Comparative Financial Performance Analysis of Bayerische Motoren Werke (BMW) AG and Audi AG from 2010 to 2014
This research paper is dedicated to make financial performance analysis of BMW AG for last five years from 2010 to 2014. Apart from the intra (within the company) analysis, the financial performance of BMW AG is compared to one of its business rivals in the German automotive industry. The competitor selected for comparative inter-firm (outside company) analysis is Audi AG. Not only in the German market, BMW AG and Audi AG compete in the global automobile manufacturing industry as well which makes the analysis presented in this report more important to all the market forces including existing shareholder base and potential investors.
Such a comparative analysis is performed by considering different performance metrics widely used in the finance industry. Based on the manner in which industry dynamics and performance metrics change throughout the period of five years, from 2010 to 2014, an investment analysis in case of BMW Ag is also performed for arriving at a feasible investment decision. In addition to these financial performance tasks, this research also undertakes the responsibility to make valuable discussion about Just-in-Time (JIT) inventory management system. Such a discussion is made by highlighting different philosophies and approaches of Just-in-Time (JIT) due to which this management philosophy still gives competitive edge to all manufacturing concerns, particularly BMW AG and Audi AG.
Under this section, the financial performance of both the BMW AG and Audi AG is compared by considering the financial data from 2010 to 2014. The five-year data is compared by using different financial ratio categories such as profitability, liquidity, working capital efficiency, financial leverage and market based metrics. The ratios are calculated for both of these companies by extracting “restated” financial figures from respective annual reports. This is done because “restated” financial data is always free from errors and material misstatements as found in the “reported” figures in financial statements of any organization.
Analysis of Profit Generation Capacity through Profitability Ratios
In this section, the profit generation capabilities of both the BMW AG and Audi AG will be examined by considering asset utilisation and the manner in which invested funds of equity holders as well as debtors are channelized. All such analysis is performed by considering the following table in which ratios are calculated from financial data extracted from concerned annual reports:
Net Profit Margin
Before making profitability analysis, it is imperative to note that BMW AG operates on a high margin business than that of Audi AG. In other words, the financial figures for BMW AG are far greater in size than those of Audi AG because the former has more stakes into the global automotive industry than the latter. As far as generation of net profits is concerned, Audi AG seems to outperform BMW AG in all years. From 2011 to 2013, both of these global competitors saw declines in their net profitability due to pressures in the worldwide automobile industry. Despite the fact that profitability for these two entities declined from 2011 to 2013, yet Audi AG still posted high net profit percentage increase compared to the ones posted by BMW AG. From 2013 to 2013, it can be observed that net profit earned by Audi AG declined by heavy percentages compared to those for its competitor, yet it outperformed BMW AG. In 2014, the overall picture for both these companies improved because of increase in demand for BMW and Audi among the elite class. Overall, when it comes to generation of net profits, Audi AG has outperformed BMW AG in all five year period with greater cost control and strict expense management system as revealed by percentages.
Return on Assets
This ratio attempts to measure the capabilities of BMW AG and Audi AG to efficiently and effectively utilise their total asset mix to generate net profit. Even though financial figures and their volume for Audi AG are lower compared to BMW AG, yet the stakes for the former entity are high. This is probably true because, in 2011, BMW was able to generate only £4.2 in net profit for each £1 invested in acquisition and maintenance of total assets but Audi AG was able to make approximately £12.95 (around £8.75 more than its competitor) .
In 2012, the asset utilisation capacity for these business rivals declined but the percentage based stakes for Audi Ag were higher than those for BMW AG. This was so because BMW AG was making £3.99 (£0.21 less compared to 2011) but its counterpart, Audi AG made only £11.06 in net profits (£1.89 less compared to the previous year). In the same manner, the asset utilisation capacity to generate each £1 in net profit declined for both the entities but Audi AG larger percentage declines than BMW AG, as stated earlier in this section. However, the picture for BMW AG and Audi AG improved in 2014 which is already confirmed by increase in net profit margin. From 2012 to 2014, Audi AG outperformed BMW AG by greater percentage margins though its business volume is less than that of BMW AG. Audi AG seems to outperform BMW AG in percentage based analysis.
Return on Capital Employed
Just as in asset utilisation and net profit generation, Audi AG still outperforms BMW AG in five year period when it comes to generation of net profit by sensible employment of financial support provided by both the equity investors and debtors in the form of capital investment. As stated earlier in this section, though Audi AG performs on a low volume business compared to BMW AG, yet it continues to perform better than the latter concerning percentage based analysis. Important to note is that BMW AG, in 2011, was able to generate £8 in net profit (£2 less compared to 2010). In contrast, Audi AG generated approximately £36 in net profit (£12.22 more than in last year) for each £1 provided by equity and debt investors.
The years 2012 and 2013 did not prove to be profitable for the global automobile industry due to which BMW AG and Audi AG also witnessed declines in their net profit levels for both the years and their profit making capacities. In 2014, the ability of both the BMW AG and Audi AG to efficiently and effectively utilise investors’ funds to generate net profit improved by slight margin.
Despite this, BMW AG was still left behind by Audi AG when it comes to generate net profit by sensible utilisation of financial support provided by both the equity and debt investors. This is true because, in 2014, BMW AG generated a net profit of £4 for each £1 provided by both the equity and debt investors whereas its counterpart, Audi AG, was able to produce a net profit of £22.8 assuming the same business environment and market dynamics.
Analysis of Liquidity Strength
This section is aimed at making assessments about the manner in which BMW AG and Audi AG are able to finance their working capital management. In other words, liquidity ratios, current and quick, are analysed into this section to measure the liquidity strength of these two German entities to retire their short-term liabilities . The five year analysis concerning liquidity management is performed by considering the following tabular representation:
The above table makes it clear that the liquidity strength for BMW AG remained unchanged from 2011 to 2013. In contrast, for Audi AG, the liquidity management weakened from 2010 to 2012 and then, in 2014. Because the liquidity analysis is mainly concerned with internal management policies and activities, one cannot blame the external environment for weak liquidity management for BMW AG and Audi AG. It is certainly based on management’s ability to manage short-term liabilities. Like in profitability generation capability, BMW AG is still outperformed in percentage based analysis by Audi AG when it comes to managing liquidity and obligations of up to one year.
Though BMW AG maintained its liquidity strength from 2011 to 2013, yet it was unable to surpass competition from Audi AG. In 2014, BMW AG only had £0.96 in its short-term assets to cover each £1 in short maturity obligations. In contrast, Audi AG was in better condition than BMW AG because it had £1.51 in its current assets or short-term reserves to repay each £1 to creditors against liabilities of up to one year. For more comprehensive liquidity assessment, quick ratio is analysed.
This ratio is analysed because it disregards those current assets that are not readily, easily and quickly convertible to cash. Generally, ending inventories and prepayments fall into this category of rejection since they cannot be sold without decline in their value. In other words, these two can only be sold at Forced Sale Value (FSV) or declined financial worth. Quick ratio only considers cash, marketable securities and receivables to be readily cash convertible without decline in their financial worth.
Analysis of Financial Leverage or Debt Management
This section makes assessments about the extent to which BMW AG and Audi AG use debt and equity in their capital structure. It also analyses their ability to service fixed interest obligations by examining interest coverage ratio for which the following table is considered:
This is true because creditors perceive BMW AG involved in a risky business and operating in highly volatile markets due to which this German company is offered costlier debt than offered to normal entities due to lower market credibility. In contrast, Audi AG is considered a stable company due to which it is able to control its financial leverage even though it employs more debt and less equity stake compared to BMW AG.
As BMW AG has more financial leverage, its financial flexibility has reduced over a five year period from 2010 to 2014. It can face numerous difficulties in the worldwide market to raise further debt finance. Comparatively, Audi AG is in better condition and reserves more financial flexibility than BMW AG. It can enter into debt management contracts with banking and financial institutions with more relaxed terms in its favour.
Interest Coverage Ratio
The financial information extracted from respective annual reports and calculated ratios confirm that BMW AG’s ability to finance its regular fixed interest obligations has been declining since 2010. This is true because it uses expensive debt in its capital structure, as confirmed in the previous section. Comparatively, Audi AG’s ability to service its debt has increased over the years since its capital structure carries cheap debt due to its increased financial flexibility and credibility compared to BMW AG.
Market Based Ratio
In this section, return on equity is analyzed because it is this financial metric considering which investors derive value and determine their investment decisions for earning lucrative returns. The price-to-earnings ratio is examined because it highlights how much market investors are willing to pay for BMW AG and Audi AG.
Return on Equity
Analysis reveals that due to decline in net profit generation capacities since 2010, BMW AG has been providing fewer returns on investment to all equity holders compared to Audi AG. For instance, by the end of 2014, BMW AG provided an investment return of £14.63 for each £1 invested into it by equity holders. In contrast, Audi AG provided £23.56 (£8.93 more) too each investor because of increased net profit margins, improved liquidity and reduced financial burdens.
Despite all negativities identified in previous sections of this research report, the above data reveals that potential investors in the global stock markets are willing to pay more for BMW AG to buy its stock compared to Audi AG. This is a single area where BMW AG has outperformed Audi AG. It is not dependent on financial performance but on overall market perception. Even though creditors believe BMW AG to be highly risky business compared to Audi AG, yet market investors think BMW AG as a growing company with more potential to manifest.
Just-in-Time (JIT) is a management philosophy, rather than a technique, in which raw materials for the production are ordered and delivered as and when they are needed. In other words, new raw material inventory is ordered and delivered only after the existing inventory level is reduced to a safety point. This management approach continues to provide competitive advantage to its users (manufacturing concerns), including BMW AG, because it reduces wastes on the production floor. Moreover, since lower inventory levels are ordered, much of the inventory handling and warehouse maintenance costs are saved . BMW AG can successfully utilise and invest those funds in profitable channels to earn higher investment returns and create more value as an elite brand.
In this inventory management system, a supplier delivers new inventory only when it is needed to undergo the production processes. By saving overhead expenses, BMW AG can give better attention to customised demands of its customers all over the globe. Since excessive inventory is avoided by using Just-in-Time (JIT) system, BMW AG can save its carrying costs that also reduce the need to setup and maintain number of warehouses. This management philosophy provides competitive edge because it lowers wastes and errors on the production floor, the company do not need to increase per unit prices due to increase in costs. Better cost control concerning inventory and warehouse management can also increase profitability of BMW AG in a drastic manner .
Overall, Just-in-Time (JIT) system reduces wastes and need to handle large volume of inventory on the production floor that helps BMW to quickly respond to customised needs of its customer base. When inventory is ordered only in times of need, products can be manufactured and inventory assembled only after a customer places an order for any BMW vehicle. Because of this, BMW does not need to sit idle for orders and establish extra warehouses to handle inventory. Just-in-Time (JIT) system, in this manner, provides a lucrative completive edge to BMW by facilitating its internal management to save warehousing and inventory handling costs. In the same way, by using Just-in-Time (JIT) system, BMW can save costs associated with realisation of obsolete or outdated inventory held in the warehouse .
Just-in-Time (JIT) system is quite supportive to BMW’s global operations because it provides a competitive edge in the worldwide marketplace only BMW’s management is able to implement strict control in the manufacturing process to avoid errors, mistakes and delays. If this happens, BMW become more capable to respond quickly customer orders and customisation request. By implementing Just-in-Time (JIT) system in its manufacturing processes, BMW gains competitive edge in the market because the company can now offer a wide range of vehicles and embedded options to customers. Moreover, due to efficiency in production management, BMW is now facilitated by Just-in-Time (JIT) system to provide new fashion vehicles with latest parts and technology to all of its customers in the global market .
Just-in-Time (JIT) system has facilitated BMW in gaining global competitive advantage because this management philosophy has helped the company to reduce inventory level in the warehouse. Because of this efficiency, BMW is able to save more on inventory costs by freeing up space in its warehouses, save most of its cash resources locked in inventory as well as minimisation of wastes resulting from obsolesce.
This section is aimed at making investment appraisal for BMW AG depending upon findings in tasks one and two of this research report. After a careful analysis of five year financial performance of BMW AG from 2010 to 2014, it is found that this company is not a strategic fit for short term creditors to invest in. The rationale for this decision is that there is a less safety of margin made available to their investments. This is probably driven by declined net profit generation capacity and weakened liquidity management from 2010 to 2014. Any investor wanting to buy BMW AG in search of capital gains should do so after carefully analysing price trends.
Furthermore, BMW AG’s shares must be sold by medium term investors because the company is already at the verge of bankruptcy due to employment of expensive debt in its capital structure. Because of decline in liquidity strength, BMW AG is facing consistent financial distress compared to Audi AG. The net profit margin is also declining together with the company’s ability to provide lucrative return against investments. Therefore, medium term investors should sell the BMW AG’s stock at the best available price due to financial volatilities.
Similarly, as one of the market based ratios revealed that though BMW AG is financially outperformed in every aspect and all five years by its German counterpart, Audi AG, yet the market perceives this company with greater growth potential than its business rivals. Therefore, BMW AG shares are worth buying for any investor having long-term investment strategy in mind. In other words, all those investors wishing to buy and hold BMW AG’s shares are welcome to do so depending upon market risk analysis and changing dynamics such as overall investors’ perception.
Note: Calculations for financial ratios are available in the excel file enclosed
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