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Custom Financial Analysis of Xerox Corporation and Ricoh Company Ltd. essay paper sample

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Xerox Corporation was established in the year 1906 with its present headquarters in Connecticut. Over the years the company has developed technologies in printing equipment and has gained a position of market leader in the US. With innovative solutions the company has been able to offer its customer products which have become industry standards and the company’s name XEROX has become common term as a replacement for the word photocopy. The company has product lines relevant to different business segments namely Office, Developing Markets Operations (DMO) and others such as equipment lease facilities. The products include LCD Monitors, photo copiers, Xerox phaser printers, multifunction printers, large digital printers and workflow software under the brand strategy of FreeFlow. The company has implemented a new corporate strategy which has allowed the company to remain as a market leader in color printing and has invested heavily in technology and distribution network to ensure that the company retains its position in small and medium offices market through its acquisition of Global Imaging Systems, Inc. (GIS). The company is further striving to become office equipment supplier for large corporations (Xerox, 2007).

Social and Ethical Responsibility

The company in its Annual Report 2007 highlighted its strategy to meet environmental and social obligations as “At Xerox, sustainability is our way of doing business. We strive to maintain the highest standards to preserve our environment and protect and enhance the health and safety of our employees and communities”. The company has clear guidelines for environment health and safety governance which are available on the company’s website (www.xerox.com). The company’s policies are in line to ensure that its business practices involving design, manufacture, procurement, marketing, distribution, maintenance, reuse/recycling, and disposal of products and related services are in fact helping the environment and not damaging it. Xerox Corporation positions itself in the market as a manufacturer and supplier of eco-friendly printing solutions. The company spent US$148million in 2007 compared to US$161million in 2006 on sustain reengineering to meet the environmental compliance. Every year tons of paper are used for printing and are destroyed which has damaging effects on the environment. The company is developing new solutions for cartridge free printing and has implemented various other programs which involves collection of used equipment after end-of-use period, waste-free packaging program to allow customers to return their packing material and also importantly a technological innovation which would create an erasable form of paper for copiers which would cut down sharply the use of papers and its harmful effects on the environment (Xerox, 2005).

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Financial Overview

Xerox Corporation has posted yet again strong financials in the year 2007 as per Appendix I. This is mainly due to the technological innovation which company has been successful offered to its customers through both products and software allowing companies to improve their operations and cut down costs. The company net sales have increased by 9.75% from the year 2006 to US$8192mn compared to US$7464mn in 2006 and US$7,400mn in 2005. The cost of sales has been increasing by nearly the same rate i.e. 9.39% from US$4,803mn to US$5,254mn which is in line with the increased sales. The selling, general and administrative expenses have surged by 7.58% to US$4,312mn after showing a decline in 2006 of -2.48% as compared to 2005. The company has posted a huge growth of 77.97% in its income from continuing operations currently at US$1,438mn compared to only US$808mn and US$830mn in the years 2006 and 2005 respectively. The provision for income tax indicates US$-5mn and US$-288mn in 2005 and 2006 respectively which had been due to the income tax readjustments for earlier years’ payment. However, in 2007 the provision for income tax has been US400mn which indicates a rise of 238.89% compared to last year. Income from discontinuing operations only indicates US$53mn in the year 2005 which was due to selling of some non-profitable asset. The company has however showed a decline in the net income this is mainly due to the provision for income tax which has been credit to last years’ income and in 2007 debit entry has been made to this provision.

On the balance sheet side of the analysis the company’s total assets have increased by 12.20% from US$7,915mn in 2006 to US$8,881mn in 2007. The company has continued a growth in total assets which could be seen from the analysis as it continues on its expansions plans and improvement of the existing technology to provide the best innovative solutions for office equipments in particular and also other products that it deals in. The company’s working capital that is current assets less current liabilities has increased by 10.03% in 2007 showing a decline in 2006 of -7.61%. The working capital in 2007 stands at US$4,463 compared to US4,056mn and US$4,390mn in 2006 and 2005 respectively. However, the company total indebtedness has also risen by 31.20% from US$686mn in 2006 to US$900mn in 2007 while it remained at a comparatively low level in 2005 at just US$434mn. The shareholders investment represented by value of shareholders equity in the company has risen by 12.98% from US$3,244mn in 2005 to US$3,665mn in 2006 where as in 2007 it indicates a slow growth of only 6.08% standing at US$4463mn which is still reflecting a positive sign from shareholders point of view (Xerox, 2007: 2006: 2005).          

The financial statement analysis of Xerox Corporation for a period 2005-07 is carried as per Appendix II. The analysis has been segregated into three different areas of analysis – liquidity, solvency and profitability. The liquidity ratios evaluate the company’s capability to pay its liabilities usually short term obligations. The current ratio has remained stable between values of 2.00 in 2005 and 2.10 in 2007. This current ratio above 1 indicates that the company’s current assets exceed its current liabilities and the company shall not have problems for settling its current liabilities if they fall due. A more focused quick ratio suggests a lower value of 1.77 in 2007 (1.62: 2006 & 1.73: 2005) which still remain higher than 1 therefore supporting the outcome of current ratio. This means that the company should not have liquidity problems. The higher current assets value suggests that the company may also have problems with its receivables and high inventory which may result in problems for the company in the future. Receivables turnover ratio calculated confirms this as it is quite low at 3.33 in 2007 (3.66: 2006 & 3.63 in 2005). This is reflected in high value of receivables in the company’s annual report standing at US$2,457mn in 2007 compared to US$2,037mn in 2006. The average collection period hovers around 100 days which seems very high for office equipment and software producing company. Similar results are derived from inventory turnover ratio which is quite low only 4.26 showing improvement from 4.06 in 2006 and 4.01 in 2005 indicating that the company may be holding large quantities of finished goods and work in progress and may have problems selling them. The average age of inventory is almost 85 days which has declined from 89 days in 2006 and 91 days in 2005. This affirms that the company is holding large quantities of inventory and is having problems with transforming into completed sales. The solvency ratios solvency ratios evaluate the company’s ability to generate sufficient funds to pay off its debts. High total debt/total assets indicate that the company has high liabilities US$17,228mn in 2007 suggesting a ratio of 73.18% compared to only 32.91% and 33.15% in 2006 and 2005 respectively.  However, the company is making sufficient net income to pay its interest payments which shows times interest earned ratio at 1.96 in 2007 compared to 2.22 and 1.76 in 2006 and 2005 respectively. The profitability ratio suggests that the pricing strategy implies high profit margin on company’s sales indicating gross profit margin ratio at 40.30% in 2007 (40.60%: 2006 & 41.20%: 2005). The net profit margin of 6.59% in 2007 suggests that the company is incurring higher selling, general and administrative expenses. The asset turnover ratio remains healthy at almost 73% for 2006 and 2007 and return on assets remains at 4.82% in 2007 and 5.57% in 2006 showing slight decrease. The company’s EPS decreased to US$1.21 in 2007 from US$1.25 in 2006. The company paid a cash dividend of US$0.0425 per share only in 2007 i.e. a payout of only 3.51%.

 

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Cash Flow Analysis

The cash flow from operating activities increased by 15.7% to US$1,871mn in 2007 compared to US$1,617mn in 2006 (see Appendix I). Also the cash outflow from investing activities of US$1,612 which has been due to acquisition of Amici LLC (now Xerox Litigation Services) and Advectis, Inc. (now Xerox Mortgage Services). The net cash outflow from financing activities improved because of net cash proceeds on other debt.

Ricoh Company  Ltd. Analysis

Ricoh Company Ltd., a Japanese company established in the year 1936, is one of the world’s leading global manufacturing companies that deals in production and distribution of office automation equipment through its worldwide network of offices. The company has different product lines which are in fact part of its different business lines is a leading global manufacturer of office automation equipment. The products include office equipment such as copiers, multifunctional and other printers, facsimiles and related supplies and services. In addition to these the company also has a range of personal computers, optical disc products, digital cameras and advanced electronic devices. The Ricoh group has its head office incorporated in Japan and includes Ricoh Company Ltd. and 322 subsidiaries and affiliates. Out of these subsidiaries 114 companies are situated in Japan whereas 208 are located in different countries and continents employing all together around overseas, together employing around 81,000 people. The company is striving to expand its global operations by building strong business relationships and providing comprehensive document solutions building upon Digital Generation III that will definitely going to help businesses to streamline their operations and cut their operating costs (Ricoh, 2007).

Social and Ethical Responsibility

Ricoh has maintain strong relationships with the environment in which it operates and have successful implemented various programs and social and ethical policies which have led the company to be ranked 2nd in the ‘10th Environment Management Survey” conducted in December 2006 by the Nippon Keizai (Nikkei) Newspaper and also received AAA ranking in the "Environmental Rankings" in April 2006 by the Tohmatsu Evaluation and Certification Organization Co., Ltd. (TECO). The company has also participated in the UN Global Support Program launched in 2002 for companies to invest in the improvement of human rights, labor standards and the environment. The company has established long term environmental vision and goals which also incorporates the company targets for its improvement plans in light of global warming to cut down carbon dioxide emission by 12% by the end of 2010. The company has also implement return policy for its customers to take their equipment back to the company which would be recycled by the company to reduce the landfills and emission of toxic gases. The company also runs various sponsorship programs supporting different sports events which are held throughout the year 2007. On the whole the company has active guidelines to develop and promote technology enabling to negate the damaging effects of company’s operations on the environment and also requires its employees to be responsible to a broader range of social issues and respect each other in group’s activities (Ricoh, 2007).

Financial Overview

Ricoh Company Ltd. has posted 17 years of consecutive of net profit as per Appendix III. This is due to its leading position in office equipment supplies. The company net sales have increased by 7.12% from the year 2006 to US$17,533mn compared to US$16,368mn in 2006 and US$16,954mn in 2005 and its sales are well above those of Xerox. The cost of sales has been increasing by nearly the same rate i.e. 7.04% from US$9,552mn to US$10,224mn. The selling, general and administrative expenses have increased by 5.21% to US$5,830mn after showing a decline in 2006 of -4.41%. The company has posted growth of 12.93% in its income from continuing operations of US$1,478mn compared to only US$1,309mn in 2006. The provision for income tax rose to US$545mn compared to US$481mn in 2006. Income from discontinuing operations indicates US$46mn in 2007 a rise of 167% compared to 2006 which was due to selling of non-profitable units of the company. The net income stood at US$946mn indicating a rise of 13.79% in 2007 and well above that of Xerox which was only US$395mn.

The analysis indicates that the company’s total assets have increased by 8.64% from US$17,499mn in 2006 to US$19,011mn in 2007 and compared to Xerox’s US$8,881 it remain high. The company’s working capital has increased by 27.71% in 2007 at US$3,936 which suggests that company’s current assets are lower than Xerox which has comparatively high inventory and account receivables. The company total indebtedness has also risen by 19.66% from US$1,677mn in 2006 to US$2006mn in 2007. The shareholders investment has risen by 10.24% from US$8,232mn in 2006 to US$9,075mn in 2007 indicating greater shareholders’ interest in the company (Ricoh, 2007: 2006: 2005).

The financial statement analysis of Ricoh Ltd for a period 2005-07 is carried as per Appendix IV. The current ratio has remained stable between values of 1.53 in 2005 & 2006 and 1.63 in 2007. This current ratio above 1 indicates that the company’s current assets exceed its current liabilities and the company shall not have problems for settling its current liabilities if they fall due. Also quick ratio suggests a lower value of 1.38 in 2007 (1.28: 2006 & 2005). However both ratios remain lower than that of Xerox Corporation. Receivables turnover ratio value remains low at 4.14 in 2007 (4.24: 2006 & 4.00 in 2005) higher than Xerox. The average collection period remains at 88 days which is well high but better than Xerox indicating better credit terms and collection procedures. Inventory turnover ratio also stood low at 6.54 showing decline from 6.59 in 2006 which is better than Xerox indicating better inventory management. The average age of inventory is 55 days which is well below that of Xerox suggesting that the company is holding inventory for short period than its competitor however it is still on the higher side. High total debt/total assets indicate that the company has high liabilities US$9,454mn in 2007 suggesting a ratio of 49.73% much better than Xerox which has increased its long term indebtedness in 2007. The company is highly efficient as it managed low interest payments and high times interest earned i.e. 24.50 in 2007 that is well above that of Xerox. The company also operates on high profit margins on company’s sales indicating gross profit margin ratio at 41.68% in 2007 (41.75%: 2006 & 41.60%: 2005). The net profit margin of 5.40% in 2007 lower than Xerox suggests it is incurring higher operating expenses compared to its competitor. The company’s asset turnover ratio remains above 92% compared to 73% of Xerox in 2007. Return on assets remains at 4.98% remains nearly same as that of Xerox in 2007. The company’s EPS sharply increased to US$6.49 and dividend cover at 6.12 compared to just 3.51 of Xerox.  

Cash Flow Analysis

The cash flow from operating activities declined by 6.2% to US$1,417mn in 2007 compared to US$1,511mn in 2006. Also the cash outflow from investing activities of US$978mn which has been majorly due to net of payments for purchases of available-for-sale securities and proceeds from sales of available-for-sale securities. The net cash inflow from financing activities stood at US$78mn which is a rise of 115.3% from outflow of US$512mn in 2006 due to proceeds from long-term indebtedness and issuance of long-term debt securities.

Conclusion and Recommendations

From the above analytical review of both companies it is suggested that Ricoh Company Ltd. is poised better than Xerox Corporation. However, both companies should review their credit terms, receivables collection and inventory management policies. These companies could run into problems if they fail to transform their holding inventory into sales. Also both companies rely heavily on external financing facilities which could lead to higher interest payments. However, Ricoh seemed to have managed low cost financing denominated in Japanese Yen. Both companies are performing well as both companies have managed to generate positive cash flow from their operating activities and are operating at high profit margins despite of the competition they face in the market.

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