News and Information

Japanese Conglomerates Struggle with Investors

Image Group
Asian Review
Toshiba Corp last week projected a $6.3 billion write-down, postponed its earnings report and said its chariman was resigning.

Troubles at Toshiba Corp highlight weaknesses with Japan's conglomerates and why they have much lower market values that those in other nations of the world.

Japanese conglomerates have market values much lower than their counterparts in the United States, Europe and Korea despite trading on one of the largest exchanges in the world, according to research by CreditPulse.  In a review of the market capitalizations of ten of the world's best-known conglomerates, Japanese firms had vastly lower market valuations in comparison to their massive revenues.  

Sony, Toshiba, Panasonic and Hitachi, four of the biggest names in the electronics world, had an average market cap-to-revenue ratio of just 0.32 compared to an average of 1.80 for the six other companies reviewed, based on 2014 data (see chart below).  Market capitalization is determined by multiplying a company's stock price by its total outstanding shares and represents the market value of a company.  Most healthy companies have market capitalizations that are three or four times annual revenue.

For example, Apple, Inc., considered one of the most valuable companies in the world, had a market cap of approximately $560 billion in June 2014 on annual revenue of $183 billion for a market cap-to-revenue ratio of 3.06.  But some market caps can go much higher such as that of Mobileye NV, an Israeli software company, that reached a market value of $10.3 billion in 2014 on revenue of just $144 million for an extraordinarily high market cap-to-revenue ratio of 72.25 to 1.00.

Nothing in the review suggests that the four Japanese companies are in trouble financially, but their abnormally low market valuations are suprising in an era of excess liquidity from central banks that in many cases have produced artifically high stock market capitalizations.  The market cap of the Tokyo Stock Exchange rose 31% from the beginning of 2014 to the end of 2015. 

Conglomerates have traditionally been viewed with sketicism by investors due to their massive size, unwieldy organizational structure and operational divisions that often aren't complimentary.   But, the market valuations of Japan's conglomerates are incredibly low compared to those of other companies similar in size and scope such as Siemens AG, the big German multinational, and even further behind four American giants led in size by General Electric, which has a respectable ratio of 2.30.  

Toshiba Corp, one of Japan's earliest conglomerates, was founded in 1939 when one electrical company merged with another.  By 1990, the company was manufacturing chemicals, televisions, word processors and color video phones.  In 2006, Toshiba branched out into yet another area by acquiring Westinghouse Electric, a designer and builder of nuclear power plants.  It was in this division that Toshiba announced the $6.3 billion write-down last week, the largest since British wireless provider Vodafone Group Plc took an $11.1 billion write-down in May 2014.

One reason for the huge descrepancy in valuations may be liabilities on the balance sheet.  Japan's four multinationals have an average debts-to-assets ratio of 0.72 compared to 0.55 for the other six conglomerates reviewed, a notable difference considering the large asset bases of these companies.  Debts-to-assets is a key solvency ratio that compares total liabilities to total assets.  

Sony Corp, the only one of the four still traded on the New York Stock Exchange, had a market cap of only $17.5 billion in 2014 on annual revenue of $77.6 billion for a market cap-to-revenue ratio of 0.23.  Sony reported a net loss of $463 million and had the highest debts-to-assets ratio of any of the companies at 0.81 due mainly to $60 billion in insurance and benefit liabilities. 

The sub-par market valuations are even more astonishing when one considers that all four Japanese companies are traded on the fourth largest stock exchange in the world.  At the end of 2014, the Tokyo Stock Exchange had a market capitalization of $4.36 trillion behind only the New York Stock Exchange, the NASDAQ (U.S.) and the London Stock Exchange.