Managerial Accounting Analyses of Continental Tire AG
The purpose of the current paper is to identify the level of financial performance of Continental AG and compare it to its competitors – Michelin and Goodyear companies. The research question is whether Continental AG financial performance better than competitors’ performance. Based on the financial ratios analyses the current research directed to analyze whether Continental AG and its competitors run the same risks. An analysis of the sets of the following financial ratios was used: liquidity, leverage, profitability, management ratios. Also, the paper contains recommendations on improvement of Continental AG financial performance based on the analyses of financial risks the company is exposed in accordance with financial ratios analyses.
Financial ratios analysis is the way to analyze financial statements data to reveal existing and potential financial issues of the company. Analysis of financial ratios is one of the main methods of performance evaluation in accounting. The aim of financial analysis is to determine the viability of a business and its perspectives. Financial analysis contains important information for the company management about the sources of profits increase and reduction of liabilities. The significance of financial ratios analyses is that it helps to evaluate various aspects of financial performance, such as efficiency, profitability and liquidity. Liquidity ratios identify the ability of the company to finance its debts. Leverage ratios help to reveal the balance between assets and debt. Profitability ratios are designed to identify the ability of the company to generate earnings. Management ratios identify the efficiency of the management of the company. It also shows the ability to effectively use company assets to generate profits. For the purposes of this paper there were several ratios used for analysis of liquidity (current ratio, quick ratio, net working capital turnover); solvency ratios (debt to equity ratio, interest coverage ratio); profitability ratio (gross profit margin ratio, net profit margin ratio); management ratio (inventory turnover ratio, accounts receivable turnover ratio, return on assets, return on investment).
With reference to the purposes of financial analysis, the aim of this paper is to carry out an analysis of financial ratios, to evaluate financial performance of Continental AG and to compare financial performance of the company with the financial performance of its competitors. Usually, comparative financial analysis of the company is conducted for the purpose of finding out which spheres of financial sphere perform better and which are worse than those of the competitors or an industry the analyzed company belongs. It is important to consult industry level financial ratios because they vary from one industry and another and depend on the type of the industry. The value of financial ratios that are normal for one industry may be a bad sign for another.
The research was conducted on the basement of two books. For financial ratios analysis of Continental AG a set of data represented in the Appendix 1 was used. Financial data were collected from annual reports and financial statements of the three companies (Continental AG, Michelin and Goodyear Type and Rubber Company) as of 2011.
There were two main books used in the research which represented the core principles of finance. The book Fundamentals of Financial Management by Brigham E. F. and Houston F. J. gives the general idea of how financial analysis should be performed and how the core principles of financial analysis should be applied (Brigham and Houston, 2009).
Formulae of financial ratios were taken from the book Key Management Ratios: Master the Management Metrics that Drive and Control Your Business by Walch C. The book contains important information regarding financial management, computation of financial ratios and basic principles of the analysis of financial ratios (Walch, 2006).
A comparison of competitors’ financial ratios is helpful when there is a necessity to evaluate financial performance relatively to similar companies or an industry. The Brandow Company (2010) information was used to compare financial performance of the Continental AG Company to the industry performance. For comparison of competitors’ financial performance data of U.S. Securities and Exchange Commission (n.d.) was used.
In the discussion part of the paper a detailed analysis of the results obtained was represented. Particular attention was paid to the comparison of financial ratios. Based on the results of the research, several recommendations with regard to the improvement of financial performance were given to the Continental AG management.
The recommendations are supported with appropriate conclusions with regard to the increase of profitability, liquidity and debt reduction. The conclusions were made on the ground of comparative analysis of the Continental AG and it competitors to reveal strengths and weaknesses of the company. Some ratios were compared to the industry level for better understanding of the company financial performance.
In general, financial performance of the company is satisfactory except for several issues that should be resolved. The analysis of financial ratios revealed several problems connected with Continental AG financial performance. In accordance with recommendations made, the company needs to improve liquidity, reconsider working capital management and management of accounts receivable, improve leverage ratios and pay particular attention to the level of indebtedness.
References
Brigham, E., F. & Houston, F. J. (2009). Fundamentals of Financial Management. (12 ed.). Mason: Cengage Learning.
The Brandow Company. Free business statistics and financial ratios. (2010). Retrieved from http://www.bizstats.com/corporation-industry-financials/manufacturing-31/transportation-equipment-manufacturing-336/motor-vehicles-and-parts-336105/show
U.S. Securities and Exchange Comission. (n.d.) Continental AG CIK. Retrieved from www.sec.gov
Walch, C. (2006). Key Management Ratios: master the Management Metrics that Drive and Control Your Business (Financial Time Series). (4 ed.). London: Prentice Hall.
