Asset management

Current ratio.

The current ratio, which is the current assets divided by the current liabilities, is used to give an idea of a firm’s ability to pay its short-term debts and payables. A low current ratio indicates that the company may be less able to do so, and a ratio lower than 1 might indicate that a company might be unable to pay its debts if called to do so at that point. On the other hand, if the current ratio is too high, then the company may not be efficiently using its current assets or its short-term financing facilities. A relatively low current ratio could be an indicator that a company has good long-term prospects and so is able to borrow against predicted future performance.

As can be seen in figure 6, which compares the current ratios of SEC, TSMC, and the industry average in the years 1998-2009, all three (with the exception of SEC in the years

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1999 and 2000), have average current ratios above 1. SEC’s mean current ratio is 1.37, TSMC’s is 3.52, and the industry average is 5.18.

Although on average the industry average current ratio is higher than either SEC or TSMC, this is not an indication that either firm is performing poorly. SEC, for example, has had a fairly consistent current ratio over the ten years, which is an indication of consistent asset management. The fact that it remains just above 1 could also be the result of the situation discussed in earlier sections in which, as part of a larger chaebol, SEC can draw on the other businesses in the Samsung Group for financial support. TSMC has kept a healthy average current ratio of around 3 with the exceptions of the years 2003 and 2005, which as already stated were times of relatively slow growth, and the higher current ratio for those years could be accounted for by industry-wide influences. In any case, after both the high points of 2003 and 2005, TSMC’s current ratio moved back towards its equilibrium of about 3.

Current Ratios 1998-2009: SEC, TSMC, and Industry Average

0.00

SEC 1.10 0.91 0.90 1.07 1.43 1.47 1.60 1.70 1.53 1.54 1.52 1.64 TSMC 3.24 2.68 2.09 2.52 3.04 5.19 2.86 6.14 4.51 3.98 3.39 2.56 Industry Average 3.50 4.27 5.49 6.36 5.74 5.34 5.44 4.96 5.33 5.02 5.41 5.36 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 6: SEC, TSMC, and industry average current ratios 1998-2009.

Source: SEC and TSMC Annual Reports, Compustat.

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In both cases of SEC and TSMC, the current ratios over the time examined suggest healthy financial performance in terms of their ability to utilize their current assets to finance their short-term debts and payables.

Inventory turnover ratio.

The inventory turnover ratio is another measure of asset management, and it takes the form of the cost of goods sold divided by average inventory. In this case, a low ratio indicates that sales are poor, creating excess inventory. A high ratio usually indicates strong sales.

In examining figure 7, it can be seen that on average both TSMC and SEC have inventory turnover ratios (approximately 10 and 12 percent respectively) that are consistently higher than the industry average of about 5%. Both firms began at about the same point as the industry average at the beginning of the twelve-year period, but while the industry average trended downward over the last three years, TSMC increased in 2008 and dropped slightly in 2009, while SEC trended consistently upward. In both cases the ability to post sales that are stronger than the industry average are indicated, thus providing evidence of sound asset management and financial performance.

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Inventory Turnover Ratios 1998-2009: SEC, TSMC, and Industry Average Industry Average 4.15 4.97 5.53 4.43 5.39 5.27 4.54 4.33 4.48 4.46 4.22 3.81

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 7: SEC, TSMC, and industry average turnover ratios 1998-2009.

Source: SEC and TSMC Annual Reports, Compustat.

Days inventory outstanding.

Days inventory outstanding (DIO), calculated by the average inventory divided by the cost of goods sold per day, is an indicator of how long it takes a firm to turn its inventory into sales. Generally the lower number of days the better.

Figure 8 clearly shows that both SEC and TSMC perform significantly better than the industry average in turning their inventories into sales, with means of 32 and 37 days

respectively, while the industry average is approximately triple that at 107 days. Again, both firms display exceptional performance for their industry for their ability to manage assets and turn inventories into sales more quickly than their competitors.

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Days Inventory Outstanding 1998-2009: SEC, TSMC, and Industry Average

Industry Average 114 98 95 128 121 107 105 103 104 102 101 105 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 8: SEC, TSMC, and industry average days inventory outstanding 1998-2009.

Source: SEC and TSMC Annual Reports, Compustat.

Fixed asset turnover ratio.

The fixed asset (FA) turnover ratio is calculated by dividing net sales by fixed assets (net property, plant, and equipment). It is an asset management measurement that shows a company’s ability to generate sales from its fixed asset investments. A high ratio shows that the firm is effective in turning its fixed assets into revenues.

In the case of this measurement, figure 9 shows that both SEC and TSMC have a relatively low fixed asset turnover ratio when compared with the industry average (respective means of 2.71, 1.08, and 7.23). This can be misleading, however, unless the nature of the industry and the individual businesses is taken into account. SEC and TSMC both take part in the manufacture of semiconductors, which requires substantial investment in fabrication facilities, thus lowering their FA turnover ratios. The semiconductor industry as a whole, on the other hand, is also made up of firms that partake predominantly in design operations or sales that require significantly lower investments in fixed assets. More telling, and indicative

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of the firms’ financial soundness, is the relatively low level of variation in both TSMC and SEC’s FA turnover ratios compared with the industry as a whole. This shows that they manage their fixed assets in a consistent way, and their overall financial performance shows that they do so in an effective manner.

Fixed Asset Turnover Ratio 1998-2009: SEC, TSMC, and Industry Average

0.00 Industry Average 5.14 5.95 6.54 5.20 4.65 5.42 7.80 10.15 10.03 8.82 8.72 8.35

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 9: SEC, TSMC, and industry average fixed asset turnover ratios 1998-2009.

Source: SEC and TSMC Annual Reports, Compustat.

Total assets turnover ratio.

The total assets (TA) turnover ratio is another asset management measurement that is calculated by dividing sales by total assets. It is used to determine how efficiently a firm uses its assets to generate sales, and generally the higher the number the better. It can also reveal pricing strategies, with firms having a higher profit margin often having a lower asset turnover, while lower profit margin firms often have a higher asset turnover.

By examining figure 10 we can see that TSMC, which enjoys high profit margins, has a TA turnover ratio that is slightly lower (but follow the trend of) the industry average. On the other hand, SEC, which has lower profit margins than TSMC, has a higher TA turnover

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ratio than the industry average. As was the case with the FA turnover ratio, the relatively low level of variation over time again shows consistency and indicates effective asset

management.

Total Assets Turnover Ratios 1998-2009: SEC, TSMC, and Industry Average

0.00 Industry Average 0.89 0.93 0.80 0.54 0.55 0.61 0.71 0.71 0.73 0.69 0.68 0.62

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 10: SEC, TSMC, and industry average total asset turnover ratios 1998-2009.

Source: SEC and TSMC Annual Reports, Compustat.

Accounts receivable turnover ratio.

The accounts receivable (A/R) turnover ratio is another asset management measure that is used to quantify a firm's effectiveness in extending credit as well as collecting debts. It is calculated dividing sales by the average accounts receivable. The higher the ratio, the more efficient the firm is at collecting debts. A high ratio could also indicate that the firm operates on more of a cash basis.

As figure 11 indicates, SEC has a significantly higher A/R turnover ratio than either TSMC or the industry average, the two of which are similar. This can be accounted for by again looking at the type of business model that SEC uses, selling not only semiconductors

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but also consumer goods. TSMC, on the other hand, only sells to other businesses, and so its sales are all done on credit, which lowers its A/R turnover ratio.

Accounts Receivable Turnover Ratio: SEC, TSMC, and Industry Average

0.00

SEC 9.07 17.68 27.46 31.59 40.65 35.06 42.49 40.62 35.32 34.69 29.84 19.14 TSMC 5.90 7.18 8.07 5.56 9.63 9.59 9.70 8.33 9.50 8.99 11.30 11.37 Industry Average 7.52 7.37 9.04 8.08 9.01 7.99 9.84 9.75 9.75 9.84 10.09 9.81

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 11: SEC, TSMC, and industry average accounts receivable turnover ratios 1998-2009.

Source: SEC and TSMC Annual Reports, Compustat.