Financial Ratio Analysis

Basic Accounting (FNBE0145)

Assignment 1

Foundation of Natural and Built Environments 2013 July Intake

Yee Algel 0313890

Thun Shao Xun 0315919

Content

Topic PAGE

1. Brief history of Volkswagen Group

2. Profitability Analysis of Volkswagen Group (Year 2012

– 2013)

3. P/E Ratio

4. Investment Recommendation

5. Appendix

6. References

Volkswagen Group

Volkswagen Group is one of the most famous automobile manufacturer in the world and it is the largest car manufacturer in Europe. The company operates in total of 153 countries but the headquarter is located in Wolfsburg, German. It was founded in 28 May 1937 by German Labour Front. Volkswagen group sells several type of products which included passenger car, motorcycles and commercial vehicles. Volkswagen Group owned 12 brand which consist of Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania and MAN. However, every brand is operated in their own ways and they have different characteristics and specifications. “Das Auto” is the slogan of Volkswagen Group which means The Car in English.

Besides, Volkswagen Group is also running another business in other industries like compressors and chemical reactors manufacturing large-bore diesel engines for marine and stationary applications (turnkey power plants), and turbochargers. Furthermore, about 572,800 employees worldwide are working for the Volkswagen Group.

The very first car that was invented in 1937 was Beetle which made Volkswagen became well known. Volkswagen group grows rapidly in the 1950s to 1960s. Originally, Volkswagen Group has only 1 brand which is the Volkswagen. Then, the company grows bigger and stronger, it started to take over other company and brand as stated earlier. “Twelve brands with individual identity and a common goal: mobility. For everyone, all over the world.” This quote was written in the annual financial report 2013 of Volkswagen Group and this represents the goal of the company. The mission of Volkswagen Group is to offer eye-catching, safe and environmentally sound vehicles that are able to survive and succeeds in the automobile market and set a world grade in its own style.

Recently, Volkswagen Group is developing new advance technology that could be applied in our daily life especially vehicles. Volkswagen Group Research department explore to improve on the safety, powertrain, organization, system of automobile. The Future Research Department focus on the early recognition of new technology and new social style and on technology motorway mapping. On the other hand, they also realize that automobile are instantaneously a driver, mobility system and rely on the traffic. Hence, the engineers and scientists from Volkswagen Mobility Research conducted an intensive study into traffic development in Germany until 2020 and drew up possible solutions aims to reduce and then solve the heavy traffic problems in Germany. They conclude that interaction of systematic traffic management, well developed and organized motorway, and further developed vehicle technology on a complete infrastructure could be the vital ways to solve the problems.

Profitability Ratio Analysis of Volkswagen AG of Year 2012-2013

Profitability Ratio

2012 2013 Interpretation

Return on Equity (Net profit/Average owner’s equity)x100%=ROE

2188163354+81995

2

×100%=30.1%

(Net profit/Average owner’s equity)x100%= ROE

9145(81995+90037)/2

×100%=10.6%

During the year of 2012-2013 period, the ROE of the business had decreased from 30.1% to 10.6%. This means the owner is getting less return from the investment.

Net Profit Margin (Net profit/Net sales)x100%=NPM21881192676

×100%=11.3%

(Net profit/Net sales)x100%=NPM9145197007

×100%=4.6%

During year 2012-2013 period, THE NPM has decreased from 11.3% to 4.6%. This means the business is getting worse at controlling its overall expenses.

Gross Profit Margin (Gross profit/Net sales)x100%=GPM35154192676

×100%=18.2%

(Gross profit/Net sales)x100%=GPM35600197007

×100%=18.1%

During year 2012-2013 period, the GPM has decreased from 18.2% to 18.1%. Hence the business is getting worse at controlling its cost of goods sold.

Selling Exp. Ratio (Total selling expense/Netsales)x100%=SER18850192676

×100%=9.8%

(Total selling expense/Netsales)x100%=SER19655197007

×100%=10.0%

During year 2012-2013 period, the SER has increased from 9.8% to 10.0%. The business is getting worse at controlling its selling exp.

General Exp. Ratio (Total general expense/Net sales)x100%=GER6220+9070192676

×100%=8.0%

(Total general expense/Net sales)x100%=GER6888+7343197007

×100%=7.2%

During year 2012-2013 period, THE GER has decreased from 8.0% to 7.2%. Thus, The business is getting better at controlling its general exp.

Financial Exp. Ratio (Total financial expense/Net sales)x100%=FER2546192676

×100%=1.3%

(Total financial expense/Net sales)x100%=FER2366197007

×100%=1.2%

During the year 2012-2013 periods, the FER has decreased from 1.3% to 1.2%. This means that the business is getting better in controlling the financial expenses.

Stability Ratio Analysis of Volkswagen AG of Year 2012-2013

Stability Ratio 2012 2013Working Capital

(Total current assets/Total current liabilities)= Working Capital 113061/105526= 1.07:1

(Total current assets/Total current liabilities)= Working Capital 122192/118625= 1.03: 1

Total Debt (Total liabilities/Total assets)x100%= Total Debt

227522309518

×100%=73.5%

(Total liabilities/Total assets)x100%= Total Debt

234297324333

×100%=73.2%

Stock Turnover

365days/(Cost of goods sold/Average Inventory)= Stock Turnover

365÷157522

27551+286742

=65.1days

365days/(Cost of goods sold/Average Inventory)= Stock Turnover

365÷161407

28674+286532

=64.8days

Debtor Turnover

365days/(Credit sales/Average debtors)= Debtor turnover

365÷192676/2

10479+100992

=39.0Days

*Credit sales not found

365days/(Credit sales/Average debtors)= Debtor Turnover

365÷197007 /2

10099+111332

=39.3Days

*Credit sales not foundInterest Coverage

(Interest expense + Net profit)/Interest Expense= Interest Coverage

1398+218811398

=16.7׿

(Interest expense + Net profit)/Interest Expense= Interest Coverage

1513+91451513

=7.0׿

Stability Ratio InterpretationWorking Capital During year 2012-2013 period, the WCR decreased from

1.580:1 to 1.375:1. This means the business’s ability to pay current liabilities with current assets is getting worse. In addition, the business does not satisfy the minimum requirement of 2:1.

Total Debt During year 2012-2013, the TDR increased from 42.7% to 49.0%. This means the business total debt is increase. However, it still stay in the safe limit of under 50%

Stock Turnover During year 2012-2013 period, the STR increase from 21.8 days to 22.1 days. Therefore, the business is selling its inventory slower

Debtor Turnover During year 2012-2013 period the DTR increased from 39.0days to 39.3days. This means that the business is collecting its debtor at a slower rate.

Interest Coverage

During year 2012-2013 period, the ICR decreased from 16.7 times to 7.0 times. However, the business is still fulfill the minimum requirement of 5.0times. As a result, the business has the ability to pay off its interest expenses.

P/E Ratio

Profit/Earnings Ratio =Current share priceEarnings per share

= 194.20/ 18.63

=10.4years

The share price of Volkswagen Group at 27 May 2014 is 194.20EUR. According to the financial report 2013 of Volkswagen Group, the earning per share is 18.63EUR. By using the above formula, we found that the P/E ratio of Volkswagen Group was 10.4 times.

In a nutshell, if an investor wants to buy Volkswagen Group’s share, it will take about 10.4years to recoup back his/her investments.

Investment Recommendation

During the year 2012-2013 period, there was a drastic changed in the return on equity (ROE). The ROE was decreased from 30.1% to 10.6%. This shows Volkswagen Group was getting less profits from the investments. Besides, the net profit margin ratio also decreased from 11.3% to 4.6%. This was caused by weak management of overall expenses. Consequently, Volkswagen Group earned less return in the year 2013 compared to the year 2012.

On the stability ratio side, working capital is slightly decreased from 1.07:1 (year 2012) to 1.03: 1 (year 2013). However, both of the ratios did not meets the minimum requirement of 2:1. Furthermore, the total debt of the company was decreased from 73.5% to 72.2% but it still exceeded the maximum limit of 50%. From other perspective, the interest coverage ratio of year 2013 is decreased from 16.7times to 7times but it still maintain the minimum requirement which makes it able to pay off its interest expenses. According to the analysis and the result, Volkswagen Group has an overall low stability ratio.

As a conclusion, Volkswagen group did not shows a potential or decent financial profitability ratio and stability ratio in their investment. Hence, I think that it is not wise to invest in the Volkswagen group as investor requires 10.4 years to get back the investment and the financial status of the company is not stable. Other than that, the share price of Volkswagen Group is quite high, 194.20EUR per share.

Appendix

References

The Group. (n.d.). Volkswagen Group. Retrieved May 23, 2014, from http://www.volkswagenag.com/content/vwcorp/content/en/the_group.html

CNBC Symbol Lookup. (n.d.). CNBC.com. Retrieved May 27, 2014, from http://data.cnbc.com/quotes/VOW-DE%2C%20

Volkswagen AG. (n.d.). Yahoo! Finance. Retrieved May 26, 2014, from http://finance.yahoo.com/q?s=VOW.DE

Publications. (n.d.). Volkswagen Group publications_overview. Retrieved May 23, 2014, from http://www.volkswagenag.com/content/vwcorp/info_center/en/publications/publications.html

Businessweek. (n.d.). Volkswagen Ag (VOW:XETRA). . Retrieved May 25, 2014, from http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=VOW:GR