Introduction
Businesses are developing depending on their strategies and appeal to consumers. With this regard, businesses should have critical evaluation of strategies to become successful. Basically, the success of these strategies depends on how they manage their financial and non-financial assets. In current businesses, progress that the firm is making is recorded as basis for, among a host of other important things, decision-making and as a standard for measuring the firm’s performance for the period under analysis (Ali, A 1993 and Pike, R & Neale, B 1999). A financial situation evaluation is one such gauge that documents current and future financial situation in an endeavour to verify a financial strategy to help achieve organisational aims. According to Riahi-Belkaoui in 1998, ‘financial analysis is an information processing system used to provide relevant information for decision making’ (p. 1). The main basis of information for such analyses is published financial statements of the concerned company. A variety of accounts from published financial statements are estimated in relation to each other to form performance indicators, which are then match up to ‘established’ standards. These performance indicators are better known as ratios, and constitute the main tools of usual financial analysis. From recent years, businesses have seen the rapid growth of the number of firms offering financial situation analysis services. This indicates that more and more organisations are realising the importance of the analysis of their financial situations in order to keep up with the demands of the business world nowadays. With respect to this, this paper will be discussing the 2006 financial situation of Neo-Neon Holdings Ltd.
Discussions
The Company[1]
Neo-Neon Holdings Ltd. are engaged in researching, developing, manufacturing and distributing of lighting products including incandescent-based decorative lighting products, entertainment lighting products and light emitting diode (LED)-based decorative lighting products. The business operations of the company are known in different parts of the globe e.g. Europe, America, China, Asia Pacific, Russia and Middle East. The company was established in 1981 and it is currently one of the world’s largest Decorative Lighting Company. Basically, Neo-Neon Holdings Ltd. was listed in Hong Kong Stock Exchange in 1868. Over the past 25 years, Neo-Neon Holdings Ltd. have never compromised their dedication towards product quality, engineering innovation and customer service. With their dedication and consumer’s support, the company became the leader in the industry of Decorative Lighting.
Analysis
Typically, financial measures as well as the relationships utilized in performance measurement are designed to stress outcomes with minimal or no consideration of the decision processes of the manager. The traditional or conventional measures of performance are based on periodic profitability indicators without the consideration to particular variables that drive these measures (Daroca and Nourayi, 2002). Performance in the past is mainly based on conventional accounting and measures based on market performance. Specifically, these measures include the evaluation on net income, return on equity/capital employed, earnings per share as well as share-price return. Some financial outrages have put corporate governance in the business spotlight. Basically, the issues and interest in the subject corporate finance can be traced back at least to the eighteenth century and economists such as Adam Smith. Certainly, there is probably little new in the existing debate involving to financial negligence, except for the range of the financial and economic consequences which replicate the greater importance of finance in the current economy. The purpose of this paper is to examine the financial context of corporate governance of Neo-Neon Holding Ltd in 2006. It attempts to evaluate the performance of the company in terms of financial reports. Basically, corporate governance has significant implications for the performance of the financial sector and, by addition, the economy as whole. Well-organised resource allocation is supported by strapping shareholder control rights, which assists investment in fresh development actions and confines the scope for corporate over-investment. Apparently, investment decisions are further linked to corporate governance insofar as investors prefer to invest in appropriately supervised corporations and be apt to avoid investing in ambiguous environments. In this way, the investor assurance created by sound corporate governance provisions and the security of minority shareholders encourages the financial market progress by encouraging share ownership and capable capital allocation across firms. Transparent financial reporting is necessary to sending efficient corporate governance.
For the last several years, the lighting industries in HK have seen the rapid growth of the number of firms offering financial situation analysis services. This serves as a proof that more and more organisations are realising the importance the analysis of their financial situation in order to keep up with the demands of the business world.
Analysis of Information
- Income Statements
From the given summary of income statement (see figure 1), every year Neo-Neon Holding Ltd. grew revenues 24.89% from 1.26bn to 1.57bn while net income improved 28.49% from 259.96m to 334.03m. Basically, we can deviate from this values that Neo-Neon Holding Ltd. is expressively performing not only in Hong Kong alone but also to other parts of the world. As we can see in figure 1 both the revenue and net income of the company are constantly moving upward even though there is a decline in 2004 net income.
Figure 1. Summary of Revenue and Net Income of Neo-Neon Holding Ltd.
source: www.ft.com
From the given situation and results of revenue and net income of Neo-Neon Holdings Ltd, it seems that the company is expressively performing in their industry. However, the organisation still needs to evaluate their not only their business strategies but also the political, economic, and cultural factors of their host country i.e. HK. It is not whether the business is in a market oriented status or not. The business norms in HK have been changing and are becoming more compatible with international codes and norms after a series of economic reforms (Barton, D., Newell, R. & Wilson. G. 2002). Given the nature of the HK economy and the large potential of the market, doing business with HK requires a continuous process of learning, caution for instability, and flexibility to catch opportunities.
· Balance Sheet and Cash Flow
From the information gathered and as seen in Figure 2, the 2007 cash reserves at Neo-Neon Holdings Ltd fell by 548.33m. However, the company earned 89.86m from its operations for a Cash Flow Margin of 5.72%. In addition the company used 446.98m on investing activities and also paid 195.22m in financing cash flows. From this discussion, it shows that Neo-Neon Holdings Ltd performed very well in 2006 compared to their performance in 2007. As seen in the figures, cash flow often describes as the amount of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project. Cash flow can be used to determine the performance of a certain company. With this regards we can see that Neo-Neon Holdings Ltd cash flow is declining after the expressive performance in 2006. Moreover, the increase of cash reserves of Neo-Neon Holdings Ltd generated in 2006 was used in 2007 development and expansion projects. According to the website Neo-Neon Holdings Ltd., their declines in terms of their sales performance is because of their current marketing strategies. With this regard, the company needs to evaluate the effectiveness of their current marketing strategy. There should have a careful evaluation in order gain business success.
Figure 2. Summary of Cash Flow of Neo-Neon Holdings Ltd
source: www.ft.com
In financial analysis, the balance sheets of company reports conform to the financial ratios. The purpose of ratios is to find out how profitable the company is, we can calculate if company has enough liquid resources to pay its creditors, employees and finance charges. It is a useful to shareholders to find out their value of shares. Ratios are most powerful and simplest tool to evaluate company’s performance and its validity (Riahi-Belkaoui, A 1998).
Atril & Mclaney (2004) mentioned that by calculating a relatively small number of ratios, it is often possible to build up a reasonably good picture of the position and performance of a business. Ratios help to highlight the financial strengths and weaknesses of a business, but they can not, by themselves, explain why certain strengths or weaknesses exist, or why certain changes occurred. Just by details investigation will find the reasons. Ratios can be grouped into certain categories; each of them identifies a particular aspect of financial performance or, position. In this paper, we’ll be considering the liquidity ratios and debt ratio of Neo-Neon Holdings Ltd. Liquidity ratios show how quickly the company can meet its short-term obligations using its current assets (Riahi-Belkaoui, A 1998).
Figure 3. Summary of Liquidity Ratios of Neo-Neon Holdings Ltd
source: www.ft.com
It is evident in the computations that Neo-Neon Holdings Ltd was performing expressively in 2006. This means that Neo-Neon Holdings Ltd. is always bale to meet their current liabilities using their current assets (cash, inventory, receivables). The figures are not high so as to make the shareholders fear that the assets of the company are not working to grow the business, and not low so as to drive creditors away with respect to the level of risk present. Since quick ratios are perceived as a sign of the company’s financial strength or weakness, the figures in the previous table shows the relative stability of the financial strength of Neo-Neon Holdings Ltd. A higher number would indicate stronger financial performance, and a lower one means weaker performance.
Apparently, the high financial leverage ratios of a company provide an implication that the organisation is solvent in the long-term. With this regard, the debt ratio shows the Neo-Neon Holdings Ltd’s position to meet it long-term obligation or liabilities. Debt ratios are dependent of the company’s classification of long-term leases and other items as long-term debt (Pike, R & Neale, B 1999). Pike, R & Neale, B 1999, stated that this is the gauge with which the financial strength of a company is a sign of the ratio of capital that has been funded by liability, counting preference shares.
A higher debt ratio (which means the company has low equity ratio) does not give the firm’s creditors the security they require from an organisation (Pike, R & Neale, B 1999). The firm would, as a result, find difficulty in raising supplementary financial support coming from outside sources if the firm wishes to take such action. Therefore it reveals that the higher the debt ratio, the harder it is for the company to raise funds from the outside. As presented in the Figure, Neo-Neon Holdings Ltd uses little or no debt in its capital structure as supported by a debt to capital ratio of 0.00%.
Conclusion
In order for a certain business to sustain their development, they should regularly assess the value of their portfolio. Stakeholders should be given importance by the company. Stakeholders, sometimes also called sponsors, or management, are extremely important to the business. Financial information are important to them because they are the ones that give political as well as resource support for the project. However, normal stakeholders are people that are influenced by any business decisions – they include stockholders but are hot limited to just that. They also include employees, surrounding businesses, competing businesses, neighbourhoods of the business, customers, etc. For instance, when a Neo-Neon’s opens up, or any store for that matter, it creates more traffic for that neighbourhood, more opportunities for jobs, and an overall change for the city/town. When that store makes important decisions, including bad ones – everyone is affected by it. Thus, from this we may say that stakeholder typically refers to anyone who has a direct financial stake in a company, therefore financial report are important for them. This does include shareholders if the company issues stock, any other owner/partner and employees. Although it is argued that the vendors servicing a business and even the competing business have a financial stake in the company, these entities are beyond the scope of the definition.
References:
Atrill, P & McLaney, E 2004, Financial Accounting for Decision Makers, 4th edn., Prentice-Hall, New Jersey.
Ali, A 1993, ‘Decision-Making Style, Individualism and Attitudes toward Risk of Arab Executives’, International Studies of Management & Organisation, vol. 23, no. 3, pp. 53+.
Barton, D., Newell, R. & Wilson. G. 2002, When Is a Good Time to Make Strategic Advances? during a Crisis, of Course. The McKinley Quarterly, pp. 77+
Daroca, FP & Nourayi, MM 1996, Performance Evaluation and Measurement Issues, Journal of Managerial Issues, vol. 8, no. 2, pp. 206+.
Pike, R & Neale, B 1999,Corporate Finance and Investment Decision and Strategies, 3rd edn., Pearson Education Limited, England.
Riahi-Belkaoui, A 1998, Financial Analysis and the Predictability of Important Economic Events, Quorum Books, Westport, Connecticut.
http://www.neo-neon.com
http://www.ft.com
[1] From http://www.neo-neon.com
Credit:ivythesis.typepad.com
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