Analysis Of BMW Financial Position And Performance Accounting Essay

Analysis Of BMW Financial Position And executing Accounting EssayThis is a pecuniary analysis report on BMW. Specifically, in the first part of this report, the pecuniary location and work of BMW for the four pecuniary years from 2008 to 2011 forget be first re-formulated, and the financial dimensions for the ships company allow be computed for analysis purposes. In order to perform a throughout financial analysis on the company, the trends of the financial ratios of BMW will be analyzed. Then, the financial statements of Audi will also be reformulated and the respective financial ratios for Audi will also be computed. The financial performance of Audi will be apply to compare to the performance of BMW, to gauge the relative performance of BMW, as compared to one of the peer in spite of appearance the industry. Then, in the second part, BMWs forecasted value of equity per share at the end of the fourth financial (i.e., at FY 2011) will also be computed. Recommendation s will be provided if the stock is a good investment choice, based on the various findings derived from this study.1.2 Company BackgroundToday, BMW is the worlds best- interchange manufacturer of premium cars (Rauwald, 2012). BMW is founded in 1916 and is headquartered in Munich, Germany. Today, the company has much than 96,000 workforces at 24 production facilities in 13 countries and had pe pass localised to about 140 countries in the world (A actually Bergsteiner, 2011). BMW is also a company emphasizing on corpo regulate social responsibilities (Stamoulakis Bridwell, 2009). Some of the competitors of BMW include Audi and Mercedes-Benz, whereby these companies has also been competing with BMW in important markets such as China (Rauwald Pearson, 2011a). Referring to put back 1 below, the various trading segments BMW is operating at bottom is shown. The major revenue contribution of the company comes from selling automobiles, and then followed by car financing activities. g ameboard 1 The discordant Business Segments BMW Operating Within extension WorldscopeTable 2 below until now shows the various geographical regions BMW is operating within. As shown from the plan, the revenue generated from BMW sales in China is improving fast, art object the revenue generated from the United States are stagnating. Indeed, forward to the financial crisis, United States is the biggest market for BMW (Rauwald, 2010). In contrast, as discussed in Muller (2010), BMW growth in new-made years had largely driven by the increase of sales from emerging countries. This is a trend worth acknowledging in analyzing the current financial performance and to predict the future probable performance of the firm.Table 2 The Various Geographical Region BMW Operating WithinSource WorldscopePart I Analysis of BMW Financial Position and PerformanceIn Part I, the financial analysis on BMW will be performed through two major methods, firstly by reviewing the trends of the financial metrics of BMW and its competitor and secondly, through the review of various financial ratios of BMW and to compare the ratios to the competitors ratios.2.1 Trend Analysis A Review of BMW Past Performances2.1.1 makeability proportionsBased on Table 3 below, the various profitability ratios of BMW are shown. As measured by the Return on Assets, Return on Equity and Return on Invested pileusital, BMW performance is generally well-performing in FY2007, but subsequently suffered to a minimal profitability in FY2008 towards FY 2010, before heel countering to superior profitability situation in FY2011. This is not surprising. In FY2008, the world financial crisis hit, and the automotive industry, which is cyclic in nature, are impacted adversely (Peterson, 2008). Indeed, the entire automotive industry fall into a turmoil as auto sales have plunged in the United State and Europe while sales faced stagnation in previously booming markets like China and India (Rauwald, 2009b). In 2 009, as discussed within Rauwald (2009a), BMW suffered losses due to recession as the sales and demand of luxury cars stalled. This is logical as in recessionary arrest, people cut down consumption and luxury product manufacturers are often the most impacted as the product demand are highly elastic.Then, qualitatively speaking, in FY 2010, the profitability reverts in BMW is due to improved efficiency signifi merchantmantly in all areas of the company (during the restructuring programme of BMW in the global financial crisis) as well as favourable exchange-rate fluctuations for the company (Rauwald, 2010). Next, Rauwald Schmidt (2012a) had however attributed the significant enhanced of BMW performance due to the companys comprehensive transformation, via cutting jobs and costs since 2007 (which include a cut of more than 8,100 jobs and diminution of more than 6 billion Euros in costs). This is also true as based on the employee per sales figure, the company is showing positiv e improvement as in recent years, more sales are generated per employee.Aside from that, it is also observed that the ratio of research and development to sales ratios has also been high, approximately around 5%. This is because BMW has been investing in research and development activities for further innovations in the future. For example, one of the recent innovations of BMW is development of eco-super car through the Vision Efficient dynamics concept (Kable, 2010).Overall, based on the profitability ratios, a gross profit margin of 24% and the Return on Equity ratio of 19.2% in the recent years suggest that BMW is a well performing firm. Nonetheless(prenominal), the fact that the firm could be seriously affected by recession also suggests that the business is cyclical, and thitherfore, the business risk faced by the firm and investors could be high.Table 3 Trends of Profitability proportionalitys of BMWSource Worldscope2.1.2 Asset Utilization RatiosBased on Table 4 below, the va rious asset utilization ratios, such as assets per employee, total assets overthrow, inventory turnover and net sales to gross fixed assets are shown. Overall, there is a trend of improvement on these ratios. As discussed in Rauwald Schmidt (2012b), the strong performance of BMW is primarily maked by the strength of the BMW, MINI and Rolls-Royce brands as well as improvements in efficiency. The improved of efficiencies can be storied as the assets per employees had increased (i.e., fewer employees as compared to the total assets), and the higher total assets and inventory turnover ratios (as the company is more able to generate more sales from every unit of asset).Table 4 Trends of Asset Utilization Ratios of BMWSource Worldscope2.1.3 Leverage RatiosBased on Table 5 below, the trends of use of debt financing and capital structure of BMW are shown. Overall, it can be noticed that BMW is a highly geared firm, as the long stipulation debt within the capital structure has been cons istently high throughout the past few years, i.e., at approximately 60%. Then, the portion of debt is also far outstrip the portion of equity, and as indicated by the total debt to common equity ratio, the total debt is approximately more than 2 to 3 times the total amount of equity. Overall, this suggests that BMW is firmly leveraged and the firm would face higher finance risks (such as solvency, liquid state and interest payment risks) in hard times. In contrast, the firm would make high return on equity for the shareholders due to use of leverage. Therefore, part of the reasons contributing to the high return on equity for BMW is through the use of high leverage within the firm.Table 5 Trends of Leverage Ratios of BMWSource Worldscope2.1.4 Liquidity RatiosBased on Table 6 below, the various liquidity ratios such as quick ratio and current ratio are shown. Overall, the liquidity position of BMW is marginally copesettic, as the current and quick ratio fall around the range of 1 . A more conservative ratio would be a current ratio of more than 2 times. Then, it is also noted that throughout the years, the proportion of receivables in the current assets is the highest, followed by cash, and then inventories. This is however unavoidable, as most of the customers would bribe the luxury cars on credit.Table 6 Trends of Liquidity Ratios of BMWSource Worldscope2.1.5 A Review of the Financial Performance Trends of BMWIn order to form an overview of the financial performance of BMW in the past few years, the general profitability picture of BMW is presented in presage 1. As shown below, prior to the crisis, BMW has been in a rising profit position for more than a decade (Avery Bergsteiner, 2011). However, unfortunately, the firm performance is badly affected during the global financial crisis (as discussed previously). During the period of financial crisis, the net income, return on equity and total common equity fall sharp-wordedly. Nevertheless, upon the cris is, the profitability of BMW surged sharply. Avery Bergsteiner (2011) had found that one of the reasons contribute to fast BMW convalescence from the global financial crisis in 2008 is due to sustainable leadership model and processes within the company. Therefore, this suggests the resiliency and the choice of the management within the firm as satisfactory and competent.Then, another trend worth discussing is that in the recent years, BMW car sales have been increasing significantly in the China market (Rauwald, 2012). Indeed, as discussed within Schafer (2011), much of the sales increases of BMW come from the growth of sales from China and India. Such a trend had contributed significantly as even in FY2011 and FY2012, BMW sales in Europe are facing challenges due to sovereign debt crisis (Rauwald Pearson, 2011a). Similarly, as discussed within Schafer (2011), the sales of BMW cars are slow in Europe due to the slow convalescence within the region.Figure 1 Net Income, Equity, ROE and ROCI Trends of BMWCDocuments and SettingsHappyGoLuckyDesktopData Collectiondatareturn analysis chart.jpgSource Worldscope2.2 Peers Financial Ratios ComparisonsIn this section, in order to understand the financial position and the performance of BMW in the context of its industry as well as in relation to its peers, the various financial ratios of BMW, the peers and one of its leading competitors, namely Audi will be performed.2.2.1 proceeds evaluate related RatiosAs shown in Table 7, the various growth rates of BMW is compared to the peers and Audi. Firstly, it is noted that the growth of sales of BMW is slightly worse than the growth of Audi, but significantly worse off than the peers. In other words, some(prenominal) Audi and BMW are performing less satisfactorily as compared to the industry second-rate. Therefore, while the financial picture of BMW is recovering and experiencing sharp upturns in FY2011, the firm is actually down perform as compared to the industry av erage.Table 7 Trends of Growth Rates of BMW, Audi and PeersCompanyBMW AGPeer MeanAudi AG termination pecuniary Yr End Date12/31/201112/31/2011 recognise 1 Year Growth RatesSales 1Yr Growth13.8022.2224.42Operating Income 1Yr Growth53.2147.7557.09Net Margin 1Yr Growth32.92104.8836.41Net Income 1Yr Growth51.26149.4369.72EPS 1Yr Growth51.12146.4769.73 match Assets 1Yr Growth11.7114.5419.56Equity 1Yr Growth13.118.5813.72Key 5 Year Growth RatesSales 5Yr Growth7.0315.177.20Operating Income 5Yr Growth16.3923.4414.71Net Margin 5Yr Growth3.927.7618.21Net Income 5Yr Growth11.2223.0926.72EPS 5Yr Growth11.2121.3526.72 keep down Assets 5Yr Growth9.1812.2514.00Equity 5Yr Growth7.179.0911.83Source Thomson one(a) BankerAs shown in Table 8, the figures of growth rates of several(prenominal) financial metrics are also computed, from the reformulated financial statements (as shown in Appendix at the end of this document). Overall, it can be observed that both Audi and BMW financial performance move i n tandem, whereby the good performance of both company tend to be happen at the similar time. For instance, the growth of sales was negative for both of the firm at FY2009. Then, the growth rates of common shareholder equity also tend to be similar in terms of magnitude. For example, the growth rate of shareholder equity has been slight negative or positive at FY2009. However, the growth rate of operating income (after tax) for both the company tend to be less similar. This could be due to the operational management differences between the two firms.Table 8 Trends of Growth Rates of BMW to AudiProfitability R200920102011Growth Rate in SalesBMW-4.73%19.33%13.80%Audi-12.74%18.77%24.42%Growth Rate in OI (after tax)BMW352.36%-20.66%49.91%Audi-43.17%128.13%60.40%Growth Rate in NOABMW31.36%13.02%-10.94%Audi10.86%47.64%-4.07%Growth Rate in CSEBMW-1.79%15.94%17.18%Audi2.62%9.30%13.72%Source Computed from Reformulated Financial Statement2.2.2 Profitability RatiosAs shown in Table 9, the prof itability related ratios for BMW, peers and Audi are shown. Overall, the profitability margins of BMW would be slightly lesser than that of the Audi (particularly from the net margin perspective), but would be higher than that of the peers. This is because BMW steer within the luxury car segment, and therefore, the margins would be higher, as the majority of other competitors go for the volume for profitability. Therefore, the asset turnover of BMW and Audi is lower significantly than the peers, as the company focus on the luxury niche segment. Aside from that, it could be seen that the RD expense to sales ratio for BMW (and Audi) is higher than that of the peers. For this, one of the successes of BMW comes from investing heavily in spear carrier production capacity and new technology constantly (Rauwald, 2012).Table 9 Profitability colligate Ratios for BMW, Peers and AudiCompanyBMW AGPeer MeanAudi AG support Fiscal Yr End Date12/31/201112/31/2011Asset Turnover0.570.851.25Pretax M argin10.7313.70ROA4.3713.86Return on Invest Cap5.6234.13Reinvest Rate13.2537.5935.68R D to Sales4.903.435.09Gross Profit Margin24.6219.4518.57Operating Profit Margin11.426.929.54Pretax Margin10.7313.70Net Margin7.099.95Source Thomson One BankerTable 10 is about the profitability ratios of BMW and Audi, computed from the reformulated financial statements (as shown in Appendix at the end of this document). Overall, it can be seen that Audi would perform slightly better than BMW, although from the net profit margin perspective, BMW outperform Audi in FY2010 and FY2011. Then, it is also observed that the financial margins of BMW are more volatile as compared to Audi. Therefore, the risks (from the standard deviation perspective) for BMW are higher. Nonetheless, as discussed before, BMW is performing well in terms of cutting down the expense. This can be observed as the portion of administration costs to the sales ratio for BMW has been decreasing from FY2008 towards FY2011 whereby the ratio for Audi had been staying relatively constant (around 8-10%). This reaffirm that BMW had been s basal transform itself into a more efficient organization.Table 10 Trends of Profitability Ratios of BMW to Audi2008200920102011Operating Profit MarginBMW0.95%-0.09%5.71%8.03%Audi5.27%3.43%6.59%8.50%Sales Profit MarginBMW1.95%9.27%6.17%8.12%Audi5.27%3.43%6.59%8.50%Other Items Profit MarginBMW0.00%0.00%0.00%0.00%Audi2.82%2.86%2.87%2.90%Net Profit MarginBMW1.25%0.13%5.23%7.75%Audi6.46%3.52%3.07%5.91%Expense Ratio Admin CostsBMW9.59%9.91%7.98%7.83%Audi9.47%10.52%8.57%8.16%Expense Ratio Distribution CostsBMW-0.21%0.10%0.24%0.50%Audi0.88%1.01%1.06%0.97%Operating Profitability (RNOA)BMWN/A14.55%9.55%14.27%AudiN/A12.48%21.87%30.03%Financing Profitability (RNFA)BMWN/A0.70%0.98%1.37%AudiN/A5.07%5.54%9.98%Source Computed from Reformulated Financial Statement2.2.3 Asset Utilization ratiosTable 11 is about the asset utilization related ratios for BMW, Audi and peers. Overall, BMW down perform b oth Audi and the peers from asset turnover and inventory turnover perspective. Indeed, Audi perform best in utilizing assets in generating revenue. This shown that BMW may not be effective to the peers and Audi in leveraging on the assets to generate sales, and there are much room for improvement to significantly enhance the asset utilization ratios for the firm.Table 11 Asset Utilization Related Ratios for BMW, Audi and PeersCompanyBMW AGPeer MeanAudi AGLast Fiscal Yr End Date12/31/201112/31/2011Asset Turnover0.570.851.25 ancestry Turnover5.118.528.85Source Thomson One Banker2.2.4 Leverage RatiosTable 12 is about the comparisons of leverage related ratios between BMW, Audi and peers. Obviously from the figure of the industry mean score, it can be noticed that most of the automotive manufacturers are highly geared. Indeed, as it is discussed that BMW is a firm that relied heavily on debt instrument for financing its operations, the industry average figure is even higher. In stark c ontrast, Audi is a lowly leveraged firm. Indeed, the use of debt is very minor within the firms capital structure.Table 12 Leverage Ratios Related Ratios for BMW, Audi and PeersCompanyBMW AGPeer MeanAudi AGLast Fiscal Yr End Date12/31/201112/31/2011Total Debt to Common Equity245.94%250.96%9.39%LT Debt to Common Equity133.58%146.61%0.17%LT Debt to Total Capital56.96%41.23%0.16%Dividend Payout17.46%15.80%0.00%Cash Dividend Coverage Ratio7.1321.08N/ASource Thomson One BankerIn Table 13 below, trends of leverage ratios of BMW and Audi, computed from the reformulated financial statements (as shown in Appendix at the end of this document) are presented. Similar to the discussions presented above, the financial leverage ratio of BMW is significantly higher than the cheek of Audi. However, from the operating liability leverage ratio perspective, the figures of the two firms are roughly comparable.Table 13 Trends of Leverage Ratios of BMW to Audi2008200920102011Financial Leverage Ratio (FLE V)BMW0.2990.4140.4130.410Audi0.2560.198-0.1280.054Capitalization RatioBMW1.3781.8431.7961.365Audi0.7810.8441.1400.962Operating Liability Leverage Ratio (OLLEV)BMW1.0930.6630.6451.011Audi1.4791.3811.0581.268Source Computed from Reformulated Financial Statement2.2.5 Liquidity RatiosIn Table 14 below, the liquidity related ratios for BMW, Audi and peers are compared and presented. It is noted that the liquidity position of BMW, as measured from all of these ratios, i.e., quick ratio, current ratio, cash and equivalent to current assets ratio, account receivables days as well as inventories days held are not only down performing the peers, but also perform much badly as compared to the situation of Audi. Indeed, Audi is having strong liquidity position, thereby indicating that the firm is unlikely to suffer from any near term liquidity issues. Audi had also outperformed the peers significantly and based on the findings above that Audi is a lowly geared firm the firm is financially care fully managed.Table 14 Liquidity Related Ratios for BMW, Audi and PeersCompanyBMW AGPeer MeanAudi AGLast Fiscal Yr End Date12/31/201112/31/2011Quick Ratio0.821.001.32 period Ratio1.041.281.60Cash Equivalent to Current Assets23.5232.2441.13Accounts Receivable Days136.25102.0761.22Inventories Days Held71.4448.6041.24Source Thomson One Banker2.2.6 SummaryOverall, while BMW is a profitable firm, and the firm is performing very well in FY2011 (i.e., experiencing sharp recovery) such performance can be largely attributed to the industry wide recovery situation around the world. However, the performance of BMW would seem to be lacking, more uncollectible and less efficiently, effectively and conservatively managed when compared to the peers. This is particularly when compared to Audi, as Audi had found to be having much stronger and yet conservative financial position and performance. It can be summarized that BMW performed unsatisfactorily as compared to the other automotive manufactur ers.Part II ValuationIn this section, military rating of BMW stock will be performed via the discount cash flow model. In order to compute the company value via this method, the dividend distributed to the investors will be treated as the proxy of the cash flow to the investors. Currently, the latest dividend payment from BMW is EUR 2.30 (Figure 2, the indicated dividend payment from the management). Then, from Figure 3, the growth rate of the dividend yield/ payment (i.e., the growth rate of the cash flow of the firm) range from 0.23% (i.e., 3-years growth rate) to 1.01% (i.e., 3-years growth rate). Theoretically, the longer term growth rate should be used. However, the global financial meltdown in FY2008 to FY2009 would be considered as anomalies (the black swan event), and therefore, it is unfair to take the three year average figure for the firm. Therefore, conservatively, a growth rate of 0.5% would be assumed to represent the growth rate of dividend payment for the investors. Then, in order to compute the required rate of return for BMW, the risks pertaining to the firm will be considered. As BMW is found to be highly geared, a required rate of return of above 10% would be necessary. Therefore, conservatively speaking, a required rate of return of 15% is justifiable.HenceD = EUR 2.30g = 0.5%r = 15%Firm value=D (1+g)(r-g)=2.3 (1+0.005)(0.15-0.005)=2.3 (1.005)(0.145)=EUR 15.94Therefore, a very conservative firm value for BMW from the dividend discount model (i.e., Gordon Growth Model rating method) is only EUR 15.94. This is even much lower than the analysts target price of EUR 75.60 (Figure 2). Therefore, from the valuation method applied, it is unwise to purchase into BMW stock.Figure 2 Estimates from AnalystCDocuments and SettingsHappyGoLuckyDesktopUK0538 Advanced financial statement analysisData Collectiondatathomson forecast report.jpgSource Thomson FinancialFigure 3 Estimates from AnalystCDocuments and SettingsHappyGoLuckyDesktopUK0538 Advanced f inancial statement analysisData Collectiondatastock valuation.jpgSource Thomson FinancialIn Table 15 below, the price multiple of BMW, peers and Audi is shown. It is shown that BMW stock prices is valued at 10 times earnings multiple, as compared to Audi (which is only 5 times earnings multiple). Indeed, from the other two yardsticks, namely price to book value and price to cash flow ratios, BMW stock is valued more expensively. Then considering that the financial position and performance of BMW is significantly lower than the peers, and particularly, to Audi, the high price multiples of BMW would justify a sell comment on the stock.Table 15 Market Value Related Ratios for BMW, Audi and PeersCompanyBMW AGPeer MeanAudi AGLast Fiscal Yr End Date12/31/201112/31/2011Current P/E Ratio10.175.15 impairment/Book Ratio1.841.331.81Price/Cash Flow Ratio-11.101.943.34Source Thomson One BankerThen, from the qualitative perspective however, looking forward, competition between automotive manufact urers in China could be intensify and this could affect how BMW compete with other car manufacturers (Rauwald, 2012). However, some analysts had also been optimistic as they anticipate growth in markets such as China and Russia which would contribute to higher BMW sales in these emerging regions (Rauwald Schmidt, 2012a). Then, as discussed in Reed Schafer (2010), the rise of sales in China is primarily due to the branding and the quality of the cars sold by BMW. Therefore, the growth story of BMW in emerging regions would be in doubts, as the competitors, such as Audi has also strong performance in these emerging regions. Therefore, from a more conservatively perspective, it is reasonable to conclude that even it is expected that BMW could profit from the emerging countries, which would also not justify the high valuation of the stock. Hence, it is not rational to purchase into the stock of the company at the current price. In contrast, investors seeking exposure to automotive industry would be better to purchase the stock of Audi, as the firm is financially conservatively and operational effectively managed, and yet, having a low price multiple.ReferencesAvery, G. C., Bergsteiner, H. (2011). How BMW successfully practices sustainable leadership principles. Strategy Leadership, 39(6), 11-18.Kable, G. (2010). Bolts from BMW. Autoweek, 60, 12-12.Muller, J. (2010). BMWs concern for made-to-order cars. Forbes, 1.Penman, S. H. (2010). Financial Statement Analysis and Security Valuation, 4th Edition. McGraw-Hill Irwin, New York.Peterson, T. (2008). BMW 135i High performance, low price. Business Week (Online).Rauwald, C. (2009a). Corporate news BMW posts loss as unit sales fall 21%. Wall Street Journal.Rauwald, C. (2009b). Corporate news BMW swings to $1.24 billion loss as luxury-car sales plunge. Wall Street Journal.Rauwald, C. (2010). sumptuosity demand drives BMW results. 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