a reduction in 2008 and comparable performance in 2009. The stagnation in cash flow could be cause for alarm since sales in 2009 outpaced those of 2007.

Figure 2. Cash Flow

The ROE calculation and the three ratios that contribute to it provide helpful insight. The asset utilization ratio has been stagnant at about 1 and could suggest an area to improve upon. The leverage ratio has also been steady with some decline over the 5 year span and could also be an area to improve upon. The moderate asset utilization and leverage numbers cause the ROE to track the profit margin closely which has declined slightly from year to year and especially in 2008. The end result is a decline in the return on equity from 2005 to 2009.

Figure 3. Return on Equity Performance

LG is smaller than Samsung but is a direct competitor in a number of electronics segments. LG by comparison has consistently higher asset utilization and leverage ratios so the ROE value does not track profit margin as closely as it does for Samsung. Samsung did hold a profit margin advantage over LG in 2006 but that gap has diminished over time. As a result, Samsung's ROE has dropped below LG's, and the two seem to be headed in different directions.

Figure 4. Return on Equity Comparison between Samsung and LG

Analyzing Samsung's financial performance over the last 5 years and comparing their performance to one of their direct competitors highlights some metrics that require Samsung's attention. Low asset utilization and leverage ratios have made Samsung's ROE more sensitive to profit margin than LG. Diminishing profit margins are characteristic of the electronics industry, but the introduction of new products and technology can boost the margin significantly.

Samsung Electronics Company's Competitive Analysis

To understand Samsung's marketplace competiveness, we use Mark Scott's market model depicting seven primary factors: stage in the product or service life cycle, threat of new entrant and ownership changes, level of innovation occurring, buyer power, supplier power, impact of government industrial policy and macroeconomic context. See Figure 5.

Stage in life cycle Threat of new entrant Level of innovation Buyer Power Supplier Power Government Industrial Policy Macroeconomic Context Overall Level of Competitiveness

Samsung 2 3 5 4 2 2 4 4

Actual competition 2 2 5 5 2 2 4 4

Potential competion 3 3 5 5 2 2 4 4

1=Low attractiveness 5=High attractiveness

Figure 5. Market Model

Stage in life cycle

Samsung is in a field that is constantly changing and being at the edge of the technology is key to retain market share, this makes the life cycle of their products to be very short. Therefore Samsung constantly has to invest in R&D.

In 2006 alone, Samsung has achieved the following accomplishments for mobile phone production and innovation:

* Developed the world's first ever OneDRAMTM

* 10 million sales record breaker in the United States for mobile phones