Download - Final Report Canon
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Finance
Project
on Canon
Inc.
July 1
2011
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Company Introduction & Background
Canon Inc. is a Japanese multinational corporation that specializes in the manufacture of imaging
and optical products, including cameras, camcorders, photocopiers, steppers and computer
printers. Its headquarters are located in ta, Tokyo, Japan. The name Canon began in 1947 after
the company Kwanon changed its name. In 1934 Kwanon began with a prototype for Japans
first-ever 35 mm cameras with a focal plane shutter. It was named 'Kwanon by Goro Yoshida
after the Buddhist bodhisattva Guan Yin, known in Japanese as Kannon.
Canon is a manufacturer of business and consumer imaging products which includes printers,
scanners, binoculars, compact digital cameras, film and digital SLR cameras, lenses and video
camcorders. The Business Solutions division offers print and document solutions for small and
medium businesses, large corporations and governments. These include multi-functional printers,
black and white and color office printers, large format printers, scanners, black and white and
color production printers, as well as software to support these products. Canon products still
includes medical, optical and broadcast products, including ophthalmic and x-ray devices,
broadcast lenses, semiconductors, digital microfilm scanners, and Handy Terminal Solutions.
Overview of Annual Report
The first part of this investigation involves an evaluation of the Canon s report and the keyfactors for success. The first thing is necessary to consider how the company has performed in
recent years. Below table provides an overall review of the organizations performance in recent
years. The data clearly suggests that Canon has made notable progress toward developing market
share, revenues and profitability.
2006 2007 2008 2009 2010
Net sales 4,156,759 4,481,346 4,094,161 3,209,201 3,706,901
Cost of sales 2,096,279 2,234,365 2,156,153 1,781,808 1,923,813
Gross profit 2,060,480 2,246,981 1,938,008 1,427,393 1,783,088
% of sales 49.6% 50.1% 47.3% 44.5% 48.1%
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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.
Operating expenses 1,353,447 1,490,308 1,441,934 1,210,338 1,395,536
Operating profit 707,033 756,673 496,074 217,055 387,552
% of sales 17.0% 16.9% 12.1% 6.8% 10.5%
Other income (deductions) 12,110 11,715 (14,927) 2,300 5,311
Income before income taxes 719,143 768,388 481,147 219,355 392,863
% of sales 17.3% 17.1% 11.8% 6.8% 10.6%
Net income attributable to Canon Inc. 455,325 488,332 309,148 131,647 246,603
% of sales 11.0% 10.9% 7.6% 4.1% 6.7%
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The Business Environment
The analysis states most significant factor that directly effects on their business. These factors
are categories into four factors which are mentioned below:
Economic Political Socio-culture technological
-foreign exchange
currency rates
-economic downturns
-Hewlett-Packards
influence
-competitive
environment
-economic downturn
effect on products
-outside influence on
employees creating
disputes regarding
payments
-logistics efficiencys
impact
-environmental laws
and regulations
adapting to other
countries policies
documentation
-public image of
reputation
-the growing photo
sharing market
-growing popularity
of HD usage
-increase in number of
counterfeit Canon
products
-limit in number of
chosen suppliers
-growing demand of
HD ready cameras
-rear and front facing
cameras
-competition among
similar businesses
After considering various important external factors Canon faces, it can be determined as Canonis not at too much of a risk in related to external factors. However, some o f 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
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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.
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Analysis of operating Results & Financial position
Financial Ratio: It designed to reveal the strength and weaknesses of a company as with other
companies in the same industry, and to show whether financial position has been improving or
deteriorating over time. The analysis talks about how Canon Inc performing every year and how
does it benchmark with its major competitor Xerox Inc.
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
Canon Ratio's
Ratio 2008 2009 2010
Current Ratio 1.57 1.74 1.59
Quick Ratio 1.18 2.09 1.94
Average collection period 51.27 63.30 54.89
Inventory turnover 8.07 8.59 9.63
Total Asset turnover 1.03 0.83 0.93
Debt Ratio 0.33 0.30 0.33
Debt Equity Ratio 0.49 0.43 0.50
Gross Profit margin 0.55 0.54 0.55
Net Profit Margin 0.07 0.04 0.06
Return on Assets 0.077 0.03 0.06
Return on Equity 0.11 0.10 0.09
EPS 2.75 1.15 2.48
P/E ratio 10.98 40.64 17.85
price/cash flow 5.21 11.9 8.41
market/book 12.76 19.90 16.64
Book value 2.37 2.34 2.66
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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.
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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.
0.0000
0.0500
0.1000
0.1500
0.2000
0.2500
1 2 3
ROE
ROA
Series1
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Comparison to Industry Benchmarks
Comparison is done for benchmarking with a group of companies to see whether the company is
using its resource effectively and generating high profit than its competitor.
Companies
/ 2010
Asset
turnover
D/E
Ratio
G/P
Margin
N/P
Margin
ROA ROE EPS P/E
Ratio
Canon Inc 0.93 0.50 0.55 0.06 0.06 0.09 2.48 17.85
Xerox Inc 0.7 0.58 0.36 0.02 0.19 .048 0.43 22.79
HP Inc 0.01 0.53 0.093 0.069 0.07 0.21 1.14 14.36
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 Xeroxbecause 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.
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Valuation of the company
Capital Asset Pricing Model
1) CAPM
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(1-
0.4439)=6.46
RM calculation
2010 9.32(1-0.4439)=5.18
2008 -25.33
2009 34.72
2010 18.24
CAPM= Risk free rate + beta ( market return - risk free rate)
2008 2009 2010
8.27+1.11( (25.33) - 8.27) 8.27+1.11(34.72-8.27) 8.27+1.11(18.24-8.27)
8.27+1.11 (-33.6) 37.62 19.33
8.27+(-36.96)
28.29 overall
8.27+1.11(9.21-
8.27)
9.31
therefore, the fundamental value = D0 (1+g)/rs-g
110(1+5.18)/19.33-5.18
679.8/14.1548.04
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2) DCF
2008 2009 2010
Short term 61,000 52,301 88,773
long term 93,000 52,763 50,933
total debt 154,000 105,064 139,706
Average 132,923
Rd= interest expenses/average debt
Rd= 0.27 27%
Effective Tax Rate
2008 2009 2010
Income before Tax 5,293,000 2,356,248 4,843,881
Tax Expenses 1,769,000 903,614 1,728,130
Rate 33.42 38.35 35.68
Average tax rate 35.82
Cost of common stock
D 2010 dividends payout/outstanding shares1.21
Rc= D2010 (1+g)/Price 2010
1.21(1+5.18)/51.34
7.477/51.34
14.56
Total debt= 139706
common Stock= 32,621,687
32761393
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Wd 0.004
We 0.995735651
WACC= wdrd(1-t)+wcrc
.004*0.27(1-35.82)+.99*14.56 =0.001(0.6418)+14.41
= 14.41
3) free cash flow 2008 2009 2010
operating working capital 22715000 21674407 26267542
net PP&E 14,930,000 13,639,669 14,819,900
total operating capital 37645000 35314076 41087442
New Investment in working capital 3132531
NOPAT 2010= 3163999
Free Cash Flow= 31467.5
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 32,761,393
Less: value of debt 139,706
value of equity 32,621,687
divide by number of shares 667035
price per share 48.91
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Conclusion
Company Value of operation Calculated price Market priceCanon Inc 32761393 48.91 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.
http://www.canon.com/investorsrelationhttp://www.canon.com/investorsrelationhttp://www.centralconrol.com/canon(CAJ)http://www.centralconrol.com/canon(CAJ)http://www.forbes.com/canonhighlights/financialhttp://www.forbes.com/canonhighlights/financialhttp://www.wikipedia.com/canon(CAJ)http://www.wikipedia.com/canon(CAJ)http://www.wikipedia.com/canon(CAJ)http://www.forbes.com/canonhighlights/financialhttp://www.centralconrol.com/canon(CAJ)http://www.canon.com/investorsrelation