Part I:Introduction-objective and scope of financial analysis Part II: Country Analysis A. Macroeconomic Analysis and Economic Ties China has undergone a relatively great deal of economic restructuring over the past year  and will likely continue to do so moving forward, due to initiatives put in place by the government.  China has been transitioning from an investment- and export-led growth model to one driven by consumption and innovation, which has led to the emergence of what is being called a two-track economy.  The part of the economy that is focused in basic manufacturing and traditional industries is experiencing difficulty growing, while the part of the economy focused in services, advanced manufacturing and consumer markets shows strong potential growth.  The economy does face some potential risks though.  Due to deterioration of the financial structure and decline of financial efficiency, the economy faces risks of stagflation and risks triggered by rising interest rates, worsening family finances and a real estate bubble.  As a whole, the Chinese economy is predicted to have long-term growth from various dividends including system, labor, science and technology, natural resources, internationalization and ecologicalization that will promote strong and continuous growth and changes in the economic development. B. Political Analysis The political power in China is called the Chinese Communist Party (CCP)and has been in control for 63 years.  Conflicting interests among leaders and institutions is common, but a state of a permanent monopoly on power and intolerance of those who question its right to rule still exists.  There is, however, a collective leadership body of China's most senior leadership body, known as the Communist Party's Politburo Standing Committee (PSC).  In the PSC the leaders are ranked from one to nine, one having the most power, but a majority must be in accordance for the passing of major policies.  The PSC has "absolute leadership" and control over the military, known as the People's Liberation Army (PLA).  The PLA is also allowed to have two uniformed officers serve on the PSC.  Overall, political figures have the power and ability to influence and/or advance particular causes, include an increasingly diverse media, state-owned and private corporations, official and quasi-official research institutes, university academics, officially sponsored associations and societies, and grassroots non-governmental organizations. C. Providers of Financing D. Cultural Analysis As home to more than one billion people, China has a variety of customs and traditions that vary by geography and ethnicity.  Vital components of Chinese culture include religion, food, style, language, marriage, and music.  Currently there are five official religions recognized in China - Buddhism, Taoism, Islam, Catholicism, and Protestantism.  All other religions are illegal.  As far as language is concerned, there are seven major groups of di.

1. Part I:Introduction-objective and scope of financial analysis
Part II: Country Analysis
A. Macroeconomic Analysis and Economic Ties
China has undergone a relatively great deal of economic
restructuring over the past year and will likely continue to do
so moving forward, due to initiatives put in place by the
government. China has been transitioning from an investment-
and export-led growth model to one driven by consumption and
innovation, which has led to the emergence of what is being
called a two-track economy. The part of the economy that is
focused in basic manufacturing and traditional industries is
experiencing difficulty growing, while the part of the economy
focused in services, advanced manufacturing and consumer
markets shows strong potential growth. The economy does face
some potential risks though. Due to deterioration of the
financial structure and decline of financial efficiency, the
economy faces risks of stagflation and risks triggered by rising
interest rates, worsening family finances and a real estate
bubble. As a whole, the Chinese economy is predicted to have
long-term growth from various dividends including system,
labor, science and technology, natural resources,
internationalization and ecologicalization that will promote
strong and continuous growth and changes in the economic
development.
B. Political Analysis
The political power in China is called the Chinese
Communist Party (CCP)and has been in control for 63 years.
Conflicting interests among leaders and institutions is common,
but a state of a permanent monopoly on power and intolerance
of those who question its right to rule still exists. There is,
however, a collective leadership body of China's most senior
leadership body, known as the Communist Party's Politburo
Standing Committee (PSC). In the PSC the leaders are ranked

2. from one to nine, one having the most power, but a majority
must be in accordance for the passing of major policies. The
PSC has "absolute leadership" and control over the military,
known as the People's Liberation Army (PLA). The PLA is also
allowed to have two uniformed officers serve on the PSC.
Overall, political figures have the power and ability to
influence and/or advance particular causes, include an
increasingly diverse media, state-owned and private
corporations, official and quasi-official research institutes,
university academics, officially sponsored associations and
societies, and grassroots non-governmental organizations.
C. Providers of Financing
D. Cultural Analysis
As home to more than one billion people, China has a
variety of customs and traditions that vary by geography and
ethnicity. Vital components of Chinese culture include religion,
food, style, language, marriage, and music. Currently there are
five official religions recognized in China - Buddhism, Taoism,
Islam, Catholicism, and Protestantism. All other religions are
illegal. As far as language is concerned, there are seven major
groups of dialects of the Chinese language. The majority of the
country, about 72%, speak Mandarin dialect. The cuisine in
China is greatly influenced depending on geographic location
and ethnic group. Regardless, rice and tofu are of major food
sources. Chinese history has impacted various aspects of the
culture including the arts and customs and celebrations.
E. Legal Analysis
The structure of the legal system in China includes the
executive branch, legislative branch, and judicial branch. The
executive branch consists of the President, Vice President, and
The State Council. The National People's Congress (NPC)
elects individuals to serve as President and Vice President. The
State Council is the highest organ of state power, and of state
administration. It consists of the Premiers, Vice-Premiers,
State Councillors, Ministers in charge of ministries, Ministers

3. in charge of commissions, Auditor-General, and the Secretary-
General, whom perform a number of functions and have powers,
including but not limited to: the adoption of administrative
measures, rules and orders, submission of proposals to the NPC,
creation and execution of a plan for national economic and
social development, conducting foreign affairs and concluding
treaties and agreements with foreign nations; protection of the
rights of Chinese nationals abroad, and exercising any other
functions that the NPC may delegate. Each of these individuals
serve a five year term, with a maximum of two consecutive
terms.
The legislative branch consists of the National People's
Congress (NPC), which is deemed to be the "highest organ of
state power." Some powers of the NCP are to amend the
Constitution, enact laws, elect the President and Vice President
of the PRC, elect the President of the Supreme People’s Court,
deciding questions of war and peace, and various removal
powers Legislation is also created at more local levels by the
people’s congresses of provinces, municipalities, autonomous
areas and cities. The stages of a typical bill in the NCP are
presentation, examination, passing the bill and publication of
the enacted law.
The judicial system consists of the people’s courts, the
Supreme People’s Court, the people’s procuratorates, the
Supreme People’s Procuratorate, military procuratorates and
other special people’s procuratorates. There is a hierarchy
within the court structure from the top down: The Supreme
People’s Courts, the Higher People’s Courts, the Intermediate
People’s Courts, and the Basic People’s Courts, as noted in the
diagram below. The specialized courts are also displayed.
Despite the different branches, China’s legislation
structure is not one of checks and balances, where the
legislation, administration and court stand independently to
restrain one another.

4. F. Tax Analysis
China's tax system has gone through various reforms over
the past 30 years. The most recent reform, in 2003, focused on
the goals of the establishment of China's socialist market
economy system. China's value added tax and business tax are
actually still in a transition period, in an effort to eliminate
double taxation issues arising under the prevailing indirect tax
system.
Currently, according to Chinese tax code, taxable income
includes profits, capital gains and passive income, such as
interest royalties and rents, and dividends received from a
foreign entity. Generally, all documented costs related to the
generation of taxable income are deductible unless the law
specifically states otherwise. The normal corporate income tax
rate for this income is 25%. However, special rates apply in the
following situations: for small-scale enterprises if certain
requirements are met (20% or 10%), enterprises with high and
new technology enterprise (HNTE) status (15%), and enterprises
incorporated in certain regions of China and engaged in
encouraged business (15%). Some other tax regulations are
outlined in the charts below:
Part III. Industry analysis
A. Looking at the computer industry, trends, competitive
environment, the major players
Part IV: Company Specific Analysis
A. Specific U.S. GAAP Adjustments
Lenovo prepares its financial statements according to the Hong
Kong Financial Reporting Standards (HKFRS). As such, there
will numerous differences in the amounts reported under the
HKFRS and U.S. GAAP. The significant differences are
highlighted below:
1. Intangible Assets - BothHKFRS and U.S. GAAP amortize
intangible assets on a straight-line basis over the useful life of

5. the intangible asset. However, HKFRS records ‘Customer
Relationships’ with their intangible assets. Customer
relationships are recognized at fair value and amortized on a
straight line basis over its useful life. U.S. GAAP does not
permit the recording of Customer Relationships on the Balance
Sheet. Thus, total assets for Lenovo are higher than they would
be had they been recorded with U.S. GAAP.
2. Provisions/Contingent Liabilities- HKFRS records provisions
on its financial statements; with its U.S. GAAP counterpart
being contingent liabilities. According to HKFRS, provisions
are recognized when there is a probable (more likely than not)
chance that an outflow of resources will be required to settle a
liability.
b. Comparing the two companies warranty provision/contingent
liability, Lenovo has a warranty provision of $1,153,855,000.
HP has a warranty contingent liability of about $1,147,000,000.
Since U.S. GAAP requires contingent liabilities to be recorded
when the probability of occurrence is 70%-90%, I would expect
Lenovo’s warranty expense to be slightly higher since they are
more conservative when the book the provision. HP’s revenue
is also nearly $20 billion higher than Lenovo, yet Lenovo
reports a higher warranty provision. This makes sense because,
as stated previously, Lenovo is more likely to record warranty
provisions than HP.
1. Inventories- Inventories under HKFRS are reported at lower
of cost or net realizable value. U.S. GAAP records inventory at
the lower of cost or market. Since U.S. GAAP places a ceiling
of the net realizable value on inventory valued at market, U.S.
GAAP inventory valuations will at least be the same as HKFRS,
if not lower. Thus, it is likely that if Lenovo reported inventory
according to U.S. GAAP, their inventory numbers would be
lower. Total assets are likely overstated in HKFRS.
c. Additionally, Lenovo reports its inventory according to the
weighted average cost flow assumption. HP reports its
inventory according to the first-in, first-out cost flow
assumption. This difference in inventory valuations has a

6. number of implications. Had Lenovo reported inventory using a
FIFO method, they would be reporting a higher net income than
they currently are because cost of goods sold would be lower.
Additionally, Lenovo would report a higher inventory amount
using FIFO than a weighted average method. These differences
are important to note in comparing companies.
1. Depreciation- Both Lenovo and HP depreciate their property,
plant, and equipment on a straight line basis over the estimated
useful life or remaining life of the lease, whichever is shorter.
HKFRS uses and estimated useful life of 10 to 50 years, while
U.S. GAAP uses an estimated useful life of 5 to 40 years. Thus,
U.S. GAAP is likely to take a larger depreciation expense
because they are depreciating their assets over a shorter period
of time. HKFRS will take a lower depreciation expense, and
thus report a higher net income.
B. Ratio Analysis
Since HP and Lenovo have many differences, including size
(revenues), reporting methods (U.S. GAAP vs. HKFRS), and
different world headquarters, it would not be very useful to
compare evaluate each company based solely on the financial
statement line items. Reporting that HP brought in $20 billion
more in revenue than Lenovo does tell us that HP is the larger
company, but it tells us nothing about the company's efficiency.
In order to better compare two different companies, a ratio
analysis is useful. A ratio analysis also helps to highlight
important company information in simple, easy to read figures.
Below are some major financial ratios for both Lenovo and HP,
followed by an analysis of each:
1. Price/Earnings Ratio: Current market price per share /
earnings per share
a. HP: 11.84 /2.51 = 4.72
a. Lenovo: 11.20 /7.77= 1.44
ii. The PE ratio indicates the amount an investor is willing to
receive $1 of that company’s earnings. Generally, the higher
the PE ratio, the more optimistic investors are about the future

7. of the company. With this ratio, HP is doing better in terms of
investor confidence in the company.
0. Return on Assets: Net Income/ Average Total Assets (in
millions)
a. HP: 4,554 / ((106,882+103,206)/2) = 4.3%
b. Lenovo: 836.6 / ((27,081 + 18,357)/2) = 3.7%
i. Return on assets is a measure of efficiency. Return on assets
gives an estimate of how efficient a company is at generating
net income by using its assets. HP has the advantage over
Lenovo. HP generates a higher percentage of net income by
using its assets than does Lenovo.
0. Profit Margin: Net Income / Net Sales (Revenue) (in
millions)
a. HP: 4,554 / 103,355 = 4.41%
b. Lenovo: 836.6 / 46,295 = 1.81%
i. The profit margin ratio gives an excellent measure of
efficiency while ignoring the size of each firm. This shows how
well a company can generate revenue and keep costs as low as
possible. HP can recognize 4.41% of revenue in profit for the
year; outperforming Lenovo who can only recognize 1.81% of
revenue as profits for the year.
0. Current Ratio: Current Assets / Current Liabilities (in
millions)
a. HP: 51,787 / 42,191 = 1.22
b. Lenovo: 15, 427 / 17,161 = .899
i. The current ratio measures a company’s ability to pay short
term debts with current resources. Generally, an investor would
like to see a current ratio above 1, because that means that the
company has enough current resources to pay back current
debts. HP is doing well because they have a ratio above 1;
however Lenovo currently does not have enough current
resources to pay off its debts.

8. 0. Acid Test Ratio: (Cash + AR + Short Term Investments) /
Current Liabilities (in millions)
a. HP: (17,433 + 13,363 + 2,918) / 42,191 = .799
b. Lenovo: (2,855 + 5,177 + 184) / 17,161 = .479
i. The acid test ratio is similar to the current ratio, however it
uses the three most liquid current assets to determine how well
the company can handle its current liabilities. The higher the
ratio, the better the company can handle current debt as it
becomes due. HP has a higher acid test ratio and is thus in a
better position to handle its current liabilities than Lenovo.
0. Accounts Receivable Turnover Ratio: Net Credit Sales /
Average Accounts Receivable (in millions)
a. HP: 103,355 / ((16,281 + 16,778) / 2) = 6.25 times
b. Lenovo: 46,295 / ((5,177 + 3,171) / 2) = 11.09 times
0. Days in receivables: 365 / AR Turnover
a. HP: 365 / 6.25 = 58.4 days
b. Lenovo: 365 / 11.09 = 32.9 days
i. Accounts receivable turnover and days in receivables are
closely related. AR turnover helps measure a company’s ability
to collect its receivables on a timely basis. An easier way to
understand this ratio is by taking the days in a year and dividing
it by the AR turnover to produce days in receivables. This is an
average of how long it takes a company to collect payments.
The lower the number the better. In this case, Lenovo is more
efficient at collecting their receivables since it only takes them
about 33 days as compared with about 59 days for Lenovo.
0. Inventory Turnover Ratio: COGS / Average Inventory
a. HP: 78,356 / ((6,485 + 6,415) / 2) = 12.15 times
b. Lenovo: 39,613 / ((2,995 + 2,701) / 2) = 13.91 times
0. Average days in inventory: 365 / Inventory Turnover Ratio
a. HP: 365 / 12.15 = 30.04 days
b. Lenovo: 365 / 13.91 = 26.24 days

9. i. The inventory turnover ratio and average days in inventory
are closely related. The inventory turnover ratio determines
how many times a company’s inventory is sold and replaced
over a period. The average days in inventory shows the amount
of days that inventory was in the warehouse before it was sold
or used. A company would want a higher inventory turnover
ratio, and thus a shorter amount of days in inventory. Holding
inventory is costly and risky, so the shorter amount of time you
have responsibility of it the better. Lenovo is more efficient at
moving inventory that HP.
C. Cash Flow Analysis
The Statement of Cash Flows provides investors with some very
important financial information. The first is that it allows
investors to predict the amount of cash that will be distributed
in the form of dividends. For the 2014/2015 year, Lenovo
distributed $326,930,000 in dividends. For the previous year,
Lenovo distributed about $266,692,000 in dividends. An
increase in distributed dividends certainly looks good to
potential and current investors, and indicates enough financial
flexibility to distribute partial earnings.
The second way that the Statement of Cash Flows provides
relevant financial information is through an evaluation of
operating cash flow. Operating cash flow is a good indicator of
financial health and the ability of the firm to pay back debts
with cash on hand. Lenovo has cash generated from operating
activities, which is a good sign for investors. A free cash flow
assessment is another tool investors can use to evaluate a
company’s financial health and future growth potential. A
company will make capital purchases to continue to grow and
operate, and free cash flow measures the excess cash on hand
after accounting for normal growth activities. The free cash
flow is calculated as follows:
1. Free Cash Flow: Cash Flow from operations - current period
capital expenditures (in millions)

10. a. 238 - 258 = -20
i. A negative free cash flow indicates that the company will
have to find external sources of financing in order to maintain
its current growth and purchase capital assets for the current
year. A negative free cash flow means that the company is not
that able to take advantage of unexpected investments because
much of their cash is tied up in purchasing capital assets. This
is somewhat concerning for Lenovo. Even though the
difference is not that substantial, the free cash flow deteriorated
significantly from the previous year. Last year, the company
had a positive free cash flow of $1,255 million. This was due to
a significant decrease in cash generated from operations, and
would probably be a red flag to investors.
V. Conclusion and recommendations
company is Lenovo, our country is China, and the US
competitor is HP
I have to finish following parts
I. Introduction-objective and scope of financial analysis
III. Industry analysis (Chen)
A. Looking at the computer industry, trends, competitive
environment, the major players
V. Conclusion and recommendations
Financial Analysis Group Project (Based on an NYU project in
International Accounting)
A written analysis will be submitted and an oral presentation
will be made in class.
International ratio comparisons are subject to a number of
pitfalls. Inter-country comparisons are complicated by

11. differences in national accounting principles, foreign exchange
rate fluctuations, differences in prices, etc. To understand how a
company is doing it is also necessary to know the economic,
social, business and legal environment in which it operates.
Select a large non-U.S. manufacturer company headquartered in
a foreign country and a company in a similar industry in the
U.S. You are to make an assessment as to which you feel is the
“better” company and why. It will be necessary for you to
adjust for significant differences in accounting principles,
currency differences and fluctuations, and price differences.
You should also identify environmental variables, such as
differences in social/cultural, financial and legal considerations
that might further account for observed profitability and risk
differences. Knowledge gained with regard to such
environmental differences will sharpen your ability to properly
evaluate the risk and return features of foreign security
investments.
A suggested outline follows:
I. Introduction-objective and scope of financial analysis
II. Country analysis
A. Macro-economic analysis and economic ties
B. Political analysis
C. Providers of financing
D. Cultural analysis
E. Legal analysis
F. Tax analysis
III. Industry analysis
IV. Company specific analysis
A. Specific GAAP adjustments
B. Ratio analysis
C. Cash flow analysis; i.e. free cash flows
V. Conclusion and recommendations