A Financial Ratio Quarterly Trend Analysis of Kia Motors - Research Paper Example

? FIN 6406 A Financial Ratio Quarterly Trend Analysis of: Kia Motors Stock Symbol: KIMTF.PK Listed on: New York Stock Exchange Prepared for: Dr. XXXXXX Department of Finance and Real Estate Florida International University In partial fulfillment of the requirements of Course FIN 6406 By: Your Name Your Panther Identification Student Number 1. Introduction Kia Motors Corporation which is headquartered in Seoul Korea was established in 1944 (Funding Universe n.d.). The company manufactures and sells various types of automobiles including commercial, passenger and recreational vehicles.. Kia which operates subsidiaries in the United States, Canada, Japan, Australia, China and Slovakia is currently engaged in developing various new technologies that will facilitate the manufacturing of eco-friendly motor vehicles including hybrid-electric vehicles (HEVs). This report represents a financial trend analysis of the company over four (4) quarters ending December 31, 2010. It also looks at a comparison of the performance of Kia Motors with the industry for the year ended December 31, 2010 and provides a SWOT analysis of the company. In addition to that the report at the ethical guidelines under which the company operates and makes recommendations to potential stakeholders. 2.0 Financial Ratio Computation & Analysis Financial ratios are used to determine the financial health of a business. The table in the Appendix below provides information on five categories of ratios which will be used to assess the financial health of KIA Motors Corporation. 2.1 Trend Analysis The table in the Appendix shows the quarterly trends for various ratios for the year ended December 31, 2010 in order liquidity asset utilization, profitability, Debt and market. 2.1.1 Liquidity ratios Liquidity ratios indicate the amount of funds the company has on hand to pay its debts as they fall due. The current ratio includes inventory which is not very liquid while the quick ratio does not. The table in the Appendix indicates that the current ratio for the 3 quarters range between 0.73 and 0.76 which is below 1. The quick ratio which does not include inventory ranges between 0.56 and 0.59. An acceptable current and quick ratio is 1.5 and 0.8 respectively (BPP Media Learning 2009). Other ratios such as working capital and current liabilities to inventory also indicates a worrying picture for Kia Motors in terms of the company’s ability to pay its debts as they become due. 2.1.2 Asset Utilization Asset utilization ratios indicate how efficiently the assets in the company’s operations have been utilized. The ratios in the Appendix show an inventory turnover rate of between 6 and 8 times for each quarter and a turnover of approximately 27 times for the year. The asset turnover is a measure of how well the assets Kia Motors are being used to generate revenue (BPP 2009). The quarterly asset turnover rate ranged from 0.39 to 0.49 with the annual rate being the cum1.66. These rates show high and moderate efficiency levels respectively in the use of Kia Motors assets. 2.1.3 Profitability Ratios Profitability ratios are a combination of the effects of liquidity, asset management and debt on operating results (Brigham and Ehrhardt 2005). The ratios indicated in the Appendix as profitability ratios include profit margin which indicates the net profit percentage earned on sales of between 2% and 13% per quarter. The trends indicate vast improvements in the 2nd quarter of an 8% increase, up from 2%. The quarterly return on assets (ROA) for Kia Motors range from 1% to 5% per quarter and 13% for the year ended December 31, 2010. In the 2nd quarter there was a 2% increase over the 1st quarter while quarters 3 and 4 showed increases of 1%. The company’s returns on equity (ROE) increased from 2% in quarter 1 to 7%, *% and 11% in quarters 2, 3 and 4 respectively, ending with a return for the year of 26%. This is considered favorable for shareholders. 2.1.4 Debt Utilization Ratios Debt ratios provide an indication of the level of financial risk in the companies operations. The debt ratio for the four quarters indicates that the level of debt ranges between 48 and 55%. The table in the Appendix shows declining debt ratios between the 1st quarter and the 4th quarter - 55% and 48%. This shows an improvement in the management of Kia Motors debts. A comfortable debt ratio is 50%. Interest coverage indicates how many times the company’s interest expense was covered for each quarter and for the year ended December 2010. The table also shows an increase in both quarter 2 and quarter 3 and a slight decline in quarter 4. The coverage ranged from 9 times to 18 times, with quarter 1 showing the least coverage of 9.61. The loan to value ratio represents the ratio of loans to the book value of property, plant and s the property value. The ratio indicates that if Kia Motors experience any difficulties in paying its debts, the company’s asset value would have to fall drastically by to between 34% and 57 % for it not to be able to pay its debts. 2.1.5 Market ratios Market ratios are also described as investment ratios. These are ratios that current and potential investors in Kia Motors will use to determine whether they should continue to hold shares or invest respectively. The overall trend in the ratios is improving and should continue in the future. The earnings per share (EPS) is less than 1% per quarter. This although appearing negligible is supported by increases in quarterly earnings from 121,391 in the 1st quarter to 557,762, 666,614 and 9085449 in the 2nd, 3rd and 4th quarter respectively. These represent major increases in EPS when compared to the increase in the number of shares in issue during each quarter. The quarterly dividend payout ratio was calculated using an equal proportion of the dividend for the year. This has resulted in the appearance of a decline from 41% to 7% which is not so. The dividend has increased and this is generally good news for investors who depend on dividends payments as income. Dividends increased from 98,999 in 2009 to 196,000 in 2010. This represents an approximate 100% increase. 3.0 Comparative Financial Analysis between Company and Industry Comparative ratios were not available for the industry. However, based on information found in the 3rd quarterly report for Kia Motors the growth rate of Kia Motors in its Korean market showed a year on year increase of 21% while the industry which was 9.7% below the industry average. The US market showed a 12.3% for Kia compared to 10.3% for the industry. The European and China market however was much different with Kia showing an increase of 8.5% and 51.6% respectively while the industry showed an increase of -3.6% and 38.4% respectively. This is an improvement for Kia over the year to date figures to March 31, 2010 which showed that Kia Motor’s growth lagged behind that of the industry in the Korean and US market. It is expected that with the improvement in sales its ratios will improve when compared to the industry. 4.0 Comparative SWOT Analysis A SWOT analysis of Kia Motors compared to the industries indicates that its strength lie in its ability to demonstrate is accountability for the environment and a 2009 report which indicates high levels of respectability in the way it treats its employees. The importance of automobile companies to manufacture automobiles that are operationally efficient and effective while minimizing their negative impact on the environment has been taken seriously by Kia Motors. The company has demonstrated its ability to provide alternatives that are not only eco-friendly operationally efficient for its customers. However, the company has liquidity problems and may not be able to pay its debts as they fall due. Some of the threats facing the company include the possibility of a double dip recession following on from the Great Recession which started in 2008. This could damper the expected increase for 2011 and beyond. There are opportunities for the company to gain increased market opportunities in Asia and Europe. 5.0 Analysis of Kia Motors Business Ethics According to Brigham and Ehrhardt (2009) business ethics reflects a company’s attitude and conduct to its stakeholders which includes employees, shareholders and customers. Kia Motors announced its code of ethics in 2001 which the company indicates would allow it be come a trusted company in the society (Kia Motors 2011). As a result of the value it places on ethics the company established a Cyber Audit office to oversee and ensure the proper implementation of the Korean Fair Trade Commission’s Compliance Program (CP) was properly implemented (Kia Motors 2011). The company has also implemented educational programs to ensure that employers understand its importance of business ethics in making a positive contribution to the continuing survival of the company. 6.0 Conclusion and Decisions Based on the information obtained from the ratios computed I would place a deposit of $1,000,000 dollars or more in the stocks of Kia Motors. In terms of profitability, the company is doing well and the prospect of increasing sales further increases in profitability is expected. Additionally, at the end of the year 2010 the stock price was $50,600 while on the 15th of April 2011 the price was $75,600. The last trading price on September 9, 2011 was $68,500. The price is expected to increase by year end December 31, 2011. PR News Wire has also indicate that Kia has seen its 12th consecutive sales increase and this is good news for investors. Information provided in our analysis of Kia’s financial statement the company’s debt ratio is favorable. Additionally, the information provided in the annual report of Kia Motors indicates that credit rating agencies including Moody’s and S&P have rated the company’s bonds as investment grade. Based on this information I would invest $500,000 in the debt of Kia Motors Corporation. If I was a member of the Board of Directors of a bank and I sat on the Bank’s Credit Committee I would not encourage the bank to lend $1,000,000 line of credit for overnight or Term Federal Funds. Based on the information provided in the ratio analysis Kia Motors may not be able to pay debts as they fall due based on its liquidity ratios. Since this is an overnight, the information gained so far indicates that the company may default on payment. Appendix Kia Motors Corporation - Financial Ratios Liquidity Ratios Q1 Q2 Q3 Q4 Annual Current 0.74 0.73 0.76 0.73 0.73 Quick 0.59 0.56 0.58 0.58 0.58 Net working capital (0.09) (0.09) (0.08) (0.09) (0.09) Current liabilities to inventory 7.05 5.96 5.57 6.65 6.65 Cash 0.19 0.13 0.15 0.16 0.16 Operating 14.69 12.61 12.52 12.20 12.84 Advertising expense to sales 0.01 0.01 0.01 0.01 0.01 Marketing expense to sales 0.05 0.05 0.05 0.04 0.05 Asset Utilization Ratios Q1 Q2 Q3 Q4 Annual Inventory turnover 5.95 6.46 6.36 7.96 26.67 Fixed asset turnover 0.39 0.45 0.42 0.49 1.66 Total assets 0.29 0.34 0.32 0.37 1.25 Asset to equity 2.21 2.10 1.98 1.93 1.93 Profitability Ratios Q1 Q2 Q3 Q4 Annual Return on assets 0.01 0.03 0.04 0.05 0.13 Return on equity 0.02 0.07 0.08 0.11 0.26 Profit margin 0.02 0.10 0.12 0.13 0.10 Basic earnings power 0.03 0.04 0.05 0.04 0.16 Earnings per share 0.00 0.00 0.00 0.00 0.01 Debt Utilization Ratios Q1 Q2 Q3 Q4 Annual Total debt 0.55 0.52 0.50 0.48 0.48 Interest Coverage 9.61 14.22 18.61 18.15 14.68 Debt/Equity 1.21 1.10 0.98 0.93 0.93 Loan to value 0.66 0.54 0.48 0.43 0.43 Market Ratios Q1 Q2 Q3 Q4 Annual Earnings per share 0.00 0.00 0.00 0.00 0.01 Price to earnings 162273790.96 35442660.87 29697828.61 21883363.71 8819545.66 Price to cash flow Payout 0.41 0.09 0.07 0.05 0.09 References BPP Learning Media Ltd. (2009) ACCA Paper F7-Financial Reporting. London, UK: BPP Learning Media Ltd. Brigham, E.F and Ehrhardt, M.H.. (2009) Corporate Finance. Edition. USA: Thomson South Western Publishing Brigham, E.F and Ehrhardt, M.H. (2005). Financial Management: Theory and Practice. 11th ed. USA: Thomson South Western Funding Universe. Kia Motors Corporation. Retrieved on 9th Sept 2011 from: http://www.fundinguniverse.com/company-histories/Kia-Motors-Corporation-Company-History.html Kia Motors (2011). Credit Ratings. Retrieved on 8th Sept from: http://www.kmcir.com/eng/financial/credit.asp KMCIR (2011). Quarterly Business Results. Retrieved on 9th Sept 2011 from: http://www.kmcir.com/eng/library/quarterly.asp PR News Wire. (2011). Kia Motors America Announces 12th Consecutive Monthly Sales Record Retrieved on 8th Sept 2011 from: http://www.prnewswire.com/news-releases/kia-motors-america-announces-12th-consecutive-monthly-sales-record-128889743.html Read More