SCHOOL OF ARCHITECTURE , BUILDING AND DESIGN

FOUNDATION IN NATURAL BUILT ENVIRONMENT

Accounting Report

Financial Ratio Analysis

Title : Lenovo Company

Group Member : Wong Qin Kai (0320024)

Lim Ting Le (0320028)

Lee Jia Kiam (0320029)

Subject : Basic Accounting (ACC30205)

Lecturer : Chang Jau Ho

Submission Date : 4th June 2015 (Week 16)

Brief Background History of Lenovo Company

Lenovo is a US$39 billion personal technology company which engineers PCs and

mobile internet devices to customers. Lenovo is also the world’s largest PC vendor and

fourth largest smart phone company which serves customers in more than 160 countries.

Besides that, its executive headquarters are located in Beijing and Morrisville. In year

1988, the company was incorporated in Hong Kong and was listed on The Stock

Exchange of Hong Kong since 1994. Lenovo’s business is mostly built on product

innovation, highly-efficient global supply chain and strong strategic execution which was

formed by Lenovo Group’s acquisition of the former IBM Personal Computer Division.

The company development, manufacture and market are known to be reliable.

Nonetheless, they supply high-quality, secure and user-friendly products and services. Its

product lines include legendary Think-branded commercial PCs and Idea-branded

consumer PCs, as well as servers, workstations, and a family of mobile internet devices,

including tablets and smart phones. Lenovo also offers Internet access through its

FM365.com portal.

Recent Development

In year 2010, Lenovo introduced LePhone, which is the company first smart phone.

Also, Lenovo sold its 60 millionth ThinkPad in the same year. In the following year,

Lenovo formed Mobile Internet Digital Home (MIDH) business unit to attract growing

opportunity in consumer devices such as smart phones, tablets and smart TV. On the other

hand, Lenovo formed a joint venture with NEC, creating the largest PC company in Japan.

Furthermore, Lenovo acquired Medion, a PC and consumer electronics company based in

Germany, substantially increasing presence in consumer market in Western Europe. In

year 2012, Lenovo formed a joint venture with EMC to sell servers in China and develop

storage solutions. In the same year, Lenovo acquired Stoneware, a software firm focused

on cloud computing. Most importantly, it sold its 75 millionth ThinkPad. Lastly, in year

2013, Lenovo became the world's first PC company, attained 329th in the Fortune 500 list

of the world's largest companies and also became the world’s third smart phone company.

Lenovo then acquired CCE, a leading consumer electronic company in Brazil. Lenovo

also has evolved its decision-making process. Instead of demanding fealty based on titles

and seniority, the current approach combines the best of the Chinese long-term focus on

strategy with the West’s intense focus on meeting quarterly targets a former IBM

executive turned private equity maven the one who helped broker and finance Lenovo’s

purchase of IBM’s personal computer unit.Grabe’s New York–based firm, General

Atlantic, remains an investor, and he currently sits on the board. In another key of respect,

Lenovo has distinguished itself from other Chinese companies, it has created a brand

name that is recognizable in markets around the world. No other Chinese company that

competes internationally has been willing to spend hundreds of millions of dollars

annually to achieve that. That is an amazing recent development for further process of the

business.

Ratio Analysis of the Lenovo’s Annual Report for 2012 & 2013

The table below show the calculations and interpret the trends from 2012 to 2013 periods.

Profitability Ratios 2012 2013 Interpretation

Return On Equity

(ROE)

%20.22

1005.434,141,2

416,475

100O/E Average

ProfitNet

x

x

%63.24

100075,564,2

592,631

100O/E Average

ProfitNet

x

x

During the period 2012 to

2013,the ROE has increase

from 22.20% to 24.63%. This

owner is getting more return

from his capital when compare

to last year.

Net Profit Margin

(NPM)

%61.1

100438,574,29

416,475

100 SalesNet

ProfitNet

x

x

%86.1

100401,873,33

592,631

100SalesNet

ProfitNet

x

x

During the period 2012 to

2013 , the NPM has increase

from 1.61% to 1.86%.The

business ability to control its

expenses is better than last year.

Gross Profit Margin

(GPM)

%65.11

100438,574,29

222,446,3

100SalesNet

Profit Gross

x

x

%03.12

100401,873,33

890,073,4

100SalesNet

Profit Gross

x

x

During the period 2012 to

2013 , the GPM has increase

from 11.65% to 12.03%.The

business ability to control its

COGS expenses us better than

last year.

Selling Expenses

Ratio (SER)

%72.5

100438,574,29

778,690,1

100SalesNet

Exp Selling Total

x

x

%57.5

100401,873,33

101,888,1

100SalesNet

Exp Selling Total

x

x

During the period 2012 to 2013,

the SER has decrease from

5.72% to 5.57%.The business

ability to control its selling

expenses is getting better.

Genaral Expenses

Ratio (GER)

%4

100438,574,29

628,183,1

100SalesNet

Exp Genaral Total

x

x

%34.4

100401,873,33

675,470,1

100SalesNet

Exp General Total

x

x

During the period 2012 to

2013 , the GER has increase

from 4% to 4.34%.The business

ability to control its general

expenses is getting worst.

Financial Expenses

Ratio (FER)

%15.0

100438,574,29

484,43

100SalesNet

Exp Financial Total

x

x

%13.0

100401,873,33

869,42

100SalesNet

Exp Financial Total

x

x

During the period 2012 to

2013 , the FER has increase

from 0.15% to 0.13% .The

business ability to control its

financial expenses is getting

better.

*Unit represented in US$’000.

Stability Ratios

The table below show the calculations and interpret the trends from 2012 to 2013 periods.

Profitability Ratios 2012 2013 Interpretation

Working Capital

Ratio (WCR)

1:1

677,809,11

400,820,11

LiabilityCurrent Total

AssetCurrent Total

1:02.1

474,091,12

737,389,12

LiabilityCurrent Total

Asset Current Total

During the period 2012 to

2013, the business’s WCR

has increase from 1:1 to

1.02:1. The business ability

in paying off its current

liabilities are getting better.

In addition, it doesn’t satisfy

the minimum ratio of 2:1.

Total Debt Ratio

(TDR)

%57.84

100748,860,15

779,412,13

100Assets Total

sLiabilitie Total

x

x

%12.84

100997,881,16

816,201,14

100Assets Total

sLiabilitie Total

x

x

During the period 2012 to

2013, the business’s TDR

has decrease from 84.57% to

84.12%.The total debt of the

business has decrease.

However ,it doesn’t satisfy

the 50% maximum limit.

Stock Turnover Ratio

(STR)

days12.14

098,011,1

216,128,26365

Inventory Average

sold goods ofCost 365

days5.19

5.642,591,1

511,799,29365

Inventory Average

sold goods ofCost 365

During the period 2012 to

2013 , the STR has increased

from 14.12days to 19.5days.

The business sells its goods

faster compared to last year.

Debtor Turnover

Ratio (DTR)

days9.127

5.595,181,5

219,787,14365

Debtors Average

SalesCredit 365

days140

5.394,495,6

5.700,936,16365

Debtors Average

SalesCredit 365

During the period 2012 to

2013, the DTR has increase

from 127.9 days to 140 days.

The business is taking more

times to collect its debts.

Interest Coverage

Ratio (ICR)

days93.11

484,43

416,475484,43

ExpInterest

ProfitNet expInterest

times73.15

869,42

592,631869,42

ExpInterest

ProfitNet ExpInterest

During the period 2012 to

2013 , the ICR has increase

from 11.93 times to 15.73

times.The business ability to

pay its interest expenses is

getting better.However , the

business should never fall

below 5 times.

*Unit represented in US$’000.

Appendix 1 Price Earning Interpretation

P/E Ratio

years200

0616.0

32.12

sharePer Earning

Price ShareCurrent

The P/E Ratio of Lenovo’s Company is

200 years.This means an investor who

bought a share of Lenovo will have to

wait for 200 years to recoup his/her

investment. In addition,a investor will

normally pay below 15 years for a share.

Investment Recommendation Based on the calculation of the ratios , the overall profitability seems to be good

and stable during the period 2012 to 2013. As you can see , the Return On Equity (ROE)

of the Lenovo’s Company has gradually increased by 2.43% when compare to

2012 ,which means that the owner is getting more return from his capital. However ,for

the other ratios such as Net Profit Margin (NPM),Gross Profit Margin (GPM), Selling

Expenses Ratio (SER) and Financial Expenses Ratio (FER) had increased slightly except

for the General Expenses Ratio (GER). It’s because the business ability to control its

expenses is getting worst.

For the stability ratios, the calculation of Working Capital Ratio (WCR) , Stock

Turnover Ratio (STR) and Interest Coverage Ratio (ICR) are getting better when compare

to last year. About the Debtor Turnover Ratio, the business is taking more times to collect

their debts because the ratio of it has vastly increase by 12.1 days. As you can see , the

Total Debt Ratio (TDR) has decrease by 0.45% during the period 2012 and 2013 but it

still doesn’t satisfy with 50% maximum limit.

In conclusion, Lenovo’s Company share is not suitable for investment because the

higher P/E ratio and the more expensive a share is. The calculation shown that the ratio of

Lenovo’s Company is 200 years, means that the investor will have to wait even more than

200 years to claim back his original principal. Today, a conservative investor will

normally purchase with P/E ratio of 15 or less so that’s why I recommend the share of

Lenovo’s company is not suitable for investment.

Appendix 2

Income Statement (2012 to 2013)

Income Statement (2012 to 2013)

Balance Sheet (2012 to 2013)

Balance Sheet (2012 to 2013 )

References

(2013, June 1). Retrieved May 27, 2015, from http://www.lenovo.com/ww/lenovo/pdf/report/E_099220130531d.pdf

(n.d.). Retrieved May 27, 2015, from http://www.lenovo.com/ww/lenovo/pdf/lenovo-factsheet-2012-mar-eng.pdf

Lenovo Group Limited SWOT Analysis. (2013). Lenovo Group, Ltd. SWOT Analysis, 1-7.

Lenovo Reports First Quarter 2010/11 Results.(Financial report). (2010, August 31). China Weekly News. Retrieved May 27, 2015, from http://www.highbeam.com/doc/1G1-235740273.html?

Domestic Company Profiles. (2010). China Consumer Electronics Report, 2(2), 44-47.

992:Hong Kong Stock Quote. (n.d.). Retrieved May 28, 2015, from http://www.bloomberg.com/quote/992:HK

Price-Earnings Ratio (P/E Ratio) Definition | Investopedia. (2003, November 26). Retrieved June 3, 2015, from http://www.investopedia.com/terms/p/price-earningsratio.asp