Introduction
Businesses are developing to suffice the need of the society. In any current business organisation, progress that the company is making is recorded as basis for, among a host of other essential things, decision-making and as a benchmark for measuring the firm’s performance for the period under scrutiny (Daroca & Nourayi 1996). A financial situation analysis is one such yardstick that documents current and future financial situation in an attempt to determine a financial strategy to help achieve organisational goals.
In any contemporary operating organisation, progress that the company is making is recorded as basis of assessing the stewardship of management and for making economic decisions. A financial statement analysis is one such yardstick that takes into consideration current and future financial situation in an attempt to determine a financial strategy to help achieve organisational goals. As formally defined by Riahi-Belkaoui in 1998, financial analysis ‘is an information processing system used to provide relevant information for decision making’ (p. 1). Various accounts from the published financial statements are evaluated in relation to each other to form performance indicators, which are then compared to ‘established’ standards. Ratios are normally calculated from the financial statements to assess the profitability, solvency, working capital management, liquidity, and financial structure of an organization. They may also be calculated over a period to enable an analysis of trends to be formulated or compared to other similar companies or industry averages.
Financial statements are, according to Atrill & McLaney (2004; p. 1), the ‘universally accepted tools for analysis of a business entity’. If properly understood, they let the users know how good a company looks and how well it has been doing. They are, at best, an approximation of economic reality because of the selective reporting of economic events by the accounting system, compounded by alternative accounting methods and estimates (Pike & Neale 1999). The purpose of financial statements is to provide users (business owners, lenders, managers, suppliers, customers, attorneys and litigants and employees and job seekers) with a set of financial data that, in summary form, fairly represents the financial strength and performance of a business (Pike & Neale 1999). They reveal opportunities and provide protection against financial pitfalls. Ideally, financial statements analysis provides information that is useful to present and potential investors and creditors and other users in making rational investment, credit and other similar decisions (Daroca & Nourayi, 2002). Further, they are comparative measurements of risk and return to make investment or credit decisions as they provide one basis for projecting future earnings and cash flows.
Competitor Analysis
The most dominant strategic management paradigm in recent years is known as the strategies model (Pike & Neale 1999). Riahi-Belkaoui, A (1998) claims that the intensity of competition in an industry is neither a matter of coincidence or bad luck. Rather, competition in any business industry is rooted in its underlying economic structure and goes well beyond the behaviour of current competitors.
Companies like GE is the main competitors of ABB. Currently, the GE shows expressive contribution to the technology and services conglomerate incorporated. With respect to this, GE joins in a wide range of markets including the transmission, generation and distribution of electricity, industrial automation, lighting, motors, medical imaging equipment, aircraft jet engines, railway locomotives, and other aviation services. Aside from this, the company also offers wide range of financial services. It has a presence in over 100 countries.
Moreover, Six Sigma was employed in GE Company which is really an advantage. Actually, in General Electric Company, the levels of quality, delivery performance, cost competitiveness, customer service, and product advancements being achieved are more easily monitored and strengthened because of Six Sigma. As a result of this, the competitiveness and profitability of the General Electric are maximized.[1] Just as the General Electric helps support improving performance in these criteria for the various product and service lines within the corporation, the same concept can be applied to optimize the sources performing functions within each business unit of General Electric Company. By viewing the sources for the key functions performed for the General Electric Company, its performance can be easily monitored in the five criteria that impact profitability.
Competitor’s strengths and weaknesses:
Company
Strengths
Weaknesses
General Electric Company
- Great experienced consulting team.
- Quality service because of Six Sigma
- Well organized and managed
- Strong financial investment
- Very dynamic and having great experience.
- Excellent communication scheme, they have their own network for finding customers.
- Got some problems in the organization similar to other large organization; cumbersome structure.
- Too much confidence in terms of financial standing.
Financial 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 & 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 part of the paper is to examine the financial context of corporate governance of ABB Group. It attempts to evaluate the performance of the group 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 automation technologies to utility and industry customers in Swiss country have seen the rapid growth of the number of firms offering financial situation analysis services (ABB 2007). The group serves electric, gas and water utilities, as well as industrial and commercial customers, with a broad range of products, systems and services for power transmission, distribution and power plant automation (ABB 2007).
Analysis of Information
- Income Statements
From the given summary of income statement (see figure 1), every year ABB’s revenues grew 25.35% from 23.28bn to 29.18bn. This along with an increase in net income i.e 170.29% from 1.39bn to 3.76bn. Basically, we can deviate from these values and from the report in ABB 2007 that ABB Ltd is expressively performing not only in Switzerland 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 expressively growing particularly in 2007 net income.
Figure 1. Summary of Revenue and Net Income of ABB Ltd.
source: www.ft.com
From the given situation and results of revenue and net income of ABB Ltd., it seems that the group is expressively performing in their industry even though there are some years that the group performance remains stagnant particularly in 2003 to 2005. Thus, the organisation still needs to evaluate not only their business strategies but also the political, economic, and cultural factors of countries they served. It is not whether the business is in a market oriented status or not, but the important thing is the value of their products and services as perceived by the consumers. The business norms in different countries have been changing and are becoming more compatible with international codes and norms after a series of economic reforms (Barton, Newell & Wilson 2002). Given the nature of the economy of countries that they served and the large potential of the market, doing business with these countries 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, increased its cash reserves by 10.77%, or 452.00m. The company earned 3.09bn from its operations for a Cash Flow Margin of 10.60%. In addition the company used 2.29bn on investing activities and also paid 625.00m in financing cash flows. From this discussion, it shows that ABB performed very well in 2007 compared to their performance in previous years. 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 business. With this regards we can see that ABB cash flow remains in good standing after the expressive performance in 2007 (ABB 2007). Moreover, the increase of cash reserves of ABB generated will be used on investing activities and expansion projects. According to the report of performance of ABB, their development in terms of their sales performance is because of their current marketing and business strategies. With this regard, the company needs to create measures to maintain the effectiveness of their current business strategy. There should have a careful evaluation in order gain business success.
Figure 2. Summary of Cash Flow of ABB 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, 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 ABB. Liquidity ratios show how quickly the company can meet its short-term obligations using its current assets (Riahi-Belkaoui, 1998).
Figure 3. Summary of Liquidity Ratios of ABB
source: www.ft.com
It is evident in the computations that ABB was performing expressively in 2007. This means that ABB 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 (ABB 2007). 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 ABB. 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 ABB’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 & Neale 1999). Pike & Neale 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 & Neale 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, ABB has a Debt to Total Capital ratio of 0.20%, little changed from the previous year’s 0.00% (ABB 2007).
Recommendations
Today, most companies like ABB find it impossible to create any kind of sustainable competitive advantage based on product or service alone. It is common knowledge that every one of the successful companies sought and found a precise understanding of how it could create a customer-centred competitive advantage. Thus, there are numerous aspects that every management should tackle. In ABB, the key internal strengths are the appropriate and effective marketing strategies used. On the other hand, the flaws of the marketing strategies implemented by the company serve as its major internal setback. Then again, the continuous effort of every company likes ABB to improve its operational standards is the ultimate solution to emerging conditions brought about by different occurrences such as stiff competition, globalisation, technological innovations and others.
Based on the business strategies used by the company and the analyses presented, ABB is indeed a company that has achieved success in the power and automation technologies industry. Nonetheless, the company still has to perform other strategic moves so as to maintain its successful status. With the identified weakness and threats of the company, the following strategic moves are recommended:
There are reasons behind these recommendations. One of which is the growing competition in their industry. Considering the activeness of ABB’s rivals in enhancing their businesses, the strategies of the companies should focus on two major essentials: profit increase and market growth. These two factors are important not only in keeping ABB afloat in the industry but also in supporting other internal or external projects of the company. Another reason for these strategic moves is the capability of ABB to put them into action. Aside from the finances, the company needed to increase their access to other foreign markets even though they are expanding efficiently for market growth and technologies for increased profit. In other words, these two predicted strategic moves are not only beneficial for the company’s current status but feasible as well.
Since it is recommended for the company to expand their distribution to other foreign countries, then it is also likely for the company to have partners with other local retailers in order to distribute its products to other foreign locations while it continues on applying its direct business model to other areas. One of the important strategies that ABB may consider is to operate alongside a local business partner. This will help the firm adapt easily to the new and foreign business environment. A local partner can also assist in learning the culture, practices, regulations and means of interaction in the area. This will support the company’s consumer study efforts. More importantly, a foreign business partner can also help in achieving progress faster. Training the staff becomes even more important in foreign business ventures. The workforce must be supported fully particularly in adapting the business’ new concepts, standards and technologies (Barton, Newell & Wilson 2002). The management should ensure that the local staff is also well-adjusted to the new system so as to encourage them to contribute more for the business.
Conclusion
Performance measurement has long been used by the various firms to assess different business factors. In general, there are different methods used to measure performance e.g. financial, non-financial and integrated approaches. While these approaches have their own advantages and drawbacks, the goal of their application remains one and the same. Through the beneficial effects of performance measurement, businesses are able to create successful strategies towards success. With this consideration, business organizations like ABB Inc. should have effective measures to maintain and sustain developments
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 an ABB’s business establishment opens up 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:
ABB 2007, ABB Group Annual Report 07, Operational Review
Atrill, P & McLaney, E 2004, Financial Accounting for Decision Makers, 4th edn., Prentice-Hall, New Jersey.
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.
[1] From http://www.ge.com/en/company/companyinfo/quality/whatis.htm
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