Term Paper, 2007
14 Pages, Grade: A+
This paper will analyze and assess the internal environment of Matsushita Electronic Industrial Co., Ltd.(Matsushita). Through the interpretation and discussion of the company's financials and financial ratios as well as the description of its core competencies, firm resources and opportunities for improvement the paper will reach an assessment of the company's current competitive standing and conclude with some suggestions of how to improve the company's position in its industry.
Matsushita founded in 1918 is a Japanese company headquartered in Osaka, Japan and the world’s largest producer of consumer electronics. Furthermore the company is engaged in the production and sale of electronic and electric products for business and industrial uses. A wide range of its products a marketed under the main brand name Panasonic and other brand names such as Technics, National, Quasar, Victor, JVC and PanaHome[i] [ii] [iii].
Before discussing and interpreting Matsushita’s financial results and ratios along with its weaknesses and strengths in the context of its own recent financial performance history and its industry rivals, it is provided some information about Matsushita’s stock price and earnings per share (EPS).
Matsushita’s share price increased from the lowest of 1,408 JPY in 2002 to the highest of 2,640 JPY in 2006. This represents a compounded growth rate, i.e. a average growth rate from 2002 examined through 2006 of 17.02% p.a. Even though the stock price went to a overall low of 875 JPY in 2004 during this period, one of the reasons behind this increase might have been the growth of EPS. These increased from a loss of 206.09 JPY per share in 2002 to earnings of 69.48 JPY in 2006. Alone the compounded growth rate went from 2004 to 2006 by approximately 95.66%.
In the Appendix are provided besides some of the financials the required ratios for Matsushita and the corresponding Audio and Video Equipment Manufacturing Industry with the Standard Industrial Classification (SIC) 3651. Besides the market value ratio of price/earnings (P/E) ratio the other key business ratios can be categorized into the three major groups of profitability, debt management, and liquidity. “Profitability ratios [such as return on equity (ROE), return on assets (ROA), return on sales (ROS), and gross profit margin] show how successfully a business is earning a return to its owners.”[iv] “Debt management ratios [on the other hand such as debt to equity (D/E) and times interest earned (TIE)] help to analyze the degree and the effect of a company’s use of … [debt] to finance its operations.”[v] Liquidity ratios such as current ratio and acid (quick) ratio finally help to measure and evaluate a corporation’s “ability to meet short and long-term obligations.” 4
To point out Matsushita’s financial weaknesses and strengths, to compare these to its own performance over the last five years and its benchmark industry as well as to a major competitor in the following it will be therefore concentrated on ROE, acid ratio, D/E, and finally TIE.
The ROE can be used to analyze and evaluate the ability of the company’s management to achieve an appropriate return on the owners’ investment. Overall this ratio should better increase over the time in order to keep the investors satisfied and to show that the management can realize certain returns. Matsushita’s ROE increased from -13.2% in 2002 to 4.1% in 2006. In 2004 Matsushita outperformed the Audio and Video Equipment Manufacturing Industry having a ROE of 1.2% vs. only 0.4% the industry. Even in comparison with a major competitor such as Sony Matsushita was able to perform better in 2006, given Matsushita’s ROE of 4.1% vs. Sony’s of 3.77%. The reason for this growth of Matsushita’s ROE over the past five years from 2002 – 2006 was mainly the increase of net income from -427,779,000K JPY to 154,410,000K JPY. Matsushita was therefore able to convert a big loss in 2002 into a adequate profit in 2006. Hence, the ROE underlines Matsushita’s financial strengths especially under the consideration of the out performance of the industry and the beating of a major competitor.
The acid ratio measures a company’s ability to use its quick assets, which are current assets minus inventories, to cover its liabilities due in the next year. If the ratio is less than “1” for a longer period of time it indicates that the company is in trouble and suffers financial difficulties. Hence, a company’s financial strengths can be indicated besides others by a minimum acid ratio of “1” for a longer period of time. The latter applies to the case of Matsushita, which has a constant acid ratio of 1.2 from 2002 – 2006, except for 2005 where it was 1.1. In 2004 however the acid ratio was below the industry acid ratio, which was 1.4, indicating that the liquidity of the overall industry to meet the current liabilities was greater than Matsushita’s. Nevertheless, by 2006 the industry ratio to cover the current liabilities with quick assets was with 0.9 much lower than Matsushita’s with 1.2. Another fact underlying Matsushita’s strength in liquidity compared to its competitors is that even Sony had only a acid ratio of 0.93 in 2006. Overall it can be observed that Matsushita’s constant acid ratio greater than “1” over the last five years indicates a financial strength in being able to cover its short-term liabilities due in every following year. Furthermore it indicates that Matsushita was capable to maintain a constant relation between its quick assets and its liabilities, i.e. Matsushita knew how to manage its liquidity to cover its liabilities.
The D/E ratio indicates “the portion of the funds obtained by the companies that came from debt vs. stockholders investments.”5 It also can be interpreted as the extent to which the company is “leveraged financially. High ratios indicate high fixed interest payments. In this case Matsushita’s D/E ratio decreased from 1.2 in 2002 to 1.0 in 2006. The major reason behind this trend is the reduction of total debt from 4,048,275,000K JPY in 2002 to 3,675,428,000K JPY in 2006 and furthermore the increase of owner equity from 3,247,860,000K JPY in 2002 to 3,787,621,000K JPY in 2006. Not only this fact indicates a financial strength of Matsushita in reducing the debt but also the observation that the industry in 2004 had a D/E of 1.2 and Matsushita a D/E ratio of 1.1. Moreover in 2006 the industry D/E ratio was with 2.0 much greater than Matsushita’s with 1.0. Only the major competitor Sony had with 0.39 a lower D/E ratio. Given Matsushita’s relatively low D/E ratio it indicates that Matsushita doesn’t have to pay high fixed interest payments. An advantage of debt is however that it reduces the tax payment obligations. But since debt redemptions and interest payments represent legal obligations a reduction of debt stands for a decreasing risk of bankruptcy. Therefore an advantage for increasing equity is that it reduces the probability of bankruptcy and furthermore can serve to buy other companies.
The TIE ratio can be interpreted as the ease with which the company is able to meet its financial obligations such as annual bonds and other interest payments. A high TIE ratio means that more earnings are available to meet the legal financial obligations and that the firm is less vulnerable to increases in interest rates. An increase in TIE should therefore equal to a decline in the risk of bankruptcy. In the case of Matsushita the TIE ratio went from -10.9 in 2002 to 18.1 in 2006. This phenomenon is driven by the fact and Matsushita’s financial strength of reducing its interest expenses from 45,088,000K JPY in 2002 to 21,686,000K in 2006 and moreover it was capable to increase its operating income (EBIT) from a loss of -492,691,000K JPY in 2002 to a gain of 392,998,000K JPY in 2006. Compared to the industry Matsushita’s TIE ratio was already by 2004 with 7.2 much higher than the industry ratio of 3.1. In 2006 Matsushita’s TIE ratio was with 18.1 compared to 3.7 the industry even much higher than in 2004. This indicates that the overall Audio and Video Manufacturing Industry decreased its operating income and/or increased its interest payments, whereas Matsushita was capable increase its EBIT and decrease its legal financial obligations. Even compared to Sony Matsushita did a much better job than its competitor. Sony had a TIE ratio of “only” 5.3 in 2006 and Matsushita as opposed a ratio of 18.1.
[ii] Value Line Investment Survey – Company Profile, 2007;
[iii] Matsushita Electric Industrial Co., Ltd., Company Profile, Datamonitor, Reference Code: 1053, June 2006;
[iv] Industry & Financial Consulting Services, Industry Norms & Key Business Ratios, Desk-Top Edition 2004 – 2005, Dun & Bradstreet, Inc., 2005;
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