Corporate History – Philips

In the early 1800’s, the idea of lighting and incandescent lightbulbs was becoming more

popular, and as the time went on entrepreneurs went with the idea of producing lightbulbs. One

family, known as the Philips, Gerard and Fredredick, were two individuals who were inspired by

the lightbulb invention, so they began producing the carbon-filament lamps (Philips, 2018). As

the years went on, Philips continued to strive in lighting and later started a research laboratory in

1914, known as NatLab (Philips, 2018). Over the years, Philips has shown their ability to keep

researching, developing, and producing modern technology.

Philips was once known for producing a large variety of products, such as, lightbulbs, x-

ray machines, CT scanners, televisions, DVD players, toothbrushes, and so much more. Now,

Philips focuses on their healthcare and lighting products, primarily healthcare to continue good

health and well-being of all customers (Philips, 2018). As individuals are continuing to have

needs for medical attention, the need for medical devices will always be in demand, so Philips

focuses on fulfilling the needs of today’s consumers.

Financial Analysis

Businesses face a variety of difficulties within every sector, so there is always room for

improvement. There are different forms of improvement throughout the business, but when it

pertains to daily financial performance of the business, there are different ways to analyze. The

financial managers will use ratios to analyze the performance of the business. The four major

groups of ratios consist of profitability ratio, asset utilization ratio, liquidity ratio, and debt

utilization ratio. The following example of ratios apply to Philips from 2014 – 2017.
Profitability

The analysis of business performance begins with the profitability ratios. The ratios help

determine how the business is managing sales, assets, and equity (Block, Hurt & Danielson,

2017).

Figure 1: Profitability Ratios for Philips (2014-2017)

Profitability
2014 2015 2016 2017
Ratios

Profit Margin
1.92 2.72 6.08 10.52
(%)

Return On Assets
1.45 2.13 4.62 7.40
(%)

Return on Equity
3.75 5.60 11.04 15.54
(%)

Profit Margin

The profit margin has gradually increased over the last four years, but by 2017 it has had

a significant percent increase than in 2014. Although sales for 2014 were not much lower

compared to 2015-2017, the net income was significantly lower than the other three years. The

decline in sales for 2014 were due to organizational changes in addition to the main concern of

operational decline within the Healthcare and Lighting sector (Block, Hurt & Danielson, 2017).

Overall, the business has continuously improved on their profit margins by either meeting or

exceeding the industry average.

Return on Assets
 Return on assets has continued to increase, but still showing a significant increase

between 2014 and 2017. The years 2014-2016 had a larger amount of total assets than 2017.

Return on Equity

Return on equity was quite low in 2014 but began to increase over the years. By 2017,

return on equity has shown how much income has grown since 2014. With an increase in sales

and net income, equity is bound to increase as well. Unfortunately, for the years 2014-2016, it

shows that return on equity was below industry average.

Asset Utilization

Asset utilization is the next group of ratios that are used. The ratios are used to determine

how fast the company can turnover assets while increasing income.

Figure 2: Asset Utilization Ratios for Philips (2014-2017)

Financial Ratios 2014 2015 2016 2017

Receivables
Turnover 4.80 5.13 4.91 4.93
(times)

Average Collection
75.34 70.20 73.30 73.06
Period

Inventory
6.45 7.00 7.23 7.56
Turnover (times)

Fixed Asset
10.21 10.44 11.38 11.18
Turnover (times)

Total Asset
0.75 0.78 0.76 0.70
Turnover (times)
Receivables Turnover

Receivables turnover has shown to be on an up and down slope. In 2015, it increased by a

small amount and then fell again in 2016 and 2017. The amounts for 2014 and 2017 have lower

sales, but 2014 has higher accounts receivables. In addition, for 2017 Philips had a much lower

accounts receivable balance than the other years.

Average Collection Period

The average collection period has a pattern of fluctuating up and down throughout 2014-

2017, like how receivables turnover was. The increase represents an increase in accounts

receivables, 2014 showing lower sales than 2016. However, 2017 shows a ratio very comparable

to 2016, with the exception of lower sales and lower accounts receivables overall.

Inventory Turnover

Inventory turnover has continually increased over the course of four years. For 2014-

2016, the ratios are a result of higher number inventories compared to a lower number of

inventories for 2017. Since 2017 was still greater than the other years, this was a result of lower

sales versus lower number of inventories.

Fixed Asset Turnover

The fixed asset turnover shows an increase from 2014 until 2016, but slightly drops in

2017. Between the years of 2014 and 2016, had an increase in the overall plant and equipment

investment, whereas 2017 has less with lower sales.

Total Asset Turnover

Total asset turnover has shown a slight increase in turnovers, but then decrease. In

addition to fixed assets turnover, total asset turnover has the same measurements of plant and

equipment investments.
Liquidity

Although it is important to measure profitability and asset utilization, it is also important

to measure liquidity of the business. Liquidity ratios are used to determine if there are substantial

amounts of financial funds needed to pay loans (Block, Hurt & Danielson, 2017).

Figure 3: Liquidity Ratios for Philips (2014-2017)

Financial Ratios 2014 2015 2016 2017

Current Ratio 1.43 1.26 1.34 1.47

Quick Ratio 1.05 0.92 1.02 1.13

Current Ratio

Current ratio stayed relatively low compared to industry average, but they are still

advancing fast. In 2014, the ratio shows that the business is closer to average even though they

were balancing acquisitions and divestments.

Quick Ratio

Although the quick ratios are a little different, especially for 2017, the business is close to

improving their short-term liabilities.

Debt Utilization

Debt utilization is the last of the four for financial ratios. These ratios help analysis to

determine whether their debt management policies are effective or not (Block, Hurt & Danielson,

2017).
Figure 4: Debt Utilization for Philips (2014-2017)

Financial Ratios 2014 2015 2016 2017

Debt to total
assets (%)
14.48 18.60 17.35 18.63

Times interest
earned (times)
0.64 1.78 3.69 6.20

Debt to Total Assets

Debt to total assets was significantly low compared to industry average of 33%.

Although, 2015-2017 show that they are continuously fluctuating in the same percentile. As for

2014, Philips had acquisitions that affected their overall debt-to-assets.

Times Interest Earned

The times interest earned increased significantly over the four years, showing a huge

increase in 2017. Although the ratios may not be industry average, it still shows a strong change.

From 2014 – 2017, the ratios have shown how the company is becoming stronger in interest

paying obligations.

Summary of Financial Ratios

Philips may have shown their ups and downs throughout the four years, but they are still

showing improvements. In 2014, the business had a difficult year while dealing with acquisitions

along with divestments, but they managed to pull through the following year.