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July 1
2011
2007
2008
2009
2010
4,156,759 4,481,346 4,094,161 3,209,201 3,706,901 2,096,279 2,234,365 2,156,153 1,781,808 1,923,813 2,060,480 2,246,981 1,938,008 1,427,393 1,783,088 49.6% 50.1% 47.3% 44.5% 48.1%
Operating expenses Operating profit % of sales Other income (deductions) Income before income taxes % of sales Net income attributable to Canon Inc. % of sales
1,353,447 1,490,308 1,441,934 1,210,338 1,395,536 707,033 756,673 496,074 217,055 387,552 17.0% 12,110 16.9% 12.1% 6.8% 2,300 10.5% 5,311
11,715 (14,927)
719,143 768,388 481,147 219,355 392,863 17.3% 17.1% 11.8% 6.8% 10.6%
455,325 488,332 309,148 131,647 246,603 11.0% 10.9% 7.6% 4.1% 6.7%
Specifically, the organization set the specific goal of obtaining 30 percent of the world market in earlier stage. But the current state of achieving this objective suggests that even though Canon has not been able to maintain a 30 percent market share in the industry, it has overcome competitor Xerox to become second only to Hewlett Packard. Canon recognized that the formula for success being used by Xerox was not the same formula which it wanted to pursue in the development of its organization. The process of developing particular core competencies for operations, Canon was able to maximize its internal capabilities and uses proper resources to benchmark and become a market leader. The unique concept acquired by HP made canon to double check with their internal capabilities because their operations, sales & profits are drastically moving downwards.
After considering various important external factors Canon faces, it can be determined as Canon is not at too much of a risk in related to external factors. However, some of Canons external factors like dependency of suppliers, logistics, Hewlett Packard & etc are subject to sudden change, which may cause damage to Canons operations if Canon is unprepared. Most of these direct damages done will likely be temporary. In case of Canons logistics systems malfunction and argument occurs, operations are likely to return to normal in a short time, considering time and money invested into them. However, long term damage may be done if malfunctions and disturbances become recurrent in result Canons brand image will be damaged, potentially losing a customer base. Logistics is incredibly important because it is the mean for Canon to distribute its products for sale to other countries. But because Canon has such a large customer base, with customers from all over the globe, problems with logistics from Canons headquarters to one specific country might not necessarily cause significant harm to Canon; since Canon has operations with many other countries. Canons dependency on a variety of countries does not
only reduce risks in logistics, but with many other factors as well. Problems with local lawsuits, policies may only harm one of Canons operating locations. In many cases, Canons operations in other countries can operate as usual. This significantly reduces the risks Canon will run into in its business operations. Additionally, the current economic state is fairly stable, and Canon is not yet prone to immediate damage due to an occurring economic downturn.
Canon Ratio's Ratio Current Ratio Quick Ratio Average collection period Inventory turnover Total Asset turnover Debt Ratio Debt Equity Ratio Gross Profit margin Net Profit Margin Return on Assets Return on Equity EPS P/E ratio price/cash flow market/book Book value 2008 1.57 1.18 51.27 8.07 1.03 0.33 0.49 0.55 0.07 0.077 0.11 2.75 10.98 5.21 12.76 2.37 2009 1.74 2.09 63.30 8.59 0.83 0.30 0.43 0.54 0.04 0.03 0.10 1.15 40.64 11.9 19.90 2.34 2010 1.59 1.94 54.89 9.63 0.93 0.33 0.50 0.55 0.06 0.06 0.09 2.48 17.85 8.41 16.64 2.66
The analysis starts with Canons current ratio that includes current assets i.e. cash, marketable securities, accounts receivable and inventories in the numerator and current liabilities consist of account payable, short-term notes payable, long term debt, accrued taxes and other accrued
expenses in the denominator. The standard current ratio rate is 2:1. The Canons ratio is 1.57, 1.74 and 1.59, which is not up to the mark because current liabilities are rising faster than current asset and its liquidity position is relatively weak and in result they should raise their current assets. Liquidity ratio shows the relationship of a firms cash and other current assets to its current liabilities. The Canons liquidity ratio i.e. quick ratio is 1.18, 2.09 & 1.94 which is above the standard rate i.e. 1:1. It states that the companys liquid asset is trading well in active market and hence can be converted into cash at the going market place. Average collection period is used to appraise account receivable and it is calculated by dividing accounts receivable by average daily sales to find out the number of days sales that are tied up in receivables. The Canons average collection period is 51.27, 63.30 & 54.89 i.e. that the customers, on the average, are not paying their bills on time. The time period taken by the customers is not bearable by the company because they have clear their debts too. Inventory turnover ratio is defined as sales divided by inventories. The Canons inventory turnover ratio is 8.07, 8.59 & 9.63; this states improper flow of inventory because the company might actually holding obsolete goods which are not worth towards their stated value.\ Total asset turnover ratio measures the turnover of the entire firms asset; it is calculated by dividing sales by total assets. The Canons total asset turnover ratio is 1.03, 0.83 & 0.93. in the year 2008, canon is doing really well because it is generating a sufficient volume of business over its total assets investment and rest of the years its doing not great but bearable because the ratio is covered by increasing. Debt ratio is money raised by the company from outsiders for financing its activities like purchase of fixed assets, acquisitions & etc. Debt ratio shows the amount of debt in comparison to the total assets of the company & it measures the percentage of funds provided by creditors. The Canons debt ratio is 0.33, 0.30 & 0.33 which is good for the company because it is below its standard i.e. < 0.50.
Debt Equity ratio is the ratio of borrowed capital to the equity capital. The Canons debt equity ratio is 0.49, 0.43 & 0.50 which shows that the company is almost equally financed by debt & equity, as debt equity ratio is nearing to average of 0.5. Gross profit margin is a profit from operating activities. It is arrived at by deducting the direct expenses from revenue. The Canons gross profit margin is 0.55, 0.54 & 0.55 which tells that the company earning more than 50% of gross profit from its sales. Net profit margin is profit after providing for all the expenses like selling and administration, depreciation, taxes & etc. it is a distributable profit of the company. The Canons net profit margin is 0.07, 0.04 & 0.06 which shows a good profit margin among the industry. Return on assets is the ratio of net income to total assets measures the return on total assets after interest & taxes. The Canons return on assets ratio is 0.077, 0.03 & 0.06 which is lower than its standard i.e. 0.078. These low returns arise from companys low basic earning or high interest costs resulting from its above-average use of debt. Return on equity is the ratio of net income to common equity; measures the rate of return on common stockholders investment. The Canons return on equity is 0.11, 0.10 & 0.9 which is less than the industry standard i.e. 15.11, but it is far better than return on asset. It is somewhat better result is due to the companys greater use of debt.
0.2500
0.2000
0.1500
ROE ROA
0.1000
Series1
0.0500
0.0000 1 2 3
The comparison starts with asset turnover ratio between the companies, canon is really doing well with its total asset compared to Xerox and HP i.e. 0.93 with 0.7 and 0.01 because utilization of asset is good compared to Xerox and HP. As you can see Canon Inc is tackling well with debt and it is up to the mark with their industrial average compared to Xerox and HP, this ratio willhelp them in benchmarking by properly utilizing their resources. As you look upon their operating profits, canon is doing well compared with Xerox & HP because Canon is generating higher profits from its operating activities than Xerox & HP. According to the net profits, HP is generating higher profit after tax than Canon & Xerox because they have control over their expenses. HPs return on asset is acceptable according to its standards than Canon and Xerox because they have low returns on asset which is not even acceptable on the basis of industrial standard. Return on Equity may be the most important, or the bottom line, because it directly reflects the return of the investment. In our case HPs return on equity is the highest return on equity in the industry than Xerox & Canon. As you focus on earning per share, the Canon is has higher earnings per share than its competitor i.e. Xerox & HP. P/E ratio shows the willingness of the investors to pay based on the reported profits generated. In this case, Xerox has highest price earnings ratio compared to Canon & HP i.e. 22.79 compared to 17.85 & 14.36. Looking upon the overall analysis with major and minor competitor i.e. HP & Xerox, Canon has benchmarked with his competitors and earned a huge market share in the electronic industry. This gave them an opportunity to generate huge and have a change to diversify their product line.
RF= 8.27 t-bond Rm= closing stock price - opening price for the particular year/ opening price of that year * 100 Beta = 1.11 growth rate=ROE (1- dividend payout ratio) 2008 11.62(10.4439)=6.46 2010 9.32(1-0.4439)=5.18
CAPM= Risk free rate + beta ( market return - risk free rate) 2008 2009 8.27+1.11( (25.33) - 8.27) 8.27+1.11(34.72-8.27) 8.27+1.11 (-33.6) 37.62 8.27+(-36.96) 28.29
2) DCF 2008 Short term long term total debt Average Rd= interest expenses/average debt Rd=
61,000
2009
52,301
2010
88,773
93,000
52,763
50,933
154,000 132,923
105,064
139,706
0.27
27%
Effective Tax Rate 2008 Income before Tax Tax Expenses Rate Average tax rate
5,293,000
2009
2,356,248
2010
4,843,881
1,769,000
903,614
1,728,130
33.42 35.82
38.35
35.68
Rc=
32761393
Wd We WACC=
3) free cash flow operating working capital net PP&E total operating capital New Investment in working capital NOPAT 2010= Free Cash Flow=
2009 21674407
13,639,669
2010 26267542
14,819,900
37645000
35314076
4) value of operation Vop= FCF 2010 (1+g)/WACC-g 31467.5(1+5.18)/14.41-5.18 194469.15/9.23 21069.24 5) valuation of share value of the operation Less: value of debt value of equity divide by number of shares price per share
32,761,393
139,706
32,621,687
667035 48.91
Conclusion
Company Canon Inc Value of operation 32761393 Calculated price 48.91 Market price 47.59
Through the analysis of all the above data, we could roughly reach the conclusion that the stock of Canon Inc is underpriced and little point of difference in the price makes lot of difference in terms of volume of the stock. Recommendation So far as our recommendation goes, there are many factors which may lead to movements in the stock price of the company. So we recommend to stockholders that to hold the stock because the market is growing as per the experts opinion which may rise in the stock price. If people are interested in buying the stock we would recommend them to buy the stock References www.canon.com/investorsrelation www.centralconrol.com/canon(CAJ) www.Forbes.com/canonhighlights/financial www.wikipedia.com/canon(CAJ) *All the competitors data are taken from the external sources and all the calculation are shown in the Excel file.