Introduction
The study evaluate the historical financial performance of Volkswagen Group through income statement and financial statement. Several financial ratios are vertical compared with competitors like Daimler AG, Toyota Motor Corporation and BMW AG. The research period is from 2013 to 2017 because 2018 annual data is not completed for whole four companies.
Background
Since owning a car has become a commodity rather than a luxury product reserved for the wealthy, the industry has been growing steadily and is expected to continue to do so in the future. Advanced technology, globalization, and increased industry competition have led to a sharp drop in car prices relative to the economy. From 2009 to 2017, annual auto production has steadily increased by about 3 percent (Berk, J., De Marzo, P. & Harford, J. 2015). Auto sales are expected to continue to grow 3-4% in 2018
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Table 1. Global Cars Production in Million. Source: Statista.com
Car Brand Introduction
The Volkswagen group is a German company, composed of 12 brands including Volkswagen passenger car, Audi, Said,Bentley, Bugatti and Lamborghini, which, Ducati, Volkswagen commercial vehicles, Scania and MAN (Volkswagen). With operations in 153 countries and regions, Volkswagen group is the largest automobile company, selling 10.78 million new cars. By the end of 2017, Volkswagen group had 642,300 employees. Daimler is also a German company, including Mercedes Benz, Daimler trucks, Daimler buses and Mercedes Benz vans (Daimler's 2017 annual report). Daimler sold 3.3 million vehicles in 2017 and had 289, 300 employees at the end of 2017. BMW group is the third German car company, it includes the BMW, mini and Rolls-Royce car brands. In 2017, BMW group's total vehicle sales reached 2.46 million, with 129,932 employees by the end of 2017. Toyota Motor Corporation is the world's second largest automaker studied in this paper. Toyota motor corp. owns five brands, including the Toyota brand, Lexus, Lands. In 2017, Toyota produced 10.5 million vehicles in 2017.
Financial Analysis
Analysis Income Statement from 2013 to 2017
Table 2. Volkswagen Group Income statement. Source: Morningstar Volkswagen Group, Author’s Calculations
The revenue of Volkswagen from 2013 to 2017 is 197 billion to 230 billion. Volkswagen group increased gross profit in 2016 because the decrease cost of revenue. 2017 is a good year for Volkswagen since the gross profit increased from 40998 million to 42545 million. The reason is that the Volkswagen increased its business performance in both US and Canada market. Volkswagen group had a good business performance in South America where sales revenue increased 25.3 percent due to higher import volumes effect (Volkswagen annual report 2017). The Asian market sale value rose by 9,4 percent because of higher import volumes too. (Volkswagen annual report 2017). Volkswagen group has moderately sales, general & administration costs of around 30 billion from 2015 to 2017. The research is part of sales, general & administration costs, for example, Daimler AG’s research development cost is 4 billion while the Volkswagen group research development cost is 13 billion. It shows that Volkswagen had done a good job in the research and development. Volkswagen Group is planning to invest more than 34 billion to future technologies by the end of 2022 (Volkswagen annual report 2017). (Data source in text: Volkswagen annual reports 2013-2017).
Analysis of Balance Sheet from 2013 to 2017
Based on the balance sheet, Volkswagen increased its asset and decreased its liability from 2016 to 2017, which is a good trend for the company financial health. Both current and non-current assets increased by 3 percent, bringing Volkswagen total assets to $422 billion. Current liabilities fell 10 percent in 2017 from a year earlier, but non-current liabilities rose 9 percent over the same period. Non-current debt is mainly the strengthen of debt operations to recover from the emissions scandal. Total debt fell 1% to 313 billion. Volkswagen succeeded in cutting short-term debt by 9% from 2016 to 2017. Its long-term debt rose 25% in 2016-2017. Volkswagen Group is financing future operating to reduce costs with emissions scandals.
Table 3. Volkswagen Group Balance Sheet from2013 to 2017. Source: Morningstar Volkswagen Group, Authors Calculations
From Manager Point of View
Current Ratio
Table 4. Current ratio. Data source: Morningstar.com
The current ratio of Volkswagen Group is close to 1 in the whole period from 2013 to 2017, which means that it can cover its current or short-term liabilities. Current ratio close to 2 is generally considered a good current ratio value, but this does not mean that these entities are in financial distress. A liquidity ratio close to 1 is a common and stable value for large automotive entities because all of these entities have strong operating cash flow. Low liquidity ratios are more common for large car companies, which have strong long-term revenue streams. This allows car companies to have larger current liabilities and finance the debt if necessary.
Quick Ratio
Table 5. Quick ratio. Data source: Morningstar.com
The quick ratio does not account for inventory in current assets. The average quick ratio of Volkswagen is about 0.70, and the change trend of quick ratio in 2013-2017 is more stable. That means Volkswagen can take on 70% of its debt immediately. High inventory levels in the automotive industry are part of the industry, so the speed ratio is often lower than 1. Daimler and BMW have quick ratios close to Volkswagen group. Toyota has a slightly better liquidity performance based on the quick ratio. A quick ratio of 0.70 for Volkswagen Group is considered tolerable because its results are close to those of its competitors.
From the Investor's Point of View
Return on Asset
Figure 1. Return on assets. Data source: Morningstar.com
Volkswagen Group's return on assets follows the trend of return on equity. The component analysis comes into the return on asset, the results show that the sales income is much lower than the competitors. Volkswagen's asset turnover is close to its competitors. This means a lower return on assets due to the lower returns on sales, especially when Volkswagen group net income turned negative in 2015. Volkswagen has managed to boost its return on sales, increasing its return on assets from negative levels in 2015 to nearly three times that in 2017. Volkswagen still lags far behind its rivals in return on assets, but with high sales and strong expectations for future sales, it is showing signs of growth.
Debt to Equity Ratio
Figure 2. Debt to equity ratio. Data source: Morningstar.com
From a investor perspective, the Volkswagen group's debt-to-equity ratio is at an average of 0.74, which is preferable to that of Daimler AG and BMW AG. Toyota has an average debt ratio of around 0.60, significantly lower than the other three companies. The debt-to-equity ratio of Volkswagen group increased from 0.75 to 0.82 in 2014-2015 because other current liabilities increased by 19% and other long-term liabilities increased by 49%. In 2014-2015 the debt incurred by Volkswagen to cover the costs of the emissions scandal and to maintain its financial efficiency. The group's debt to equity ratio is good, although its debt-to-equity ratio edged up from 0.69 to 0.73 in 2016-17. Financing assets with equity is less profitable but less risky for Volkswagen long-term financial health.
Price Earning ratio and Price Sales Ratio
Figure 3. Valuation ratio. Data source: Morningstar.com
Volkswagen group’s price-to-earnings ratio is 7.1, slightly higher than Daimler AG's 6.6 and BMW AG's 6.9. On a price-to-earnings basis, it would be best to invest in Daimler's BMW, but Volkswagen is not far from its German rival. Volkswagen Group AG and Daimler AG also have lower price to sales of 0.4, suggesting that both companies are trading at more attractive prices relative to revenue for BMW and Toyota Motor Corporation.
The Du Pont Formula
Return on equity can be divided into component analysis as DuPont analysis. DuPont analysis equals to profit margin times asset turnover rate times equity multiplier.
Net Profit Margin
Net profit margin is a ratio that compares how a company converts its net income into profit after expenses, including taxes. Volkswagen group's net profit margin fell to -0.74 from 5.36 in 2015. The steep decline is due to the rising financial costs of the emissions cheating scandal. Volkswagen's net profit margin rose to 2.37 in 2016 and 4.92 in 2017, close to 2014 levels. BMW has the most impressive net margin schedule, with net margins of nearly 7 percent in 2013-16 and 8 percent in 2017. Toyota's ADR and Daimler AG posted net profit margins of just over 6 percent in 2017. Compared with its competitors, Volkswagen group has the lowest net profit margin, but Volkswagen has significantly improved its net profit margin in the past two years, and it will continue to increase in the beginning of 2018.
Figure 4. Net profit Margin. Data source: Morningstar.com
Asset Turnover
The asset turnover ratio of Volkswagen group dropped from 0.62 to 0.55 in 2013-2017, which was a significant decrease of adverse changes of Volkswagen. The asset turnover of BMW (0.52) and Toyota (0.57) is close to that of Volkswagen group. Daimler has the highest asset turnover ratio, at 0.66 in 2017, which means it can generate more sales per dollar of assets.
Figure 5. Asset Turnover. Data source: Morningstar.com
Equity Multiplier
Volkswagen group's equity multiplier was same as Daimler AG in 2017 around 4. BMW AG's equity multiplier is just under 3.6, while Toyota Motor Corporation's market capitalization in 2017 was significantly less than 2.8. It shows that Toyota use more shareholder equity instead of debt. [image: ]
Figure 6. Equity multiplier. Data source: Morningstar.com
Return on Equity
The average return on equity of the Volkswagen Group in 2013-2017 is 7.67% while the average return on equity of German competitors exceeds Volkswagen 15%. In 2015 huge financial costs are reduced Volkswagen AG's net profit and reduced shareholders' equity because of emission scandal.
As the financial costs of the emissions scandal reduced Volkswagen's net income, the consequences of the emissions cheating scandal in 2015 had a huge impact on its profitability. Despite the negative publicity from the emissions scandal, Volkswagen managed to increase its sales from 202 billion in 2014-15 to 213 billion and 217 billion in 2015-16. In 2017, Volkswagen's sales rose 6 percent to 230 billion vehicles. It seems that Volkswagen is relatively easy to get rid of the emissions scandal because of loyal customers.
Figure 7. Return on Equity. Data source: Morningstar.com
Conclusion
Daimler AG and BMW AG are more profitable than Volkswagen AG. BMW AG has the highest net profit margin 874% above Volkswagen Group's 2017 net profit margin of 492%. Daimler has the highest gross margin, return on equity and return on assets, which means it has a high efficient asset turnover and equity multiplier, but its operating expenses are higher than BMW.
The Volkswagen group follows an emissions scandal in September 2015. The operating expenses have increased since 2015, net profit margins have been significantly lower than competitors because of the emissions scandal. Volkswagen managed to significantly increase its negative margin for 2015, mainly by reducing operating expenses by 17 percent and increasing its sales by 8.2 percent during the 2015-2017 period. In 2015-17, net profit margin rose from 0.74 to 4.92. Volkswagen group's net profit margin is still the lowest, but there are signs of rapid growth in the coming future.
The group's liquidity ratio has reached a sufficient level. Its current ratio is stable and in 2017 is around one, which means that the current assets of Volkswagen group make up its current liabilities. The quick ratio is also at the full level of 0.70, which is in high inventory in car manufacturing. The Volkswagen group has a quick ratio between BMW (0,67) and Daimler (0,77).
This paper analyzes the solvency of Volkswagen group and makes an empirical analysis of other companies. Volkswagen's average debt-to-equity ratio is 0.74 below BMW AG and Daimler AG. This ratio suggests that the Volkswagen group has a lower risk of future bankruptcy, but since these assets are more externally financed, it may not be able to generate earnings efficiently. Volkswagen's balance sheet also shows that it has a strong financial fund and is not at risk, even though the emissions scandal has added to the debt.
Volkswagen group's valuation is evaluated by price-to-earnings ratio and price-to-sales ratio. Volkswagen's shares are the most undervalued of the four entities. Volkswagen group has the highest market value relative to book value and the lowest share price relative to revenues. Daimler AG is also an attractive entity on a price-to-earnings basis because of its high earnings relative to the industry's share price.
In conclusion, from the manager and investor perspective, Volkswagen group is at an adequate level. Profitability has not yet risen to the level of BMW and Daimler, but it shows positive signs of growth in the future. Operational efficiency is considered long-term and should be reduced through management decisions. Compared with BMW and Toyota, the cash conversion cycle is inefficient because of the long inventory turnover time. Management should manage inventory levels more carefully to reduce the time and cost. The assessment shows that Volkswagen group's current performance and market value are undervalued.
Reference
- Berk, J., De Marzo, P. & Harford, J. (2015). Fundamentals of Corporate Finance. London: Pearson Education 3rd or 4th edition.
- BMW AG annual reports 2013-2017 https://www.press.bmwgroup.com/global/article/detail/T0279390EN/bmw-group-annual report-2017?language=en
- Daimler AG annual reports 2013-2017 https://www.daimler.com/investors/reports/annual-reports/
- Toyta Motor Corporation annual reports 2013-2017 http://www.toyota-global.com/investors/ir_library/annual/
- Volkswagen annual report, (2017) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2018/volkswagen/en/Y_2017_e.pdf
- Volkswagen annual report, (2016) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2017/volkswagen/en/Y_2016_e.pdf
- Volkswagen annual report, (2015) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2016/volkswagen/englisch/Y_2015_e.pdf
- Volkswagen annual report, (2014) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2015/volkswagen/english/GB+2014_e.pdf
- Volkswagen annual report, (2013) https://www.volkswagenag.com/presence/investorrelation/publications/annual-reports/2014/volkswagen/english/Y_2013_e.pdf
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