Accounting Ratio Analysis

Automotive 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.

16. 00%
14. 00%
12. 00% 2
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 BMW, Mini, Volkswagen Mercedes-Benz, Renault, Peugeot,
Range Rolls- Passenger Smart, trucks Dacia CITROË
Royce, cars, Audi, N
Motorcycles Skoda, SEAT,
Bentley,
Volkswagen
commercial
Vehicles ,
Scania,

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
Asia, South America, instead of merely relying on the more seriously shrinking
European markets, it can perform better in profitability. This will explain why

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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 P137
2
Peugeot annual report 2008 P12
3
Renault annual report 2008 P51
4
BMW annual report 2008 P50
5
Volkswagen annual report 2008 P137
6
Daimler annual report 2008 P53
7
Daimler Annual Report 2008 P44
8
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 Expenditure

and R&D Expense ( in € millions)

3900 3816
3800
Automobile
3700
Division
3600 Capital
3507
3500 Expenditure
and R&D
3400
3300
2007 2008

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 P13
10
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 P51
12
BMW annual report 2008 P74
13
Renault annual report 2008 P57
14
Daimler Annual Report 2008 P145
15
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 P20
17
BMW annual report 2008 P71
18
Daimler Annual Report 2008 P53
19
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 Net Profit 2008: 2008: 2008: 2008: 2008:

Equity (ROE) after 324/20265= 1348/31216= 4753/35011= 571/18959= -343/13143=
Tax/equity
1.60% 4.32% 13.58% 3.01% -2.61%
(both the net
2007: 2007: 2007: 2007: 2007:
profit and
3126/21733= 3979/36718= 4120/31875= 2669/21577= 885/14245=
equity exclude
14.4% 10.8% 12.9% 12.4% 6.2%
the minority
interest)

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 Operating Operating 2008: 2008: 2008: 2008: 2008:
Profit Profit/sales 921/53197= 5956/95873= 6333/113808= -117/37791= -367/54356=
Margin(OPM) revenue
1.73% 6.21% 5.56% -0.31% -0.68%
(sales revenue
2007: 2007: 2007: 2007: 2007:
here includes
Ratio BMW4212/56018= 7885/99399=
Daimler 6151/108897=
VW 1238/40682=
Renault 1120/58676=
Peugeot
revenues from
Gearing Ratio=non-current 7.52% 7.93% 5.65% 3.04% 1.90%
financial 2008 2008 2008 2008 9955/
liabilities/equity+ non-current 41526/ 47313/ 65729/ 7996/ (13143+995
liabilities x 100 services) (20273+41526)= (31216+47313)= (35011+65729)= (18959+7 5)=
1. Non-current liabilities 67.20% 52.88% 65.26% 996)=29.6 43.10%
here include the non- 6%
current provision
2. equity here exclude the 2007 2007 2007
minority interest 33469/ 47998/ 57351/ 2007 2007
(21744+33469)= (36718+47998)= (31875+57351)= 7819/ 10366/
60.62% 56.66% 64.28% (21577+7 (14282+103
819)=26.5 66)=
9% 42.06%
Interest Cover 2008 2008 2008 2008 2008
Ratio=Operating 921/930= 4396/681= 6333/1008= -117/373= -367/311=-
Profit/interest payable 0.99 6.46 6.28 -0.31 1.18

2007 2007 2007 2007 2007

4212/897= 8710/480= 6151/1041= 1238/375 1120/294=
4.69 18.14 5.91 = 3.30 3.81

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

Ratio Formula BMW Daimler Volkswagen Renault Peugeot

Curr Current 2008: 2008: 2008: 2008: 2008:

ent ratio=current 38670/39287= 55389/52182= 76169/64802= 31278/36419= 39774/38488=
Ratio asset/current
0.98 1.06 1.18 0.86 1.03
liabilities

Acid Acid test 2008: 2008: 2008: 2008: 2008:

test ratio=current (38070- (55389- (76169- (31278- (39774-
ratio assets (excl
7290)/39287= 16805)/52182= 17816)/64802= 5266)/36419= 7757)/38488=
inventories)/cu
rrent liability 0.78 0.74 0.90 0.71 0.83
2007: 2007: 2007: 2007: 2007:
(32378- (61120- (68516- (36780- 34277/44084
7349)/33784 14086)/47034 14031)/56068 5932)/38310 = 0.89
=0.74 =0.96 =0.97 = 0.80

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

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 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.pd
f
[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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