Horizontal and Vertical Analysis
Analysis of the financial information
The main goals of analyzing the financial information of Huawei is to access all the entities related to finance to determine its profitability, performance and the growth of the company. The entities related to finance are financial statements such as the balance sheets, cash flow statements, changes in statements of equity, and statement of income. The methods that we will use to analyze the financial information of Huawei are the fundamental and DuPont, vertical and horizontal analysis and using the financial ratios. We will assess whether The Huawei Company is solvent, liquid, profitable or stable. After the analysis, from the data, we will determine Huawei’s financial health, growth, and profitability.
Horizontal and vertical analysis: The horizontal analysis gives a comparison of the financial situation of a company over a given period of time. The vertical analysis, on the other hand, gives the percentage of one commodity in comparison to another. We did a comparison between 2015 and 1016 balance sheets and statements of cash flows.
Huawei’s balance sheet as at 31st December 2016
Fixed assets 88132 Equity attributable 14094
Current assets 355502 No interest 39
Total assets 443634 Total equity value 140,133
Long term liabilities 64,230
Current liabilities 239,279
Total liabilities 303501
443634443634
Huawei’s balance sheet as at 31stDecember 2015
Fixed assets 70509 Equity attributable 119021
Current assets 301646 No interest 48
Total assets 372155 Total equity value 119069
Long term liabilities 40459
Current liabilities 212627
Total liabilities 253086
372155372155
Statements of cash flows in 2016
Revenue from sales 559,918
Cost of supplies 547,331
Other cash flows 40,631
Net cash 49,218
Cash used to invest 28,524
Net cash for finance 10,851
Net increase 9,843
Amount at the year 110,561
Beginning
Foreign exchange rates 2,643
Amount at the end of the year 123,047
Statements of cash flows in 2015
Revenue from sales 424,413
Cost of supplies 408,497
Other cash flows 36,384
Net cash 52,300
Cash used to invest 741
Net cash for finance 19,763
Net increase 31,796
Amount at the year 78,048
Beginning
Foreign exchange rates 717
Amount at the end of the year 110,561
Financial ratio analysis: The 4 main classes of the ratios are the liquidity, profitability, activity and the leverage ratios.
Liquidity: This ratio is used to test how fast a company can transform their assets into money if they are either bankrupt or in a bad financial situation. The value of the current assets in US million dollars in reference to the 2016 financial statements given by Huawei is 355,502, while the value of the current liabilities is 239,271. Since the current ratio is given by:
C.R= C.A/C.L where C.R is the current ratio, C.A is the current assets and C.L is the current liabilities, then
Current assets=355,502/239,271 =1.48577
Huawei is able to remain in operation since its liquidity ratio is high.
Profitability: This ratio shows how much gain or loss the company is making. The company’s profit has been increasing for the past 5 years. The table below has a record of Huawei’s net profit in a million US dollars against their respective years.
|
Year |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Net profit |
21,003 |
27,866 |
36,910 |
37,052 |
47,455 |
Huawei’s Balance Sheet at 31st December 2016
Leverage: This ratio shows the extent of the reliability of a company in using their liabilities to fund and run their operations. The liability to equity ratio of Huawei in 2016 is calculated as:
Ratio of leverage=total liabilities/total equity
=301,501/140,133 =2.18008
So the company relies so much on their debts to fund their day to day operations.
Activity: The common form of this ratios are the receivable and the payable account turnover. Huawei pays off their workers’ employees and suppliers on time. The cash flows statement of Huawei in 2016 showed that Huawei received 555,918 million US dollars from sales of their products and services and paid 547,331 million US dollars to their employees and suppliers. They are receiving more so the company’s continuity is still guaranteed.
DuPont Analysis: This analysis is meant to measure a company’s income with respect to the amount of investment. A good model to calculate this is the dividend discount, which will use the stock’s worth to pay for future dividends. Huawei’s stock is worth more than 500,000 million US dollars which is worth sustaining the company’s dividends and keeping a reasonable profit.
Using the above analysis, we will determine Huawei’s financial health, its growth, and profitability.
Financial health:The financial health of Huawei will be determined by its liability ratio and cash inflows. The Huawei’s liability ratio has been relatively high over the past few years. This is but since its revenue has also been growing fast, Huawei is still financially strong. The investment and the loans comparison show the Huawei’s ability to generate income and their risk of debt. The table below shows the values of short-term investments in a million US dollars against the number of loans borrowed with their respective years
|
Year |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Short-term investments |
65342 |
78654 |
81944 |
106036 |
125208 |
145653 |
199943 |
|
Amount of loans |
20539 |
24578 |
35127 |
31009 |
29898 |
32008 |
33456 |
The value of investments rises gradually but the value of loans borrowed steadily remains below 40,000, thus Huawei have more cash inflows and they are in a better position to pay off their debts. This shows that Huawei’s income is high and hence they are not at a risk of bad debts.
Financial growth: Factors that indicate that a company is growing financially are its revenue, net and operating profit, equity, and cash inflow (GONG.Z, 2017).
Below is a table showing the net and the operating profit, and the cash inflow between 2011 and 2017.
|
Year |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Operating profit |
18796 |
23564 |
29128 |
34305 |
45786 |
47515 |
56384 |
|
Net profit |
13456 |
17897 |
21003 |
27866 |
36910 |
37052 |
47455 |
|
Cash inflow |
18900 |
25789 |
32455 |
41755 |
52300 |
49218 |
96336 |
The Huawei Company have economically managed their company and have increased their profit margin. Besides that, they have different revenue from several sources and so the company has grown so much financially.
Profitability:The operating and net profit of Huawei is relatively lower than that of their competitors. However, they have lowered their selling price to win more customers, though they are still making a reasonable profit. Huawei’s return on equity is growing yearly
|
Year |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Operating profit (%) |
9.679 |
10.783 |
12.673 |
15.876 |
14.764 |
13.875 |
15.009 |
|
Net Profit (%) |
5.980 |
5.765 |
7.897 |
12.897 |
11.786 |
10.7867 |
12.098 |
The company’s net profit is good so the company is still growing financially. Below is a financial report of the Huawei net profit in 2016.
Huawei’s 2016 net profit
Revenue 521,574
Huawei’s Balance Sheet at 31st December 2015
Net income 219
Total gross earning 521,355
Net finance expenses 3,737
Total Tax 7,006
Net personal expenses 121,872
Total expenses 132,615
Net profit 388,740
The microeconomic performance
The microeconomics performance of a company is generally the individuals and the firm itself concerning the decisions usage of the scarce resources to maximize profit. It analyzes the situation of the market and hence determines whether there are high or low demands (Li et al, 2011). The Huawei’s microeconomics performance is based on the performance of their customers, workers, competitors, suppliers and the shareholders. All these personnel work hand in hand and contribute greatly to the cost of producing goods and services, actual production of goods and services, determining the demand and the supply of the Huawei’s products, and the dynamics of labour which helps understand the cost of labour. All these factors help in determining the sales of the Huawei’s products and in overall play a big role in determining the profitability of the company.
In reference to the financial statements of Huawei by the end of 2016, the cost of paying their suppliers and employees amounted to 547,331 CNY million. They received a total amount of 555,918 CNY million from their sales. Their net income inflow was 40,631 CNY million. The demand for their products was quite high compared to that of the previous year since the year’s sales had amounted to 424,413 CNY million. The cost of paying their suppliers and employees was 408,497 CYN million, and hence their net income was 36,384 CYN million. The company’s demand for their products increased gradually within one year and so did their profits.
To analyze the microeconomic performance of Huawei, several factors are put into consideration (MEI.L, 2012). Such factors are the cost of labour, production, and cost of sales, and factors that control the demand and supply of goods and services. TheApple and Samsung companies are the Huawei’s greatest competitors. They have a higher profit margin than the Huawei Company. They have a better advantage of labour so the cost of their labour its lower. They make more sales per year than Huawei. Samsung is the greatest mobile producer followed by Apple. Huawei is struggling hard to keep their clients and maintain a good profit margin. Apple made a revenue of $229 billion, Samsung made a revenue of $312.892 billion while Huawei made a revenue of $92.549 billion. Huawei is still a way behind its competitors and they are struggling hard to keep up with their pace. Huawei’s profit margin is increasing gradually every year and so they will be way ahead of their competitors
Being a global company, Huawei has a greater advantage when they need loans and leases to fund their operations. One of the global finance companies that funds the Huawei Company is the PO which helps the Huawei’s partners to access Huawei’s products and services in a cost-effective way. Besides, because of their large economies of scale, financial institutions are always more than willing to lend them money. As a result, the company can still invest more on its production and produce more of their services effectively.
Statements of Cash Flows in 2016
Conclusion:
In view of the financial situation of the Huawei Company, it is clear that this global company will grow more and produce one of the world’s best telecommunication devices. From the company’s annual reports, it is clear that the company is a profit making company and in the due time, it will be among the largest firms operating globally. We are looking forward to seeing them come up with their own operating system.
We are doing the financial analysis for the Huawei Company to access its financial position. We will use the existing data and financial statements to give a final result. Huawei is one of the largest company worldwide dealing with networking and telecommunications in China. Ren Zhengfei is a former engineer, founded the Huawei Company back in 1987 and its headquarters are in Shenzhen and Guangdong in China (Man et al, 2016). The report will entail the Huawei’s financial information, the assessment of Huawei’s microeconomic performance through publicly available data, an analysis of Huawei’s microeconomic performance, and its practical aspects of financing global companies.
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