Finance Concepts and Short Essay Questions

1) Debt-

A debt is the money that is owned by a person to another. It usually comprises of two parties, a creditor and a debtor. Examples include; short-term bank loans, lease payments and wages.

2) Bond-

A bond is a form of a loan, which is usually a long-term loan, offered with a fixed interest rate which is calculated as per the agreed terms. The common types of bonds are municipal bonds and corporate bonds. Examples of bonds include; treasury bills, treasury notes and municipal bonds.

3) Risk-

A risk is a situation where a person becomes exposed to something of value but dangerous. In business, it is referred to as taking a risk. There are different types of risks which are, business risk, financial risks and non-business risks. Examples of risks are; natural disasters like floods, fire damage and financial loss in a firm.

4) Annuity-

An annuity is referred to as a fixed amount of money, that is usually paid to a person every year and goes continues in his entire life. The types of annuities include, immediate annuity, deferred income annuity, and fixed annuity. The common examples of annuities are; monthly payments to an insurance company, regular depositing funds to a saving account and also payment of pension. Annuity at many times usually involves an insurance company.

5) Deficit-

It is also called budget deficit. It is the amount of money spent at a particular period of time which is more than the revenue at that time. An example of deficit is where a company spends about 1000 dollars while its original revenue is 850 dollars.

6) Primary Market-

Primary market is also called new issue market. It is found where new securities are issued in the market. A good example of a primary market is where a company decides to sell its shares to the members of the public at a specific market.

7) Secondary Market-

This type of market is where a firm buys securities and own them, and later sells them to the members of public in a stock exchange market. The commonly examples of secondary market involves national stock exchange and the New York exchange. When they are first issued, is when they are able to be sold in primary market.

8) Debenture-

A debenture is a type of a loan which is usually issued by large companies and the government to the people of the public which is usually at a fixed rate. A good example of a debenture is a loan between the government and the public members.

9) Loanable Fund-

It is the money collected in total by the people in an economy that is rather than being used for consumption, it is lend out to people as an investment. Examples of Loanable funds are small loans given to people from different organization.

10) Return-

It is the total money that a business accumulates and loses over a period of time. An example of a return is original return which is filled within the date required and a revised return which is filled after the period required.

2. Financial Analysis

1.

SAIC Motor Corporation Limited (SAIC Motor) is the largest auto company on China's A-share market. The Company's principal activities include research and development (R&D), production and sales of vehicles (including passenger vehicles and commercial vehicles); active promotion of the commercialization of new-energy vehicles and internet vehicles, and implementation of technical research and industrialization exploration such as intelligent driving; R&D, production and sales of spare parts. In 2018, SAIC Motor achieved a sales volume of 7.05 million (1.75% Y-Y growth) and accounted for 24.1% of the Chinese market, making itself the first Chinese auto company with annual sales over 7 million. And the large automobile manufacturing sector accounted for more than 95% of the revenue. With consolidated revenue of $136.39 billion, SAIC Motor took the 39th place on the 2019 Fortune Global 500 list, ranking 7th among all auto makers on the list and 10th among all Chinese companies.

BYD is a high-tech company devoted to technological innovations for a better life. After more than 20 years of fast growth, the company has established over 30 industrial parks worldwide and has played a significant role in industries related to electronics, automobiles, new energy and rail transit. From energy generation and storage to its applications, BYD is dedicated to providing zero-emission energy solutions. BYD is listed on the Hong Kong and Shenzhen Stock Exchanges, with revenue and market capitalization each exceeding RMB 100 billion.

In China, SAIC Motor and BYD both are successful auto companies. Therefore, we can compare the differences between SAIC Motor and BYD in total assets, total sales and market capital in 2018.

Table 1 Unit: billion Yuan

Reference: SAIC Motor and BYD annual report in 2018

From table 1, we can see SAIC Motor is far better than comparable competitor BYD in terms of total sales and total assets. It is mainly due to the advantages of collaborative integration of industrial system and continuous improvement of innovation ability. SAIC Motor is the automobile enterprise with the most complete layout and the strongest comprehensive strength in the domestic automobile industry chain. Aiming at the new development trend of the automobile industry, it promotes the implementation of the "new four modernizations" development strategy, which are electrification, intelligent networking, sharing and internationalization. And it also has established an independent R & D system with global linkage.

2.

Table 2 Income statement

Unit: Yuan

Reference: SAIC Motor annual report 2016 to 2018

Since 2009, SAIC Motor 's net profit has been growing rapidly, and it is far ahead of all enterprises in this industry. From 2016 to 2018, SAIC Motor 's net profit increased steadily. In 2018, the Company’s total operating income was RMB 902.194 billion, a year-on-year increase of 3.62%; the net profit attributable to the shareholders of the listed companies was RMB 36.009 billion, a year-on-year increase of 4.65%; the net profit attributable to shareholders of listed companies after deducting nonrecurring profit or loss was 324 billion, a year-on-year increase of -1.5%.

This is mainly due to the accumulative effects of internal and external factors. The year 2018 witnessed the first annual negative growth in the domestic automotive market since 1990. In 2018, a total of 28.146 million vehicles were sold in domestic market, a year-on-year decrease of 3.8%. But the Company sold 7.052 million vehicles, a year-on-year increase of 1.8%, 5.6% more than overall market growth rate in 2018.

3.

Table 3 Balance sheet

Unit: RMB

Reference: annual report 2017 to 2018

In 2018, the Company’s total assets was RMB 782.77 billion, a year-on-year increase of 8.19%; the total liabilities of the listed companies was RMB 498.05 billion, a year-on-year increase of 10.33%.

Table 4 Cash flow statement

Unit: RMB

Reference: annual report 2017 to 2018

From table 4, we can see that the net cash flow from operating activities decreased by RMB 15.33 billion year on year, a decrease of 63.06%, which was mainly due to SFC’s decrease of customer deposits for the period. The net cash flow from investing activities increased by RMB 20.76 billion year on year, an increase of 190.22%, which was mainly due to SFC’s reduction of financial asset allocation according to liquidity demand, increasing cash receipts from disposal and recovery of investments and decreasing cash payments to acquire investments. The net cash flow from financing activities decreased by RMB18.62 billion year on year, a decrease of 3792.19%, which was mainly due to cash receipts of fund raised by non-public offering of shares last year, but none in the current period.

4.

 Liquidity means an ability to pay as and when some obligations are due. 

Current Ratio=.

This ratio over 1 indicates that the company’s debts due in a year or less are smaller than its assets. The higher the current ratio, the more capable a company is of paying its obligations because it has a larger proportion of short-term asset value relative to the value of its short-term liabilities.

Asset management ratio= =.

This ratio measures how effectively a firm is managing its assets. The lower the ratio of management cost to operating cost, it shows that SAIC Motor is a high profit company.

Debt ratio==63.63%

This ratio explains the proportion of a company’s assets that are financed by debt. According to the formula, the debt ratio of SAIC Motor is 63.63% of the average level. This ratio is within the suitable range.

Interest coverage

This ratio measures the margin of safety a company has for paying interest on its debt during a given period. The higher the interest coverage ratio, it shows how easily SAIC Motor can pay their interest expenses on outstanding debt.

Profits are reflected in the margins you make at each stage of operations. We can use gross margins to do profitability analysis.

.

According to the calculation, we know that the gross profit margin of SAIC Motor is 13.25%.

In my view, SAIC Motor has long term investment value. There are three reasons as follows.

Firstly, the Company has leading advantages in domestic market. SAIC Motor gave a full display of its solid growth strength and innovative development ability under the background that the car market suffered from a negative growth with large volume base.

Secondly, the Company has advantages in its industrial system with integration synergy. The Company is an automobile enterprise with the most complete domestic auto industry chain layout and the most remarkable comprehensive strength.

Thirdly, the Company has advantages in its continuously advancing innovation capability. Focused on “intelligent mobility for people, convenient services for vehicles and highly efficient flow of things”, the Company took advantage of AI, big data and cloud computing technology, brought the superiority of resource synergy advantage of industry chain into full play, and accelerated the construction of transportation platform and service ecology of SAIC.