CORPORATE FINANCE 1
This research paper aims at analysing the financial statements toassess the financial health of a business. The financial analysisinvolves examining the financial performance of a firm (Brealey &Myers, 2010). The two commonly used methods of financial analysisinclude the qualitative analysis and quantitative analysis. In theresearch, quantitative analysis has been used to analyse thefinancial performance of the Levono Group Limited Company for thefinancial year 2014. Quantitative analysis constitutes theexamination of the firm`s performance using those parameters that canbe expressed in monetary terms as opposed to qualitative analysisthat involve the use of parameters that cannot be expressed inmonetary terms though they are essential for assessing the company’sperformance.
Lenovo is a multinational computer technology corporation listed onthe Hong Kong Stock Exchange, and its executive headquarters arebased in China, United States, Beijing and North Carolina. Thecompany has operations in about 60 countries, and its product andservices are sold in over 160 countries. Lenovo Group Ltd. has beenrecently ranked the fourth largest manufacturers of personalcomputers after HP, Dell and Acer. The company produces products suchas laptops, desktops, imaging equipment, mobile phones, hand heldcomputers, servers, and many others. The company also provideinformation technology integration services and contractmanufacturing. Under the leadership of the current CEO Yang Yuanging,Lenovo Group Limited has been performing better according to theanalysis of the financial reports of the companies.
Horizontaland vertical size analysis
From the balance sheet, the horizontal analysis has shown the currentassets constitute only 10.18% of the total assets. This implies thatmore investment in the current assets is required. On the other hand,the vertical analysis of the income statement has shown that the firmincurs a lot on the cost of sale as it occupies the highestpercentage. There if therefore a need to minimize this cost so as toboost the productivity of the firm.
These are also called turnover ratios. They measure how efficientlyand intensively a firm is using its assets to produce sales. In thiscase, higher turn-over ratios are preferable. The Lenovo’s activityratios for the financial year 2014 include the following
= = 29.30
These ratios show the ability of the firm in meeting its currentobligation as they fall due to (Ross & Westerfield). The ratioexpresses the relationship between the current liabilities and thecurrent assets. They include the current ratio and the quick ratio,and they are calculated as shown below.
Thisratio is below the recommended level of 2:1 and therefore, itindicates that Lenovo Group Ltd may become incapable of paying offits current obligation as they become due. The company is also mostlikely to face short-term financial distress.
Thisratio is also known as the acid the acid test ratio and in measuresthe ability of the fir, to encounter its current obligationsutilizing its most liquid assets. In this analysis, inventory isexcluded because it is relatively difficult to convert inventory intocash whenever the need arises. The ratio is still lower, and thisindicates that the firm is more likely to face short-term financialdistress.
These ratios show the capability of the firm to meet short-term andlone term obligations as they become due. The ratios also showwhether the firm’s cash flow is adequate to cater for the bothshort-term and long-term debts. The lower the ratios, the better(Ross& Westerfield). They include the debt to equity ratio and debtratio
= 0.00336 = 0.033%
Comparingthe liquidity and the solvency ratios in the analysis above, Lenovohas proven to be more insolvent though highly illiquidity. This is aclear indication that the firm is investing heavily in its long-termassets, or it is using short-term sources of capital to fundlong-term investment.
Returnon equity (ROE)
The above analysis has shown that the firm is capable of generatingprofit from its sales. Lenovo has therefore proven to be profitableand also attractive for the investors. The ROE which the measure ofthe firms profit from the shareholders’ perspective shows thatLenovo creates high returns to the investors and therefore the firmis financially healthy.
These ratios relate the market performance of the firm to the equityand the dividends. The ratios include
Thisrelates the profitability of the firm to the total number of sharesheld in the firm.
The cash flow analysis revealed that most of the cash is generatedfrom the operating activities. The Total cash generated fromoperating activities amounted to $1,432,058,000, and this amount wasused to fund some financing activities and investing activities. Thatis, the net cash flows generated from financing and investingactivities are negative.
The analysis of the financial statements of Lenovo Group Ltd for theyear 2014 has proven that the company is financially stable. Thatresearch also revealed that the company is more likely to performeven much better shortly as it invests more in non-current assetsrather than the current assets. This is as evidenced by the lowliquidity ratios and low solvency ratios. High liquidity ratios arerecommended while low solvency ratios are most preferable (Brealey &Myers, 2010).
In conclusion, we can confirm that Lenovo is one of the bestperforming Corporation in the technology industry. Also, comparingthe averages of the profitability measures in this industry, Lenovois more profitable, and its profitability ratios are above theindustry averages. Therefore, the firm is performing better in theindustry, and it has acquired high competitive advantage. It has alsoremained attractive to the investors whom would wish to maximizetheir returns at the lowest risk.
The leverage ratios have shown that the firm is lowly geared.However, the management should understand that debt is the cheapestsource of finance, and they should utilize it to maximize theirprofit. The firm should also seek more capital from long-termborrowing and finance short-term investments so as to increases theliquidity ratios to the recommended levels.
LenovoGroup Ltd. Annual reports (2014). Retrieved 17 November, 2015from https://www.lenovo.com/ww/lenovo/pdf/report/E_099220140529a.pdf
Ross,S., & Westerfield, R. (2005). Corporate Finance (7th ed.).Boston: McGraw-Hill/Irwin.
Brealey,R., & Myers, S. (2010). Principles of Corporate Finance(3nd ed.). New York: McGraw-Hill.