Case Analysis: Acer Incorporation

Introduction:

     Acer Inc. is Taiwan based IT Company engaged in manufacture and distribution of PCS and laptops, research, design, HDTVs and, cell phones, LCD monitors, storage product and other IT related products. The company operates in Americas, Europe, Middle East / Africa and Asia-Pacific region. The company employs about 8000 employees worldwide and estimated revenue for 2010 is US $ 19.9 billion (Acer, 2011).

     The roots of Acer Inc. were planted in the year 1976 and today Acer became one of the world’s prominent PCS & Notebook providers. In the year 2009, Acer ranked 2^nd worldwide in total PC shipment and also ranked 2^nd in notebook market for over third year (Acer annual report, 2009).

     Acer is emerging as strong IT products provider company while most of its business relies on European market (Datamonitor, 2010). Recently Acer announced its ICONIA series of tablets including dual screen laptop come tablet with navigation jog which is a breakthrough product line any company has offered yet (Acer, 2011) and also introduced world’s first dual sim supported smartphone equipped with snapdragon processor (Datamonitor, 2010). The financial analysis of Acer Inc. tells us about the economic condition of the company in the market.

Acer’s financial ratios analyzed here for the year 2007 to 2010 recent quarter with industry average and one of the marker competitor Dell Inc. Analysis of profitability, liquidity, activity, leverage and market value ratio is performed here. The ratios are useful to evaluate company’s financial condition and tell us about company’s profitable condition, does company has enough money to pay its debt, how efficient the company is in asset management etc.

Acer Inc. Financial Ratios
Ratios and Financial Year
	2007	2008	2009	2010 Latest Qtr	Industry 2010	Dell Latest Qtr
Profitability Ratios (%)
Net  Profit Margin	2.80	2.15	1.98	2.03	4.26	4.29
Gross Profit Margin	10.26	10.49	10.16	10.16	32.29	18.53
Return on Total Asset	6.00	4.83	4.25	4.79	4.49	7.29
Return on Equity	17.18	14.76	13	14.04	12.69	39.31
Liquidity Ratios (Times)
Current Ratio	1.34	1.24	1.29	1.32	1.38	1.49
Quick Ratio	0.72	0.73	0.63	0.63	1.05	1.26
Activity / Efficiency / Asset Management Ratios
Days Sales Outstanding (Days)*	68	70	70	70	40	37
Days Inventory (Days)*	26	28	32	32	18	9
Inventory Turnover (Times)	13.88	13.24	11.31	11.38	20.05	42.60
Fixed Asset Turnover (Times)	31.16	30.39	41.98	41.98	--------	29.75
Total Asset Turnover (Times)	2.14	2.24	2.15	2.15	1.05	1.70
Receivable Turnover (Times)	5.34	5.18	5.19	5.19	9.14	9.97
Leverage / Debt Management Ratios
Debt Ratio (%)	68.18	65.96	68.09	66.21	--------	79.88
Debt / Equity (%)	------	-------	-----	0.14	0.42	0.77
Time Interest Earned (Times)	19.88	11.33	24.08	--------	--------	16.83
Market Value Ratios
Price/Earning (Times)	12.5	-------	21.2	21.4	16.39	11.05
Price / Cash Flow (Times)	-----	------	6.3	4.0	12.06	7.35
Price / Book	2.4	161.3	2.7	2.6	4.81	3.66
Price / Sales	0.4	22.8	0.4	0.4	1.83	0.47

Table: Acer Inc. Financial Ratios

Sources: (Acer Annual Report, 2009, Hoovers, Morningstar, 2011)

* DSO are rounded up to calculate days.

1. Profitability Ratios:

     Profitability ratios shows how efficient the company’s operations.

1.1 Net Profit Margin: This ratio also knows as net return on sales and indicates profits after tax per dollar of sales. Higher the ratio compared to industry or competitor is considered better and it should progressed upwards. (Gamble J. E., Strickland A. J., and Thompson A. Jr., 2010). Acer’s net profitability decreased (from 2007) by 0.65 % and 0.82% during the year 2008 and 2009 where as a slight upward movement (0.05%) noted in recent quarter. Also Acer has below the industry average and its competitor Dell net profitability ratio which indicates Acer has law profit margin.

1.2 Gross Profit Margin: Acer’s gross profit margin fell below industry as well as by 0.33% from the year 2008. The ideal trend should be upward (Gamble et al., 2010) but it’s altered here. That means Acer has less percentage (amount) of revenue to cover operating expenses. The industry average is more than three times the Acer (32.29%) and Dell is nearly double (18.53%), so the relative position of Acer in terms of revenue is poor in the industry.

1.3 Return on Total Asset: Return on total asset is the amount of the portion available to creditor and stockholders (internal to the company), higher the trend, better the return to investors. Acer has upward trend than the industry with 4.79 % where as Dell still leads with 7.29%. However Acer’s return on total asset is decreased by 1.21 % from the year 2007 to recent quarter of 2010.  

1.4 Return on Equity: The return on common equity or return on stockholder’s equity tells us how stockholders are getting their returns in the company. Acer has maintained the industry average which is usually between 12-15. Acer has lead over market by 1.35% where as Dell still nearly three times ahead the Acer Inc. Although Acer gives more return to its stockholders compare to industry average, its return for stockholder is significantly decreased by 3.14% within the company so the company has less return for its investors.

2. Liquidity Ratios:

     Liquidity ratios tell us, will the company be able to pay off its short term debt? Liquidity ratios indicate how quickly the company can generate cash by converting its liquid assets.

2.1 Current Ratio: Current ratio shows company’s ability to pay off its debt by using its current assets. Current ratio should be over 1 (Gamble et al., 2010). Acer’s current ratio is above suggested which is 1.32 but it’s slightly below industry average. This shows Acer can pay off its short term debt by using its current asset, whereas Dell’s current ratio is still above industry average and then Acer’s. Higher the current ratio, lower the current liabilities the firm has.

     Sometimes creditors may like to see high current ratio, in case when company starts paying off its bills from account payables and use bank loans, this could happen in financial crisis. On the other hand sometimes high current ratio is a result of inventory holdings which might become obsolete before it can be sold. In short the ideal range for current ratio is 1, higher could be better but it’s not required all time (Brigham E. F., & Ehrhardt M. C, 2008).

2.2 Quick Ratio: Quick ratio also know as Acid test ratio. It shows the company’s efficiency to pay current liabilities without relying on inventories because inventories are the least liquid form of the company’s asset and there are less chances of company’s bankruptcy based on inventories. So the quick ratio is more important (Brigham E. F., & Ehrhardt M. C, 2008)..

     Acer’s quick ratio fell by 0.09 times from 2007 and it’s below industry average too, further Dell has double the quick ratio than Acer. Acer’s quick ratio is still remained same from 2009 to recent quarters indicates that, it has no significant increase in inventory distribution where as Dells distribution is more efficient than Acer. Inventory increased or fall in sales may be reason why Acer has low quick ratio.

3. Activity / Efficiency / Asset Management Ratios:

     Activity ratios also known as Efficiency or Asset management ratios which tell how efficiently the firm is managing its assets. The purpose of analysis of Asset management ratio is to see whether the company has right amount of investment in its current assets or not. Excessive investment in assets may reduce stock price where as low investment or low asset may hurt profitability (Brigham E. F., & Ehrhardt M. C, 2008).

3.1 Days Sales Outstanding (DSO): Acer’s DSO is 70 days which is much higher than industry average and its competitor Dell. DSO indicates average collection period of receivables after sales done. Acer’s DSO is 70 means it takes Acer about 70 days to collect receivables after sales done.

     Increased in DSO may result sometimes due to increased time in clearance of credit / debit amount from clearance company or bank. Sometimes foreign transaction may take longer time while consumers pay in foreign currency, also delay in distribution channel may increase DSO.

3.2 Days Inventory: Acer’s days inventory is again higher than industry average and that of Dell. Acer’s average days inventory is 32 days. Lower is the better (Gamble et at., 2010). More days inventory shows poor inventory management. Acer doesn’t have quick delivery or ship within 24 hours facility like other competitors in market like Dell has. Dell ships its product within 24 hours anywhere worldwide where as Acer has not that much efficient supply chain and inventory management.

3.3 Inventory Turnover: Acer’s inventory turnover is 11.38 which is lower than industry average and much lower than Dell Inc. Inventory turnover indicates number of inventories turned in to cash in the particular time period. Higher the rate, better the inventory sold. Acer’s inventory turnover ratio is significantly lower which means Acer is not able to sale its inventory frequently as market trend. This is possible when (i) the company has mass production or pre-ordered inventories and / or (ii) the inventories become obsolete before it gets sold. Computer industry is very dynamic, if products not get sold within particular time period, hardware –software become obsolete and may result in lowering inventory turnover.

3.4 Fixed Asset Turnover Ratio: Acer has significant upward movement in fixed asset turnover ratio (41.98 times) over its competitor Dell Inc. Fixed asset includes property, plant and equipments (PP&E) and is a sole source of major investment. Sometimes rise in inflation may be responsible for increase in fixed asset turnover, for example, if the company has purchased PP&E at lower price in past and inflation makes price up, the ratio may go up (Brigham E. F., & Ehrhardt M. C, 2008).

3.5 Total Asset Turnover Ratio: Acer’s total asset turnover ratio is 2.15 which is above industry average and its competitor Dell. Higher total asset turnover ratio indicates that Acer is generating good sales from its total asset. This may be because of Acer emerged globally as second largest to ship PCS & Notebooks.

3.6 Receivable Turnover: Acer’s receivable turnover is 5.19 times which is quite poor compared to industry average and Dell. Lower the receivable turnover indicates Acer is not efficient to collect its receivables compared to industry competitors. Furthermore Acer’s receivable turnover reduced over time which may be due to economic downturn and borrowers not able to pay debt on time.

4. Leverage / Debt Management Ratios

     Leverage or Debt management ratios show how much company borrows from creditors.

4.1 Debt Ratio: Acer’s debt ratio declined by 2.22 % during 2008 and by 1.88 % in the latest quarter followed by previous year’s debt ratio, which means Acer’s liabilities decreased during 2008 and latest quarter. Compared to Acer, Dell’s debt ratio is higher which means Dell’s liability increased.

     Creditors may want lower debt ratio because during the time of liquidation, creditors can get their money back easily because company has more in assets and lower liabilities, on the contrary, stockholders may look for higher debt ratio because when company borrowed money from creditors, it pays more in interest and hence stockholder’s profit / return maximized (Brigham E. F., & Ehrhardt M. C, 2008).

4.2 Debt / Equity Ratio: Acer’s debt/equity ratio is 0.14% which is lower than industry average by 0.28% and 0.63% lower than its competitor Dell Inc. Lower the debt/equity ratio, lower the liabilities and stronger balance (Gamble et at., 2010). Both debt/asset and debt/equity ratio indicates, Acer’s liabilities decreased and hence it has stronger balance on assets side, hence Acer has upward progressive growth.

4.3 Time Interest Earned: Acer’s time interest earned is 24.08 times which is greater than its competitor and also relatively increased since 2007. Time interest earned measures Acer’s ability to pay annual interest charges. Higher time interest earned ratio, less risky for company to meet its obligations.

5 Market Value Ratios

     Market value ratios show relationship of stock price to earnings, cash flow, book value per share and sales (Brigham E. F., & Ehrhardt M. C, 2008)..

5.1 Price / Earnings Ratio: Price / Earnings ratio for Acer Inc. is 21.4 times which is above Industry average and its competitor Dell. Higher the P/E ratio shows more growth prospects for investors.

5.2 Price / Cash Flow ratios: Acer’s price/cash flow ratio 6.4 times is about half of the industry average (12.06 times) and also slightly lower than its competitor Dell (7.35 times). This indicates lower growth aspects for Acer in the future. The ratio is below industry average which may be risky for the company investors.

5.3 Price / Book Ratio: Acer has variations in market / book ratio since 2007. The highest pick was 161.3 times according to ACID (London Stock Exchange) and was 1.7 times as per Standard and Poor’s (US based) in the year 2008 (Morningstar, 2011). Generally the market / book ratio remains above 1. Acer’s recent quarter market / book ratio is below industry average and also below its competitor Dell Inc. More is the market / book ratio, more investors willing to pay for stocks.

5.4 Price / Sales Ratio: Acer’s price / sales ratio is also below industry average and its competitor Dell Inc. Acer’s price / sales ratio has little change over time except in the year 2008 where it was 22.8 times noted by ACID (LSE) and 0.9 times by S&P (Morningstar, 2011). This ratio evaluates its own past performance and useful while comparing similar company.  

Conclusion:

     Acer’s profitability ratios fall below its competitor Dell and also below industry average. Since Acer is relatively smaller in size compare to its competitors in the industry, its profits may be lower. This may be due to Acer’s major source of income or revenue is from Europe and company doesn’t have strong position in US market (Datamonitor, 2010). Acer’s operational management also affects profitability.

     Acer’s liquidity capacity meets the industry standards where they can easily convert current asset in to cash but sometimes Acer has to be dependent on its inventory to generate cash as its quick ratio is below industry average.

      Furthermore, Acer’s operations over receivable are very poor. Receivables take more than suggested days. Acer’s inventory turnover, days sales outstanding, and days inventory is more than the industry average which show Acer may face difficulty to clear its inventory and to receive sales amount. This is a contrary from Acer’s claim that it ranked 2^nd globally in PC shipment during 2009 (Acer annual report, 2009). If this is true the DSO should be more and days inventory should be less than the industry average but it’s not prove from the ratios. This creates question against company’s quick shipment and delivery efficiency. Acer need to improve its operational management to reduce DSO and to clear inventory.

     Acer’s leverage ratio indicates its liabilities decreased in the latest quarter and hence stockholder’s return may reduce as company not borrowing any more money from creditors. Decreased in liabilities is in favor of Acer Inc. so company can invest more in research and innovation.

    Acer’s stocks show poor performance compared to industry average and to its competitor Dell Inc. Acer can give low return to its investors compared to industry average.

     Overall Acer Inc. needs to improve its operations and distribution chain so it can expand its business. Although the company operates in Americas, Europe, Africa and Middle East and Asia-Pacific the effective distribution and manufacturing channel should be develop to reduce receivable times and increase inventory turnover. Acer’s new product line ICONIA (Acer, 2011) may bring some shining hope for the company to expand its business and the company may complete its objective to become world’s number one mobile PC Company (Wang J. T., 2009).

References

Brigham, E. F., & Ehrhardt, M. C. (2008). Analysis of financial statements, Financial Management Theory and Practice 12^th edition (pp. 123-136). Thomson South Western, OH.

Datamonitor. (2010, September 9). Acer Inc. Company Profile. Retrieved on March 22, 2011 from http://0search.ebscohost.com.helin.uri.edu/login.aspx? direct=true&db=bth&AN =54576734&site=bsi-live

ICONIA. (2011). Welcome to the world of ICONIA. Retrieved on April 05, 2011 from http://us.acer.com/ac/en/US/content/iconia-home

Key Ratios: Acer Inc. GDR ACID (2011). Retrieved on April 07, 2011 from http://financials.morningstar.com/ratios/r.html?t=ACID&region=GBR&culture=en-US

Key Ratios: Dell Inc. DELL (2011). Retrieved on April 07, 2011 from http://financials.morningstar.com/income-statement/is.html? t=DELL &region =USA&culture=en-us

Thompson, Jr. A., Gamble, J., and Strickland III, A. (2010). Key Financial Ratios : How to Calculate Them and What They Mean: Evaluating a Company’s Resources and Competitive Position. Crafting and Executing Strategy (17th ed.) (pp.104-105). New York: McGraw Hill Publication.

Wang, J. T. (2009). Acer Annual Report 2009. Retrieved on April 7, 2011 from http://www.acer-group.com/public/Investor_Relations/pdf/2009AnnualReport_English.pdf