Canon 2011 Annual Report Download - page 41

Strategy Business Units Management System FINANCIAL SECTION
39
!37 !101
FINANCIAL SECTION
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Canon uses in managing its business. The changes from year to
year in these KPIs are set forth in the table shown on page 39.
Revenues
As Canon pursues the goal to become a truly excellent
global company, one indicator upon which Canon’s man-
agement places strong emphasis is revenue. The following
are some of the KPIs related to revenue that management
considers to be important.
Net sales is one such KPI. Canon derives net sales primarily
from the sale of products and, to a much lesser extent, provi-
sion of services associated with its products. Sales vary
depending on such factors as product demand, the number
and size of transactions within the reporting period, market
acceptance for new products, and changes in sales prices.
Other factors involved are market share and market environ-
ment. In addition, management considers the evaluation of
net sales by segment to be important for the purpose of
assessing Canon’s sales performance in various segments, tak-
ing into account recent market trends.
Gross profit ratio (ratio of gross profit to net sales) is
another KPI for Canon. Through its reforms of product devel-
opment, Canon has been striving to shorten product
development lead times in order to launch new, competitively
priced products at a faster pace. Furthermore, Canon has fur-
ther achieved cost reductions through enhancement of
efficiency in its production. Canon believes that these achieve-
ments have contributed to improving Canon’s gross profit
ratio, and will continue pursuing the curtailment of product
development lead times and reductions in production costs.
Operating profit ratio (ratio of operating profit to net
sales) and research and development (!R&D") expense to net
sales ratio are considered to be KPIs by Canon. Canon is focus-
ing on two areas for improvement. Canon is striving to
control and reduce its selling, general and administrative
expenses as its first key point. Secondly, Canon’s R&D policy
is designed to maintain a certain level of spending in core
technology to sustain Canon’s leading position in its current
business areas and to seek possibilities in other markets.
Canon believes such investments will create the basis for
future success in its business and operations.
Cash flow management
Canon also places significant emphasis on cash flow manage-
ment. The following are the KPIs with regard to cash flow
management that Canon’s management believes to be important.
Inventory turnover measured in days is a KPI because it
measures the adequacy of supply chain management.
Inventories have inherent risks of becoming obsolete, physi-
cally damaged or otherwise decreasing significantly in value,
which may adversely affect Canon’s operating results. To mit-
igate these risks, management believes that it is crucial to
continue reducing inventories and decrease production lead
times in order to promptly recover related product expenses
by strengthening supply chain management.
Canon’s management seeks to meet its liquidity and capital
requirements primarily with cash flow from operations.
Management also seeks debt-free operations. For a manufactur-
ing company like Canon, it generally takes considerable time
to realize profit from a business as the process of R&D, manu-
facturing and sales has to be followed for success. Therefore,
management believes that it is important to have sufficient
financial strength so that the Company does not have to rely
on external funds. Canon has continued to reduce its depend-
ency on external funds for capital investments in favor of
generating the necessary funds from its own operations.
Canon Inc. stockholders’ equity to total assets ratio is
another KPI for Canon. Canon believes that its stockholders’
equity to total assets ratio measures its long-term sustainabil-
ity. Canon also believes that achieving a high or rising
stockholders’ equity ratio indicates that Canon has main-
tained a strong financial position or further improved its
ability to fund debt obligations and other unexpected
expenses. In the long-term, Canon will be able to maintain a
high level of stable investments for its future operations and
development. As Canon puts strong emphasis on its R&D
activities, management believes that it is important to main-
tain a stable financial base and, accordingly, a high level of
its stockholders’ equity to total assets ratio.
KEY PERFORMANCE INDICATORS
2011 2010 2009 2008 2007
Net sales (Millions of yen)
¥ 3,557,433 ¥3,706,901 ¥3,209,201 ¥4,094,161 ¥4,481,346
Gross profit to net sales ratio 48.8% 48.1% 44.5% 47.3% 50.1%
R&D expense to net sales ratio 8.7% 8.5% 9.5% 9.1% 8.2%
Operating profit to net sales ratio 10.6% 10.5% 6.8% 12.1% 16.9%
Inventory turnover measured in days 46 days 35 days 39 days 47 days 44 days
Debt to total assets ratio 0.3% 0.3% 0.3% 0.4% 0.6%
Canon Inc. stockholders#equity to total assets ratio 64.9% 66.4% 69.9% 67.0% 64.8%
Note: Inventory turnover measured in days; Inventory divided by net sales for the previous six months, multiplied by 182.5.