Ratio Analysis
Introduction
The ratio analysis helps in understanding the financial position and performance of the company in context of its industry and competitors. Over the last few years, the competition in the vehicle or automotive industry has been increasing that have resulted in fluctuations in their financial performances. BMW is one of the oldest company in the automotive industry have successfully developed itself over the period of time and completed 100th years with the beginning of 2016 (BMW, 2014). On the other hand, Volkswagen is another one of the leading automotive company in the global industry. Both of these companies are German and produce automobiles, engines and motorcycles (Volkswagen, 2014). Therefore, the paper is going to analyze their financial ratios, mainly to evaluate their operational efficiency and solvency in comparison with the industry to suggest the investors for what situations are favorable for them in both of these companies.
Operational Efficiency
Operational efficiency can be defined as the difference between the input in the business and the output raised from the business. The companies always make efforts to increase their output as compare to the input that is known as the improved efficiency.
Gross Profit Margin
The gross profit margin of BMW is 21% for the fiscal year of 2014, where, the gross profit margin of Volkswagen is 18%. According to the annual report of BMW, the sales of its premium vehicles throughout the year was the ever highest that was 2.118 million. It is the major and the most giving factor in the highest revenue of the company in the year of 2014 that is resulted in high gross margin (BMW, 2014). The sales and revenue performance of Volkswagen is also almost similar to BMW as its sales of vehicles has reached to 10.2 million and the revenue has reached to €202.5 billion (Volkswagen, 2014). However, the gross profit margin of the company is less than what of BMW.
According to its annual report, the exchange rate has negatively impacted on the net profitability of the company. This is the major cause of lower gross profit margin of the company. Furthermore, although, the overall sales have increased, the sales in different foreign regions such as South America North America etc have decreased in the year of annual report of 2014 (Volkswagen, 2014).
In comparison, the gross profit margin of the industry is 20.3% that is higher than Volkswagen and lower than BMW. The lower gross margin of Volkswagen as compare to the industry is the direct product of its investment and expanses in new technologies that is resulted in decrease in the total money available for the operations (Volkswagen, 2014).
Return on Assets
The return on assets of both BMW and Volkswagen is 4% in the similar fiscal year of 2014, where the return on assets of the industry in 2.9%. The return on assets of Volkswagen is higher than the industry even after its gross profit margin is lower. The reason is that the company has used its assets to increases its revenue. Volkswagen has successfully increased its investment in the affiliated companies in 2014 and reached from €54,787 million to € 69,689 million (Volkswagen, 2014).
On the other hand, the return on assets of BMW is higher than the industry because its sales on its assets have increased dramatically in 2014, mainly those sales that have raised on Noord Groningen, Lease B.V. and the sales of market equity (BMW, 2014). Both companies are strongly engaged in investing their assets in the market shares, capital and equity to increase the sales and it is the major cause of the high return on assets for both companies.
Return on Equity
The return on equity of BMW is 16%, just same as 16% of Volkswagen. In contrast, the return on equity of the industry is 9.5%. Volkswagen has reported that its return on equity has increased because of its Chinese joint venture. The company has generated the high profit and revenue from its Chinese joint venture (Volkswagen, 2014). On the other side, BMW has reported in the annual report of the company that it is outstandingly performing in return on equity because of the stability in the risk situation. The major equity partners of BMW include Brilliance Automotive Ltd, DriveNow GmbH & Co, Munich, Shenyang, Verwaltungs GmbH and in joint venture with these companies, the equity is improved by € 248 million (BMW, 2014).
Discussing the operational efficiency ratios of both companies shows that the conditions are more favorable for investors to put their money in BMW firm as its returns and profitability both are improved and higher than the industry as well as the competitors, where, the returns of Volkswagen are also higher but its gross profit ratio is lower that may result in low performance in future.
Solvency
Before analyzing the solvency ratio of the companies, it is important to understand the term solvency. Solvency can be defined as the capability of the firm to meet its long term loans, debts and obligations.
Debt-to-equity ratio
The debt to equity ratio of BMW and Volkswagen is similar that is 0.3, where, the ratio of the industry is 0.43. The lower debt to equity ratio than the industry shows that both companies are financially stable and repaying their debts more efficiently than the industry average. As the debt of the both companies is growing, the investments in the assets from the shareholders are also increasing. Total liabilities to bank of Volkswagen are €1,003 million in 2014 as compare to €491 million in 2013, where, the apparent growth can be seen. On the same side, the equity of the company is also increased from €25,874 to €28,483 (Volkswagen, 2014).
On the other side, the balance in the equity and liabilities is caused by the pension provisions, current and non-current liabilities, equity increased by 5.2% and other provisions as well. It means that BMW also maintains the balance in the growth of debt and equity. However, the lower debt to equity is also caused because of the decline in the deferred tax and current tax liabilities (BMW, 2014). Debt to equity situation of both companies is favorable as the investors usually feel risky in making investments in the companies with higher debt to equity.
Conclusion
The ratio analysis of BMW and Volkswagen shows that the companies are outstandingly performing in the market and it is the most favorable condition for the investors to buy the stock of these companies. Though, the gross profit margin of BMW is higher, with the similar performance in other aspects, the investors can more favorably invest their money in BMW capital market, as the profitability growth is the major aim of any investor and shareholder.
References
BMW. (2014). Annual report 2014. Available from https://www.google.com.pk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0ahUKEwj6i5OCyY3LAhVQCY4KHWBeDNMQFggzMAQ&url=https%3A%2F%2Firpages2.equitystory.com%2Fdownload%2Fcompanies%2FBMW%2FAnnual%2520Reports%2FDE0005190003-JA-2014-EQ-E-00.pdf&usg=AFQjCNEDNXnGJH9Sq7TYQUWar1BdZ4LTlQ&sig2=IvUb7gHDDkQ89IJj5T44Qg&bvm=bv.114733917,d.c2E [Accessed 23 February 2016]
Volkswagen. (2014). Annual Financial Statements of Volkswagen AG. Available from http://www.volkswagenag.com/content/vwcorp/content/en/misc/pdf-dummies.bin.html/downloadfilelist/downloadfile/downloadfile_30/file/Y_2014_e.pdf [Accessed 23 February 2016]
