Canon 2015 Annual Report Download - page 37

CANON ANNUAL REPORT 2015 35
STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA
involved are market share and market environment. In addi-
tion, management considers the evaluation of net sales by
segment to be important for the purpose of assessing Canon’s
sales performance in various segments, taking 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 develop-
ment lead times in order to launch new, competitively priced
products at a faster pace. Furthermore, Canon has further
achieved cost reductions through enhancement of efficiency in
its production. Canon believes that these achievements have
contributed to improving Canon’s gross profit ratio, and will
continue pursuing the curtailment of product development
lead times and reductions of production costs.
Operating profit ratio (ratio of operating profit to net sales)
and R&D expense to net sales ratio are considered to be KPIs
by Canon. Canon is focusing 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 adequate spending in
core technology to sustain Canon’s leading position in its cur-
rent business areas and to exploit opportunities in other mar-
kets. 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 relating to cash flow man-
agement that Canon’s management believes to be important.
Inventory turnover measured in days is a KPI because it mea-
sures the efficiency of supply chain management. Inventories
have inherent risks of becoming obsolete, physically
damaged or otherwise decreasing significantly in value, which
may adversely affect Canon’s operating results. To mitigate
these risks, management believes that it is crucial to continue
reducing work-in-process inventories by decreasing produc-
tion lead times in order to promptly recover related product
expenses, while balancing risks of supply chain disruptions by
optimizing finished goods inventories in order to avoid losing
potential sales opportunities.
Canon’s management seeks to meet its liquidity and cap-
ital requirements primarily with cash flow from operations.
Management also seeks debt-free operations. For a manufac-
turing company like Canon, it generally takes considerable time
to realize profit from a business due to lead times required for
R&D, manufacturing 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
dependency on external funds for capital investments in favor
of generating the necessary funds from its own operations.
Canon Inc. shareholders’ equity to total assets ratio is
another KPI for Canon. Canon believes that its shareholders’
equity to total assets ratio measures its long-term sustainabil-
ity. Canon also believes that achieving a high or rising share-
holders’ equity ratio indicates that Canon has maintained
a strong financial position or further improved its ability to
fund debt obligations and other unexpected expenses. In the
long-term, Canon’s management believes a high sharehold-
ers’ equity ratio will enable the company to maintain a high
level of stable investments for its future operations and devel-
opment. As Canon puts strong emphasis on its R&D activities,
management believes that it is important to maintain a stable
financial base and, accordingly, a high level of its shareholders’
equity to total assets ratio.
KEY PERFORMANCE INDICATORS
2015 2014 2013 2012 2011
Net sales (Millions of yen) ¥3,800,271
¥3,727,252 ¥3,731,380 ¥3,479,788 ¥3,557,433
Gross profit to net sales ratio 50.9% 49.9% 48.2% 47.4% 48.8%
R&D expense to net sales ratio 8.6% 8.3% 8.2% 8.5% 8.7%
Operating profit to net sales ratio 9.3% 9.8% 9.0% 9.3% 10.6%
Inventory turnover measured in days 47 days 50 days 52 days 57 days 46 days
Debt to total assets ratio 0.0% 0.0% 0.1% 0.1% 0.3%
Canon Inc. shareholders’ equity to total assets ratio 67.0% 66.8% 68.6% 65.7% 64.9%
Note: Inventory turnover measured in days is determined by: Inventory divided by net sales for the previous six months, multiplied by 182.5.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements are prepared in accor-
dance with U.S. generally accepted accounting principles
(“GAAP”) and based on the selection and application of sig-
nificant accounting policies which require management to
make significant estimates and assumptions. These estimates
and assumptions include future market conditions, net sales
growth rate, gross margin and discount rate. Though Canon
believes that the estimates and assumptions are reasonable,
actual future results may differ from these estimates and
assumptions. Canon believes that the following are the more
critical judgment areas in the application of its accounting
policies that currently affect its financial condition and results
of operations.