Financial Analysis of Volkswagen
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History of the Company
Volkswagen (AG) is an automobile company which was formed in 1937, and its located in the Germany. Initially, the company produced low priced automobiles for their customers. During this tenure, Volkswagen operated under the Nazi organization, and Ferdinand Porsche was responsible for the design of the first car. Before the mass production of automobiles, the World War II occurred in 1939, forcing the company to manufacture military equipment and vehicles. Because of this, Volkswagen became a target by the allied bombers. Under the British supervision, Volkswagen was rebuilt and the mass production began in 1946. Three years later, the West German government took control of Volkswagen leading to the production of passenger cars. For the last 70 years Volkswagen has operated throughout the world like China, Mexico, Brazil and the United States. Apart from producing passenger cars, Volkswagen produces commercial vehicles and vans. The most popular automobiles produced by Volkswagen include Porsche ad Audi in Germany. In the UK, Bentley is the common passenger car, while in Italy is Lamborghini. In 2015, Volkswagen became the largest automobile manufacturer surpassing Toyota Motors (Tikkanen, 2019). Despite this, Volkswagen encountered public relations crisis where the Environmental Protection Agency of the US announced that the company's diesel-powered automobiles which altered its performance. Volkswagen acknowledged its fault during the installment of defeat devices. Due to this, Volkswagen was forced to recall over 10 million cars across the world. Volkswagen faced litigation cases and was fined over $4 billion in the US. Additionally, some company's officials were found guilty of criminal cases. However, the company's sales of automobiles continue to increase each year. Recently, the company has ended the manufacturing of Beetle because of several redesigns.
Profitability ratios
These ratios compare various income statement items and how well a company achieves its operations. These ratios show the company's efforts in generating income from its core operations. Investors use this ratio in describing whether a company can generate a positive return from their investment. Generally, increasing profitability ratios are preferable as they indicate that a company is moving in the right direction. A decreasing ratio or below the industry ratios suggest that a company is an inefficiency in generating profit.
Gross profit
It shows the company's efforts in its production processes. This amount is obtained after the cost of sales are deducted from the sales and then expressed as a percentage. A higher ratio is considered by the management since it shows that it will have the capacity to meet the operating expenses. A lower ratio shows the management inefficiency in its production activities. From the analysis, Volkswagen had a ratio of 19.50% in 2016, then improved to 20.53% in 2017, and then declined slightly to 20.13% in 2018. The decline in 2018 was contributed by an increase in the cost of sales.
Net profit margin
It shows the income generated by a company after all the expenses are deducted. Analysts rely on this ratio in determining how the company produces income. Investors also rely on this ratio in making sales forecasts and predicting the company's profitability (Adedeji, 2014). The ratio expresses what the shareholders receive after the operating and non-operating expenses are deducted. Additionally, a company use this ratio in deciding whether to reinvest the earnings or pay the shareholders. A higher ratio is preferred because it indicates that a company can translate more revenues into profits in each financial year. On the other hand, a decreasing profit margin is a red flag to a company by reflecting that its operations are inefficient. From the analysis, Volkswagen had a profit margin of 2.48% in 2016, increased to 4.99% in 2017 and then increased slightly to 5.15%% in 2018. The increase in this ratio was contributed by the increase in net profit attributable to shareholders..
Return on Equity (ROE)
This ratio shows the relationship between the net income and stockholder's equity. It also indicates the return which investors receive after investing in the company (Nuhu, 2014). Stockholders commonly utilize this ratio in indicating whether or not to purchase stock. A company with a higher return to stockholders is capable of generating more internal cash flow, and hence less dependent on the debt financing. From computations, Volkswagen had a ratio of 5.79% in 2016 then increased to 10.51% in 2017 and then decreased slightly to 10.36% in 2018. The decline was contributed by an increase in the operating expenses.
Return on Total Assets
It shows the return to total assets after the company generates net income. In simple words, ROA shows how well a business manages the total assets in producing net income for a particular financial year (Nuhu, 2014). A company purchases its assets with the primary objective of generating more revenues and profits. Therefore, ROA shows how management is efficient in converting investments into net income. This ratio is considered necessary since a company's assets are the biggest form of investment a company can achieve. Volkswagen had a ROA of 1.36% in 2016, then increased to 2.76% in 2017 and then remained constant to 2.76% in 2018. The increase in ROA was contributed by an increase in the net profit.
Efficiency Ratios
These ratios are used to evaluate the management's ability in using its assets and liabilities in its core operations. Efficiency ratios are also known as activity ratios since they show how long a company take in converting inventories and collecting cash. The analysis can be used in improving the company's profitability and overall cash flow (Nuhu, 2014)..
Inventory Turnover
This ratio shows how well a company manages its inventory during the production process. It also expresses the times a company's inventory is converted into sales during the year. A higher ratio is recommended because it shows that the company is converting its stock many times during the year (Adedeji, 2014). A lower ratio indicates that a company is holding too much inventory into the business is associated with obsolescence and holding costs. From the analysis, Volkswagen had a ratio of 4.49 times in 2016 and then increased to 4.51 in 2017 and then lowered to 4.12 in 2018. The analyses indicate that the company's efficiency in converting inventory into revenues is improving from 2016 to 2018.
Accounts receivable turnover
The ratio shows how much a company can collect its receivables during a particular financial period. Usually, a company sells its sales on a cash or credit basis. When it decides to sell on credit, it allows the customers to pay on particulars dates during the year (Nuhu, 2014). A higher ratio is favourable since it shows that a company collects receivables many times during the year. On the other hand, a lower ratio shows that a company is inefficient in collecting its debts from the debtors. A lower ratio may reflect that a company's payment policy is not efficient. From the analysis, Volkswagen had a ratio of 27.95 times in 2016, then lowered to 17.99 times in 2017 and lowered further to 15.10 times in 2018. This indicates that the company's efficiency in collecting its debts is lowering.
Accounts payables turnover
It indicates a company's ability in paying its creditors (Nuhu, 2014). A company purchases its goods on cash or a credit basis. When it chooses to buy on credit, it is mandated to pay the debts during the year. The ability to pay the suppliers more times during the year indicates its efficiency in paying the debts. A higher ratio is considered since it shows that a company has the ability to pays debts, whereas a lower ratio shows that it's inefficient. The analysis reflects that Volkswagen had a ratio of 8.09 in 2016, then improved to 7.96 in 2017 and then improved to slightly to 8.08 in 2018.
Asset Turnover
It shows the return to the total assets after the company produce revenues (Nuhu, 2014). This ratio indicates how efficient a company is utilizing its assets to produce sales. It also indicates the management's efficiency in producing each dollar of sale. A lower ratio may reveal that the management is having production challenges since assets are inefficiently used. From the analysis, Volkswagen had an asset turnover of 0.55 in 2016 and then remained constant at 0.55 in 2017 and then lowered to 0.54 in 2018.
Liquidity ratios
It indicates a company's ability in meeting the current liabilities using the most current assets. It also indicates whether a company is in a position to settle these obligations when they occur and fall due. The ratio also reflects the ability to convert the current liabilities into cash and pay its debt. A company which is incapable of paying its short term obligations may have challenges in its operating cash flow. On the other hand, a company with a sound liquidity position is financially healthy (Adedeji, 2014).
Current ratio
It shows how efficient a company stands at settling its small debts when they occur (Adedeji, 2014).This ratio uses current assets like short term investments, accounts receivables, cash, trading securities and inventory. The recommended ratio is 2:1, meaning that a company stands at a position of settling its debts when they arise. However, a ratio below 1 means that a company is facing liquidity problems and might be declared bankrupt in the future. The analysis shows that Volkswagen had a ratio of 0.88 in 2016, then improved to 1.00 in 2017, then increased slightly to 1.09 in 2018.
Cash flow from operations
It shows whether a company has enough cash flow from operations to pay current liabilities (Adedeji, 2014).The ratio indicates the number of times that the current liabilities can be paid using the operating cash flow in a particular year. In the cash flow statement, the operating cash flow is obtained by deducting the non-cash expense from the net income. From the analysis, Volkswagen had a ratio of 0.05 in 2016 then lowered to -0.01 in 2017 and then improved to 0.04 in 2018.
Leverage Ratios
These ratios show how the company's operations are financed. The most common ratios used in this category is debt to equity ratio and debt ratio. The later shows the total liabilities as a proportion of the total assets. Debt to equity compares a company's liabilities with the total equity. From the analysis, Volkswagen had a debt ratio of 0.77 in 2016 and then lowered to 0.74 in 2017 and then remained constant at 0.74 in 2018. On the other hand, the company had a debt to equity ratio of 3.41 in 2016 then slowed to 2.87 in 2017 and then improved slightly to 2.90 in 2018.
References
Adedeji, E.A., (2014) A Tool For Measuring Organization Performance Using Ratio Analysis.
Research of Journal of Finance and Accounting, Vol.5, No.19, 2014
Nuhu, M., (2014) Role of Financial Analysis in Business Decisions. Journal of Educational and
Social Research, Vol. 4, No.5
Tikkanen, A., (2019) Volkswagen Group German Corporation. Retrieved from:
https://www.britannica.com/topic/Volkswagen-Group
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