Accounting Ratio AnalysisAutomotive Industry

By Syndicate Group 5 Diversity

Chibuzo Chinwuba

Thomas Bentz

Antreas Konalis

Chao Chen

Ji Youn Kim

08/11/2009

Introduction

The world economy slowed down significantly during 2008 in the aftermath of financial and real-estate crisis. The increasingly tough environment has exerted a big impact on the global automotive industry. This report aims to deduce the 2008 financial performance of five automobile companies from the perspective of the investors. By looking closely at some key financial ratios such as profitability, liquidity and solvency, we will elaborate on what factors have contributed to the varying performance within same sector and how they will affect investors’ decision making.

The five companies are BMW, Daimler, Volkswagen, Renault and Peugeot.

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Profitability Analysis

For an investor, profitability of a particular company is the key issue to consider first. A comparison of Return on Equity ratio is very important as it provides the investors with the most visualized picture of how much they will gain from investing in the business. Operating Profit Margin is also of great interest to investors because it measures the performance of trading operation of the business, without being influenced by profits generated from other financing activities.

From the ROE ratio, Volkswagen projects the most positive picture for investors, reaching up to a record high of 13.58% (1.6% increase from 2007). Daimler and Renault are in the second group, with ROE ratios 4.32 %( 6% decrease from2007) and 3.01 % (9.4% decrease from 2007) respectively. BMW shows a poor performance falling from 14.4% (2007) to 1.60% (2008); even a bank deposit may give a better return. Peugeot is the worst among the five with a negative figure in terms of ROE.

Fig 1.0 Return on Equity Ratios Bar Chart

A mixed picture of performances can also be found in view of the OPM; however it portrays some similar result as that of the ROE ratio. Daimler and Volkswagen are still among the leading group with OPM 5.56% and 6.21% respectively in 2008, much larger than BMW’s 1.73%. Renault and Peugeot failed to perform well in terms of trading operation with negative OPMs.

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Return on Equi ty

-4. 00%-2. 00%0. 00%2. 00%4. 00%6. 00%8. 00%

10. 00%12. 00%14. 00%16. 00%

BMW Dai ml er Vol kswagen Renaul t Peugeot

20082007

Operat i ng Profi t Margi n

- 4. 00%- 2. 00%0. 00%

2. 00%4. 00%6. 00%8. 00%

10. 00%

12. 00%14. 00%16. 00%

BMW Dai ml er Vol kswagen Renaul t Peugeot

20082007

Fig 1.1 Operating Profit Margin Ratios Bar Chart

Possible explanations for the varying performances are as follows.

Firstly, wider range of portfolio, the better. Consumers’ decreasing spending of 2008 had a great negative effect on automobile companies, especially to the premier car sector. That is why BMW (focusing on premier cars) suffered such a drastic decline in profits. Volkswagen’s wider range of models, especially those relative cost-efficient models like Pasata and Golf received popularly during the recession, gave it an edge to compete in the markets. Daimler, though not competitive in its passenger car range as Volkswagen, was helped by the strong performance of the truck sector and hence secured second place. The poor performance of Renault and Peugeot can be vastly attributed to their small product ranges.

Product Range Comparison BMW Volkswagen Daimler Renault Peugeot

Brand Range

BMW, Mini, Rolls-Royce, Motorcycles

Volkswagen Passenger cars, Audi, Skoda, SEAT, Bentley, Volkswagen commercial Vehicles , Scania,

Mercedes-Benz, Smart, trucks

Renault, Dacia

Peugeot,CITROËN

Secondly, global orientation of revenues helps growth. Despite the worldwide economic downturn, the negative impact to different regions varies in degrees. This means if a company can orient its focus of revenue from less affected areas such as

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Asia, South America, instead of merely relying on the more seriously shrinking European markets, it can perform better in profitability. This will explain why Volkswagen which generated 75.7% of revenue outside European markets1, can enjoy a steady growth; while companies like Renault and Peugeot, whose sales are mainly from European markets suffered dramatic decrease in profits accordingly.

Thirdly, strategic efforts are also a key factor to a company’s profitability during the period. Peugeot’s low profitability can largely be explained by its failure in tackling with the collapsing demand, which resulted in a restructuring plan increasing its operating expenses by €917milion2. A similar situation can also be found in Renault, whose restructuring plan cost a total of €489million3. BMW’s overall profits declined due to expenses of €455 million in an effort to reduce its workforce4. Daimler and VW performed well in this aspect. Volkswagen’s strong profitability (a 4.5% increase in sales) was primarily attributable to the consolidation of Scania from July 22, 20085. Daimler’s profitability was helped by its strategic acquisition of Tognum and joint venture with the Indian Hero Group, yet it is still much less than Volkswagen in net profit largely because of a €3228 million investment in Chrysler6.

Liquidity Analysis

Acid test ratio mainly focuses on current assets which can be quickly converted into cash to cover current liabilities of a company. Since acid test ratio is a good indicator for the level of a company’s liquidity, it is an important factor for investors to decide a company is secure enough to meet their demands.

Volkswagen had the highest acid test ratios in both years. The relatively high quick ratio for Volkswagen in 20087 is largely due to its consolidation of Scania. This not only led to an increase in non-current assets and current liabilities but also enabled the company to have liquid current assets including financial services receivables from Scania’s financial services business.

Daimler, on the other hand, enjoyed high quick ratio in 2007 but the ratio fell down dramatically with the company’s managerial decision to acquire 4.2 billion of their own shares and negative free cash flow of €3.9 billion in 2008. This reduction was due to acquisitions of equity interests in Tognum (€0.7 billion) and Kamaz (€0.2 billion) as well as the company granted loan to Chrysler (€1.0 billion)8.

1 Volkswagen annual report 2008 P1372 Peugeot annual report 2008 P123 Renault annual report 2008 P514 BMW annual report 2008 P505 Volkswagen annual report 2008 P1376 Daimler annual report 2008 P537 Daimler Annual Report 2008 P448 Management Report 2008 –liquidity and capital resources –cash flows http://ar2008.daimler.com/reports/daimler/annual/2008/gb/English/303020/cash-flows.html

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Fig 1.2 Acid Test Ratios Bar Chart

Peugeot had low acid test ratio in 2008 which was caused by capital expenditure and R&D outlays which amounted to €3.8billion9.

Automobile Division Capital Expenditureand R&D Expense ( in € millions)

3507

3816

3300

3400

3500

3600

3700

3800

3900

2007 2008

AutomobileDivisionCapitalExpenditureand R&D

Source: Peugeot annual report

The higher values of derivative financial instruments of BMW led to an increase in financial assets and higher business volumes enabled the company to have 11.2% increase in receivables from sales financing resulting in an increase in liquidity, hence BMW’s the acid test ratio was sound for investors10.

Renault had a relatively low acid test ratio in 2007 and 2008. This is largely caused by negative free cash flow at 3028 million and the company’s payment of €1076 million 9 PSA Peugeot Citroen / 2008 sustainable development and annual report P1310 BMW Group Management Report P53

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in dividends compared with €913 million in 200711, which shows its inability to conduct efficient risk management during a recession.

Solvency Analysis

Financial gearing ratios will be used to analyze each company’s the level of debt and its ability to cover its interest payments. The results from the analysis will be used to measure the level of risk each company poses towards investors.

Fig 1.3 Gearing ratios Bar Chart

Fig 1.3 indicates a general increase in the level of contribution by long term lenders of the car making companies analyzed with the exception of Daimler. BMW and VW had a substantial increase in noncurrent liabilities in 2008 by 24% and 12% respectively12. Renault had a slight increase in long term borrowings of 2.26%13. Daimler reduced its long term debt in 2008 by 1.2% from thereby reducing its gearing ratio from 56.66% in 2007 to 52.88% in 200814; this would be good news to the shareholders who would benefit from a decline in interest payments by an increase in the net profit. Peugeot also reduced its leverage by 3.96% but still experienced an increase in gearing ratio from 42.06% to 43.10%; this increase was triggered by an 8% drop in shareholders’ equity in 200815. These figures indicate Peugeot’s declining financial performance and would be a risk to investors.

The potential risks and gains involved when a business borrows to finance operations can be better assessed by analyzing the interest cover ratios for the companies being scrutinized.

11 Renault Annual Report 2008 P5112 BMW annual report 2008 P7413 Renault annual report 2008 P5714 Daimler Annual Report 2008 P14515 Peugeot annual report 2008 P22

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Figure 1.1 shows that Renault and Peugeot’s interest cover ratios were below zero; this was caused by a substantial drop in operating profits due to the downturn in the global automobile market. Renault generated an operating loss of 117million in 2008 down from an operating income of 1238million in 2007; Peugeot experienced an operating profit drop from 1120 million in 2007 to an operating loss of 367 million 200816. These figures indicate that Renault and Peugeot could not cover their interest payments and are of high risk to lenders and investors.

Fig 1.4 Interest Cover Ratios Bar Chart

BMW low interest cover ratio of 0.99 in 2008 was attributable to a 78.1%17 operating profit drop in 2008 hence it poses a high risk to investors due to its high level of gearing and the risk of not being able to meet its interest payments.

Daimler experienced a substantial drop in interest cover ratio from 18.14 in 2007 to 6.4 in 2008. This decline was related to its 3228million investment in Chrysler and a fall in sales of Mercedes Benz car18 . Volkswagen projected the best financial performance out of all the companies analyzed. Volkswagen’s interest cover ratio increased from 5.91 to 6.28, this was achieved by its rise in sales revenue which was partly attributed to its consolidation of Scania in 2008 and also its increase in spending on sales promotions to tackle a competitive market19. We would conclude by stating that Volkswagen bears the least risk to lenders and investors.

Conclusion

16 Renault annual report 2008 P56 & Peugeot annual report 2008 P2017 BMW annual report 2008 P7118 Daimler Annual Report 2008 P5319 Volkswagen annual report 2008 P144

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Based on our financial analysis on the five car manufacturing companies of 2008, it is suggested that Volkswagen has the best financial performance overall and may provide the best returns for an investor. In an industry which was severely affected by the economic crisis, Volkswagen managed to outstand from other competitors in its return on equity, liquidity levels as well as lowering the risky for investors because of its timely beneficial strategies. Peugeot was the worst performing company due to its inefficient strategy during the economic crisis which resulted in a dramatic increase in expenditure.

Appendix

Table 1 Results for Profitability Analysis (in million of €)

Ratio Formula BMW Daimler Volkswagen Renault Peugeot

Return on

Equity (ROE)

Net Profit

after

Tax/equity

(both the net

profit and

equity exclude

the minority

2008:

324/20265=

1.60%

2007:

3126/21733=

14.4%

2008:

1348/31216=

4.32%

2007:

3979/36718=

10.8%

2008:

4753/35011=

13.58%

2007:

4120/31875=

12.9%

2008:

571/18959=

3.01%

2007:

2669/21577=

12.4%

2008:

-343/13143=

-2.61%

2007:

885/14245=

6.2%

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interest)

Operating

Profit

Margin(OPM)

Operating

Profit/sales

revenue

(sales revenue

here includes

revenues from

financial

services)

2008:

921/53197=

1.73%

2007:

4212/56018=

7.52%

2008:

5956/95873=

6.21%

2007:

7885/99399=

7.93%

2008:

6333/113808=

5.56%

2007:

6151/108897=

5.65%

2008:

-117/37791=

-0.31%

2007:

1238/40682=

3.04%

2008:

-367/54356=

-0.68%

2007:

1120/58676=

1.90%

Table 2 Results for Liquidity Analysis (in million of €)

Ratio Formula BMW Daimler Volkswagen Renault Peugeot

Curre

nt

Ratio

Current

ratio=current

asset/current

liabilities

2008:

38670/39287=

0.98

2008:

55389/52182=

1.06

2008:

76169/64802=

1.18

2008:

31278/36419=

0.86

2008:

39774/38488=

1.03

Acid

test

ratio

Acid test

ratio=current

assets (excl

inventories)/cu

rrent liability

2008:

(38070-7290)/

39287=

0.78

2007:

(32378-7349)/

33784

=0.74

2008:

(55389-16805)/

52182=

0.74

2007:

(61120-14086)/

47034

=0.96

2008:

(76169-17816)/

64802=

0.90

2007:

(68516-14031)/

56068

=0.97

2008:

(31278-5266)/

36419=

0.71

2007:

(36780-5932)/

38310

= 0.80

2008:

(39774-7757)/

38488=

0.83

2007:

34277/44084

= 0.89

Ratio BMW Daimler VW Renault Peugeot

Gearing Ratio=non-current

liabilities/equity+ non-current

liabilities x 100

1. Non-current liabilities

here include the non-

current provision

2. equity here exclude the

minority interest

2008

41526/

(20273+41526)=

67.20%

2007

33469/

(21744+33469)=

60.62%

2008

47313/

(31216+47313)=

52.88%

2007

47998/

(36718+47998)=

56.66%

2008

65729/

(35011+65729)=

65.26%

2007

57351/

(31875+57351)=

64.28%

2008

7996/

(18959+7

996)=29.6

6%

2007

7819/

(21577+7

819)=26.5

9955/

(13143+995

5)=

43.10%

2007

10366/

(14282+103

66)=

9

9% 42.06%

Interest Cover

Ratio=Operating

Profit/interest payable

2008

921/930=

0.99

2007

4212/897=

4.69

2008

4396/681=

6.46

2007

8710/480=

18.14

2008

6333/1008=

6.28

2007

6151/1041=

5.91

2008

-117/373=

-0.31

2007

1238/375

= 3.30

2008

-367/311=-

1.18

2007

1120/294=

3.81

Table 3 Results for Solvency Analysis (in million of €)

References[1]BMW Annual Report 2008, accessible at

http://www.bmwgroup.com/bmwgroup_prod/e/nav/index.html?http://www.bmwgroup.com/

bmwgroup_prod/e/0_0_www_bmwgroup_com/home/home.html

[2]Daimler Annual Report 2008, accessible at

http://www.daimler.com/Projects/c2c/channel/documents/

1677323_DAI_2008_Annual_Report.pdf

[3]Volkswagen Annual Report 2008, accessible at

http://www.volkswagen.co.uk/assets/common/content/volkswagen-world/annual-report-2008.pdf

[4]Renault Annual Report 2008, accessible at

http://www.renault.com/en/Lists/ArchivesDocuments/Renault%20-%202008%20Annual

%20Report.pdf

[5]Peugeot Annual Report 2008, accessible at

http://www.psa-peugeot-citroen.com/en/fonctionnelle/finances.php

[6]McLaney, E, Atrill, P. 2008.Accounting An Introduction .Prentice Hall.

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