Financial analysis is a fundamental process for evaluating the company you are interested in. When I make financial analysis, I would like to analyze from the following perspectives: financial health, financial growth, profitability analysis, management related data for a long time span, at least 3 years.
Next, I will take Huawei as an example to analyze for the past 5 years, and the financial data are all coming from Huawei annual reports, and are all using CNY.
1. Financial Health.
The liability and asset ratio is one most important factor of financial health of a company. Let’s see the liability ratio of Huawei in the past 5 years.
As we can see from the chart, the liability ratio is fixed between 60% and 70% during the past 5 years. The ratio is a little higher, but since Huawei revenue is growing fast, this is reasonable.
let’s see the cash, short term investment and borrowing comparison, which reflects that Huawei generate cash capability and have a debt risk or not.
Cash and short term investment increased from 62,342 Million CNY in 2011 to 125,208 Million CNY in 2015, the volume is doubled in last five years, in comparison, the borrowing stays almost the same from 20,327 Million CNY in 2011 to 28,986 Million CNY in 2015.
This shows Huawei have good business to generate cash flows every year, and also have a good capability to pay the debt. Cash, like human body blood, is vital to a company; Debt, like illness to human, often leads company to death.
2. Financial Growth
In my opinion, there are several indicators for us to analyze financial growth: revenue, operating profit, net profit, operation cash flow, and owner’s equity.
let’s see Huawei financial growth from these indicators one by one:
The first is revenue in the last 5 years.
From 2011 to 2015, the revenue growed steady from 203,929 Million CNY to 395,009 Million CNY, the CAGR is 18%.
Next is about Operating Profit, Net Profit and Cash flow from operating activities:
The Operating Profit increases from 18,796 Million CNY to 45,786 Million CNY during the past 5 years, the CAGR is around 25% which is larger than the revenue. This shows that Huawei management team have done very good job to increase the management effiency and the gross profit level.
The net profit increases from 11,655 Million CNY to 36,910 Million CNY during the past 5 years, the CAGR has reached astondingly 33%. Hence, Huawei created fast growing wealth for the shareholder and employees every year.
Last but not least, we can see Huawei cash flow from operating activities for the past 5 years is from 17,826 Million CNY to 49,315 Million CNY, and the CAGR is 29%. Cash flow from operating activities is a key indicator which can show a company real cash generating capability from its business services.
One more important thing is regarding to owner’s equity, which reflects the shareholders’ real wealth growth.
As we can see that the owners’ equity grows from 66,228 Million CNY in 2011 to 119,069 Million CNY in 2015, almost doubled in the last 5 years and the CAGR reached 16%. So the shareholders not only enjoyed amazing dividends, but also the wealth grows.
3. Profitability Analysis
Profitablity is very important to a company. Good company will have a higher profitability compared with other companies in the same industry, and the profitability ratio should be stable for a long time, even increase every year ideally.
Let’s focus on the operating profit margin and net profit margin in this post.
Compared with Cisco or most other telecom vendors in USA or Europe, the operating profit margin and net profit is very low, however, this is the key reason that Huawei can take others vendors market share each year for aggressive bidding price. In the strategic market, Huawei will sacrifice profit to win market share. So Huawei revenue can grow 18% each year, and the increasing profit ratio leads to profit and cash flow faster growth.
The next part is about ROE (Return on Equity), which will measure the return on your investment, and this is a good indicator to measure a great company or medicore one. A great company should yield much more return comparing to other investment, such as bank deposit, bond, real estate, etc. The following figure is relative to ROE of Huawei during the past 5 years.
As we can see, the ROE of Huawei is from 18% in 2011 to 31% in 2015, and the ROE is growing in each year. Normally, a great company should have at least 20% of ROE in the long time span, so Huawei have good days in the past 5 years, and still have bright future in the long run.
4. Management Related Data
Since Huawei is not a public company yet, so the management data from its annual reports is very limited. However, based on our analysis of Huawei profit margin, the operating profit margin and net profit margin grows at 6% and 13% each year during the past 5 years, we know that the management team is doing their best to optimize management efficiency to improve the profit margin.
And we can also get some info from the 2015 annual report, that:
In 2015, Huawei’s DSO was 84 days, 11 days shorter than the 95 days in 2014.
Its ITO decreased by 8 days to 96 days compared with the 104 days in 2014.
The company’s DPO was 95 days, 6 days shorter than the 101 days in 2014