Financial ration-analysis-1

SCHOOL OF ARCHITECTURE , BUILDING AND DESIGN

FOUNDATION IN NATURAL BUILT ENVIRONMENT

Accounting Report

Financial Ratio Analysis

Title : Lenovo Company

Group Member : Wong Qin Kai (0320024)

Lim Ting Le (0320028)

Lee Jia Kiam (0320029)

Subject : Basic Accounting (ACC30205)

Lecturer : Chang Jau Ho

Submission Date : 4th June 2015 (Week 16)

Brief Background History of Lenovo Company

Lenovo is a US$39 billion personal technology company which engineers PCs and

mobile internet devices to customers. Lenovo is also the world’s largest PC vendor and

fourth largest smart phone company which serves customers in more than 160 countries.

Besides that, its executive headquarters are located in Beijing and Morrisville. In year

1988, the company was incorporated in Hong Kong and was listed on The Stock

Exchange of Hong Kong since 1994. Lenovo’s business is mostly built on product

innovation, highly-efficient global supply chain and strong strategic execution which was

formed by Lenovo Group’s acquisition of the former IBM Personal Computer Division.

The company development, manufacture and market are known to be reliable.

Nonetheless, they supply high-quality, secure and user-friendly products and services. Its

product lines include legendary Think-branded commercial PCs and Idea-branded

consumer PCs, as well as servers, workstations, and a family of mobile internet devices,

including tablets and smart phones. Lenovo also offers Internet access through its

FM365.com portal.

Recent Development

In year 2010, Lenovo introduced LePhone, which is the company first smart phone.

Also, Lenovo sold its 60 millionth ThinkPad in the same year. In the following year,

Lenovo formed Mobile Internet Digital Home (MIDH) business unit to attract growing

opportunity in consumer devices such as smart phones, tablets and smart TV. On the

other hand, Lenovo formed a joint venture with NEC, creating the largest PC company in

Japan. Furthermore, Lenovo acquired Medion, a PC and consumer electronics company

based in Germany, substantially increasing presence in consumer market in Western

Europe. In year 2012, Lenovo formed a joint venture with EMC to sell servers in China

and develop storage solutions. In the same year, Lenovo acquired Stoneware, a software

firm focused on cloud computing. Most importantly, it sold its 75 millionth ThinkPad.

Lastly, in year 2013, Lenovo became the world's first PC company, attained 329th in the

Fortune 500 list of the world's largest companies and also became the world’s third smart

phone company. Lenovo then acquired CCE, a leading consumer electronic company in

Brazil. Lenovo also has evolved its decision-making process. Instead of demanding fealty

based on titles and seniority, the current approach combines the best of the Chinese long-

term focus on strategy with the West’s intense focus on meeting quarterly targets a former

IBM executive turned private equity maven the one who helped broker and finance

Lenovo’s purchase of IBM’s personal computer unit.Grabe’s New York–based firm,

General Atlantic, remains an investor, and he currently sits on the board. In another key

of respect, Lenovo has distinguished itself from other Chinese companies, it has created a

brand name that is recognizable in markets around the world. No other Chinese company

that competes internationally has been willing to spend hundreds of millions of dollars

annually to achieve that. That is an amazing recent development for further process of the

business.

Ratio Analysis of the Lenovo’s Annual Report for 2012 & 2013

The table below show the calculations and interpret the trends from 2012 to 2013 periods.

Profitability Ratios 2012 2013 InterpretationReturn On Equity (ROE)

During the period 2012 to 2013,the ROE has increase from 22.20% to 24.63%. This owner is getting more return from his capital when compare to last year.

Net Profit Margin (NPM)

During the period 2012 to 2013 , the NPM has increase from 1.61% to 1.86%.The business ability to control its expenses is better than last year.

Gross Profit Margin (GPM)

During the period 2012 to 2013 , the GPM has increase from 11.65% to 12.03%.The business ability to control its COGS expenses us better than last year.

Selling Expenses Ratio (SER)

During the period 2012 to 2013, the SER has decrease from 5.72% to 5.57%.The business ability to control its selling expenses is getting better.

Genaral Expenses Ratio (GER)

During the period 2012 to 2013 , the GER has increase from 4% to 4.34%.The business ability to control its general expenses is getting worst.

Financial Expenses Ratio (FER)

During the period 2012 to 2013 , the FER has increase from 0.15% to 0.13% .The business ability to control its financial expenses is getting better.

*Unit represented in US$’000.

Stability Ratios

The table below show the calculations and interpret the trends from 2012 to 2013 periods.

Profitability Ratios 2012 2013 InterpretationWorking Capital Ratio (WCR)

During the period 2012 to 2013, the business’s WCR has increase from 1:1 to 1.02:1. The business ability in paying off its current liabilities are getting better. In addition, it doesn’t satisfy the minimum ratio of 2:1.

Total Debt Ratio (TDR)

During the period 2012 to 2013, the business’s TDR has decrease from 84.57% to 84.12%.The total debt of the business has decrease. However ,it doesn’t satisfy the 50% maximum limit.

Stock Turnover Ratio (STR)

During the period 2012 to 2013 , the STR has increased from 14.12days to 19.5days. The business sells its goods faster compared to last year.

Debtor Turnover Ratio (DTR)

During the period 2012 to 2013, the DTR has increase from 127.9 days to 140 days. The business is taking more times to collect its debts.

Interest Coverage Ratio (ICR)

During the period 2012 to 2013 , the ICR has increase from 11.93 times to 15.73 times.The business ability to pay its interest expenses is getting better.However , the business should never fall below 5 times.

*Unit represented in US$’000.

Appendix 1

Price Earning InterpretationP/E Ratio The P/E Ratio of Lenovo’s Company is

200 years.This means an investor who bought a share of Lenovo will have to wait for 200 years to recoup his/her investment. In addition,a investor will normally pay below 15 years for a share.

Investment Recommendation

Based on the calculation of the ratios , the overall profitability seems to be good and

stable during the period 2012 to 2013. As you can see , the Return On Equity (ROE) of

the Lenovo’s Company has gradually increased by 2.43% when compare to 2012 ,which

means that the owner is getting more return from his capital. However ,for the other ratios

such as Net Profit Margin (NPM),Gross Profit Margin (GPM), Selling Expenses Ratio

(SER) and Financial Expenses Ratio (FER) had increased slightly except for the General

Expenses Ratio (GER). It’s because the business ability to control its expenses is getting

worst.

For the stability ratios, the calculation of Working Capital Ratio (WCR) , Stock

Turnover Ratio (STR) and Interest Coverage Ratio (ICR) are getting better when compare

to last year. About the Debtor Turnover Ratio, the business is taking more times to collect

their debts because the ratio of it has vastly increase by 12.1 days. As you can see , the

Total Debt Ratio (TDR) has decrease by 0.45% during the period 2012 and 2013 but it

still doesn’t satisfy with 50% maximum limit.

In conclusion, Lenovo’s Company share is not suitable for investment because the

higher P/E ratio and the more expensive a share is. The calculation shown that the ratio of

Lenovo’s Company is 200 years, means that the investor will have to wait even more than

200 years to claim back his original principal. Today, a conservative investor will

normally purchase with P/E ratio of 15 or less so that’s why I recommend the share of

Lenovo’s company is not suitable for investment.

Appendix 2

Income Statement (2012 to 2013)

Income Statement (2012 to 2013)

Balance Sheet (2012 to 2013)

Balance Sheet (2012 to 2013 )

References

(2013, June 1). Retrieved May 27, 2015, from http://www.lenovo.com/ww/lenovo/pdf/report/E_099220130531d.pdf

(n.d.). Retrieved May 27, 2015, from http://www.lenovo.com/ww/lenovo/pdf/lenovo-factsheet-2012-mar-eng.pdf

Lenovo Group Limited SWOT Analysis. (2013). Lenovo Group, Ltd. SWOT Analysis, 1-7.

Lenovo Reports First Quarter 2010/11 Results.(Financial report). (2010,

August 31). China Weekly News. Retrieved May 27, 2015, from http://www.highbeam.com/doc/1G1-235740273.html?

Domestic Company Profiles. (2010). China Consumer Electronics Report, 2(2), 44-47.

992:Hong Kong Stock Quote. (n.d.). Retrieved May 28, 2015, from http://www.bloomberg.com/quote/992:HK