Final Report Canon

8/3/2019 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

Documents

Final Report Canon