SEC 10-K Analysis on Sony Corp

The financial statements of any company are fundamental to the success
of the entity both in the long term and the short-term. This is
especially considering that financial statements are aimed at outlining
the true financial position of the entity at a certain date, thereby
allowing the varied stakeholders such as managers, directors,
shareholders, employees, the government and the public at large to make
decisions that would essentially touch on the company. This explains the
different growth rates and trends that different companies in different
industries exhibit in terms of their expansion, sales, inventories and
other aspects. Recent times have seen an increase in the number and
magnitude of companies investing in the electronic industry. As much as
there are numerous companies in this industry, none arguably sticks out
as Sony Corporation. This is the electronic business unit, as well as
the parent company for the Sony Group. Its line of business involves
carrying out the strategic business planning for the group, design,
research and development, planning and marketing for the company’s
electronic products. Some of the products that it offers include LCD
televisions, DVD players, Blu-ray discs, memory based portable devices,
home-use video, compact digital, personal computers and interchangeable
single-les cameras. On the same note, it offers professional solutions
and devices such as system LSIs, CMOS image sensors, B2B business
solutions, System LSIs, as well as other semiconductors ,
audio/data/video recording media, optical disc drivers and optical
pickups among other devices. Testament to its diversity is the fact that
it offers varied financial services including non-life and life
insurance, loans, savings products, and undertakes research, design,
development, production and marketing, as well as distribution and
servicing of electronics. Started in 1946 as Tokyo Tsushin Kogyo
Kabushiki Kaisha, the company changed its name in 1958 to Sony
Corporation. Its headquarters, however, still remain in Tokyo, Japan.
Capitalization Ratio
This is a measurement of the debt component in the capital structure of
a company that is used in supporting the operations and growth of the
company. It is calculated by dividing the long-term debt and the sum of
long-term debt and shareholders’ equity (Bhimani & Bromwich, 2010).
The ratio is considered as one of the most meaningful debt ratios as it
gives a key insight into the use of leverage by the company. While there
exists no right amount of debt, the data presented by the debt ratio
would show the quality of investments that the company has made.
Capital ratio for the Sony Corp (as at 2013) = long-term debt/(Long-term
Debt + Shareholders Equity)
Long-term Debt (in million yens) =938,428
Shareholders’ Equity (In million yens) = 630,923
Capitalization ratio = 938,428/ (938,428+630,923) = 0.59797203= 60%
This may be compared to the previous years’ capitalization ratio:
Long-term debt as at 2012= 762,226
Shareholders’ equity as at 2012= 630,923
Capitalization ratio for Sony Corp. (as at 2012) =
762,226/1393149=0.54712454= 55%
This means that there has been an increase in the capitalization ratio,
which essentially implies that the company has been increasingly
financing its growth and operations through obtaining long-term loans.
Scholars have noted that prudent utilization of leverage or debt would
increase the financial resources that are available to a company for its
expansion and growth (Bhimani & Bromwich, 2010). The measurement assumes
that the management would earn significantly higher amounts on borrowed
funds than the fees and interest that it would be required to pay on
these funds (Bhimani & Bromwich, 2010). However, the higher the leverage
in the company’s financial structure, the more the restrictions that
are placed by its creditors on its freedom to act, not to mention the
possibility of having its profitability hurt by the high cost of debt
(interest). The worst case scenario would involve the inability of the
company to meet its debt and operating liabilities in a timely manner,
as well as surviving the adverse economic conditions. Inability to
finance the debt may see the shareholding structure change with the
creditors increasing their share in the company.
The Debt Ratio
This is a measure that compares the total debt of the company to its
total asset. It gives the analyst a general idea pertaining to the
amount of leverage that the company is using. A low percentage implies
that the company does not depend much on leverage, i.e. funds owed to
and/or borrowed from other people (Bhimani & Bromwich, 2010). In
essence, the lower the percentage, the stronger the equity position of
the company as it would be using less leverage. Conversely, the higher
the debt ratio, the higher is the risk that the company would be seen as
having taken on (Bhimani & Bromwich, 2010). The formula for the
calculation of debt ratio would be total liabilities divided by the
total assets.
Debt ratio for Sony Corp. =
Total assets in million yens (as at 2012) = 13,295,667
Total assets in million yens (as at 2013) = 14,206,292
Total liabilities (As at 2012) = 10,785,546
Total liabilities (as at 2013) = 11,522,117
Debt ratio for Sony Corp (as at 2012) = 10,785,546/13,295,667 = 0.8112=
81%
Debt ratio for Sony Corp (as at 2013) = 11,522,117/14,206,292=0.8110=81%
The debt ratio for Sony corp. is quite high as it means that around 81%
of its operations are financed by debt. However, there has been a slight
reduction in the debt ratio of the company (0.02%) between the year 2012
and 2013. Nevertheless, the large size of Sony corp. would allow it to
push the liability component pertaining to its balance sheet structure
to an extremely high percentage without any serious concerns. On the
same note, this measure cannot be said to be pure per se as it also
takes into account operational liabilities like taxes payable and
accounts payable, which companies use as going concerns so as to finance
their daily operations, in which case they would not amount to debts in
this ratio’s leverage sense.
What is the capacity of Sony Corp. to turn its sales to cash? (OCF/Sales
Ratio)
The operating Cash flow/sales ratio underlines a percentage measure
pertaining to the capacity of the firm to convert its sales to cash.
This is a crucial indicator as to the productivity and creditworthiness
of the company. A high number would imply that the firm has the capacity
to grow as it has enough cash flow that would allow it to finance any
additional production, while a low number would be an indicator of the
opposite.
Expressed as a percentage, the ratio is a comparison of the operating
cash flow of the company to its net revenues or sales, which would
essentially give investors an idea as to the capacity of the company to
convert sales to cash. This indicator would show any positive or
negative variation in the terms of sale, as well as the collection
experience pertaining to the accounts receivable of the company.
OCF/Sales Ratio is calculated by dividing the operating cash flow to the
Net sales/revenue.
OCF/ Sales ratio for Sony Corp.
Net Sales for 2011 (Yen in millions) = 6,304,401
Net Sales for 2012 (Yen in millions) = 5,526,611
Net Sales for 2013 (Yen in millions) = 5,691,216
Operating cash flow for 2011 (yen in Millions) = 616,245
Operating cash flow for 2012 (yen in Millions) = 519,539
Operating cash flow for 2013 (yen in Millions) = 481,512
Sony Corp. OCF/ Sales ratio for 2011 = 616,245/ 6,304,401 = 0.0977 =
9.8%
Sony Corp. OCF Sales ratio for 2012 = 519,539/5,526,611 = 0.09400 = 9.4%
Sony Corp. OCF Sales ratio for 2013 = 481,512/5,691,216= 0.0846 = 8.46%
It is well acknowledged that a higher operating cash flow would be more
preferable. However, there exists no standard guideline as to the
operating cash flow/ sales ratio. This, nevertheless, does not undermine
the act that the capacity of a company to create consistent, as well as
improving percentage comparisons amount to positive investment
qualities. An evaluation of the Operating cash flow/ sales ratio of Sony
corp. over the last three financial years indicates that there has been
a consistent gradual drop in the operating cash flow/ sales ratio from
9.8% through 9.4% to 8.46% for the financial years 2011, 2012 and 2013
respectively. This, in essence, means that there has been a reduction in
the capacity of the company to turn its sales to cash, in which case it
would be imperative that the company reevaluates its revenue collection
structures.
Accounts receivable
Accounts receivable refers to the amounts that a business entity’s
customers owe it and are composed of a likely large number of invoiced
amounts. They make up the primary or main source of incoming cash flow
for a large number of businesses, in which case analysts should have the
capacity to analyze the invoices in aggregate so as to ascertain or
evaluate how healthy the predisposing or underlying cash flows are.
Varied methods may be used in evaluating the accounts receivable, one
of which is the accounts receivable turnover. This refers to the ratio
of a business’ net credit sales to the average accounts receivable in
the course of a given period, which is often a financial year. It
underlines an activity ratio that carries out an estimate of the number
of times that a business collects the average accounts receivable
balance within a certain period. The calculation of accounts receivable
turnover involves the following formula.
Receivables turnover = Net credit sales/average account receivables
Accounts receivable for Sony Corp for 2012 (yen in millions) = 840,924
Accounts receivable for Sony Corp for 2013 (Yen in millions) = 844,117
Net credit sales for Sony Corp. for 2012 (yen in millions) = 5,526,611
Net credit sales for Sony Corp. for 2013 (yen in millions) = 5,691,216
Accounts receivable turnover for Sony corp. in 2013 = 5691216/
{(844,117+840,924)/2)= 5691216/842520.5= 6.7549
The calculation of accounts receivable turnover is usually done on an
annual basis. However, it is preferable (and more meaningful) that the
same is calculated on a quarterly or monthly basis especially for
purpose of generating trends. It is worth noting that accounts
receivable turnover is a measure of the efficiency of a company or
business entity in the collection of its credit sales. It is, generally,
preferable that a company would have a high accounts receivable turnover
value as a low figure would be an indication of the business entity’s
inefficiency in the collection of its outstanding sales (Hansen et al,
2009). An increase in the accounts receivable turnover in time would, in
general, be an indication of the improvement in the business entity’s
process of collecting the cash owed on credit sales. It is worth noting,
however, that business entities in different industries would have
different normal levels of accounts receivable turnover (Hansen et al,
2009). Sony Corp.’s accounts receivable turnover is a bit on the low
side, in which case it may be an indication that it is significantly
inefficient in the collection of its outstanding sales. Nevertheless, as
much as it would be preferable that a company has a high accounts
receivable turnover, high levels of the ration would be unfavorable in
cases where it is achieved through the use of extremely strict terms of
credit as such policies would be likely to repel potential buyers.
Analysis of the Net Income
Net income underlines the amount of money that remains after the
deduction of all the operating expenses, taxes, interest, as well as
preferred stock dividends (not common stock dividends) from the total
revenue of a company (Hansen et al, 2009). The net income of a company
is extremely crucial in the measurement of the profitability of the
company over a certain period, as well as in the calculation of earnings
per share. An analysis of the net income and profitability of a business
entity would entail going beyond the figures presented in the financial
statements of the company (Hansen et al, 2009). The figures would be
used to determine how well the company turns its revenues to profits, or
rather evaluating how effective the business entity is in controlling
its costs. This may, for example, be used in determining the net profit
percentage. In the case of Sony Corp., the net profit percentage would
be calculated as follows.
Net income for Sony Corp. as at 2013 (yen in millions) = 104, 176
Total sales for Sony Corp. as at 2013 (Yen in millions) = 6,800,851
Net profit percentage for Sony Corp. as at 2013 (yen in millions) =
(104,176/6800851) x 100= 1.531%.
This, by all means, is an extremely small figure that necessitates an
examination into the borrowing structures of the company. This is
especially with regard to borrowings. It is evident that the company
increased its borrowings and loans, which would have temporarily lowered
the profitability of the company at least in the short term. However, it
would be imperative that analysts examine how the loans and the debts
were used (Riahi-Belkaoui, 2001). This would not only come in handy in
examining the financial stability of the business entity in the
short-term and the long-term, but would also go a long way in
determining whether the funds so borrowed have been put to proper use in
the finance of assets that would generate some income for the business
entity in the future (Riahi-Belkaoui, 2001). High net profit percentage,
however, may also raise questions as to the investment decisions of the
business entity, especially regarding whether or not the company has
been deficient in making investments, which would signal that the high
profits are artificial. This underlines the fact that there is no
standard appropriate net profit percentage.
References
Riahi-Belkaoui, A. (2001). Advanced management accounting. Westport,
Conn. [u.a.: Quorum Books.
Bhimani, A., & Bromwich, M. (2010). Management accounting: Retrospect
and prospect. Amsterdam: CIMA/Elsevier.
Sony (2013). Sony Consolidated Financial Accounts for the Fiscal Year
Ended March 31 2013.
Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost management:
Accounting and control. Mason, Ohio: South-Western.
SEC 10-K ANALYSIS ON SONY CORP PAGE * MERGEFORMAT 8
SEC 10-K ANALYSIS ON SONY CORP PAGE * MERGEFORMAT 1

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