Financial Statement Analysis of Audi AG - Case Study Example

FINANCIAL STATEMENT ANALYSIS OF AUDI AG Audi AG is a German based company which excels in the production of cars. An Analysis of the financial statements of Audi AG as at December 31, 2009 is given, which includes the Ratio Analysis, Horizontal and Vertical analysis along with Cash Flow and Benchmark analysis. (AG, 2009) A. Financial Statement Analysis An analysis over the Ratios, Horizontal and Vertical components are given. 1. Ratio Analysis Various ratios pertaining to the company are calculated and the financial position of the company is explained in brief based on the calculated ratios. Liquidity Ratio: The liquidity ratio gives information regarding the ability of the company to pay off their current liabilities through the current liquid assets or to pay off the liabilities incases they become due immediately. Current Ratio = Current Assets = €10,413 = 2.6 times Current Liabilities €4,074 Acid Test Ratio = Cash + Investments + Receivables = €9,091 = 2.25 times Current Liabilities €4,047 The data shows good liquidity of the company, having current and acid test ratios of 2.6 and 2.25 respectively. The company has enough liquid assets to pay off their current liability, which shows the sustainability of the company. Solvency Ratio: The solvency ratio shows the ability of the company to ability of a company to meet its long term and short term obligations. Solvency Ratio = Profit after tax + Depreciation = €2,198 = 42% Total Liabilities €5,216 The company has a strong Solvency ratio, showing a good sign to pay off both its long term and short term liabilities. A general rule is that a 20% solvency ratio shows a positive sign for the company and here the ratio over 40% indicates a positive solvency to pay off its liabilities. Profitability Ratio: The profitability ratio tells about the earning of a company over sales, the ability of a company to utilize their assets to earn income. Return on Sales = Net Income = €1,172 = 4.82% Net Sales €24,339 Return on Assets = Net Income + Interest Expense = €1,355 = 8% Total Assets €16,832 The company has shown good signs of recovery as the Return on Sales has rose from 4.3% of last year to 4.8% this year, along with the improvement in the return on Assets as well. Market price of shares: The current market price of the shares rests around €630 for the company while at the year end the price of the shares touched €500. The company has shown a good development in the recent trend after the economic crisis as the year started for the company with declining trend and the company had a low share price, being around €228 but with the passage of time the company showed improved results and the market price of shares at the year end reached €500 and currently lingers around €630/share. 2. Horizontal Analysis Comparison of the company’s assets, liabilities, Sales, Cost of goods sold and Income with the previous years is provided. Total Current Assets of the Company: The total current assets of the company in the current year amount to €10,413 Million compared with the last year figures that amounted to €10,267 Million. The assets have increased by 1.4% (€146 Million). This increase is because of the increase in their Receivables and Cash balances over the period. Total Fixed Assets: The total Fixed Assets of the company in the prior year were €6,047 Million and after showing an increase of €367 Million, they have reached a total of €6,414 Million. This shows a considerable increase of 5.7%. The increase is mainly because of the Addition of Plant and Machinery as well as due to the new investments of the company. Total Assets: The total assets of the company have increased by €513 Million which makes around 5% increase in the overall assets. This increase is due to the increase in sales as well as the Fixed Assets and Long term Investments of the company. Total Liabilities: There has been a minor change in the liabilities of the company as the liabilities which amounted to €5,295 Million have decreased to an amount of €5,215 Million showing a decrease of €80 Million i.e. 1.5%. This change is mainly due to the decrease in the Trade Payables of the company but some liabilities to the affiliated companies have also increased which has balanced this figure. Shareholder’s Equity: The share capital of the company stood at €110,010,000 divided into 43,000,000 shares bearing no par. There were no shares issued during the year. Sales: The sale of the company has decreased considerably by 16.28% and an amount of €3,964 Million. The maximum revenue of the company, i.e. 89%, is generated through sale of cars and rest is from the good and services supplied to affiliated companies. As the company supplied cars all over the world, a significant decrease in sale was recorded especially in European countries as well as North America and Asia Pacific as the sale decreased from €28 Billion to €24 Billion from 2008 to 2009. Cost of goods sold: The cost of goods sold has also decreased as a result of the decrease in the Sales of the company. The decrease is from an amount of €25.4 Billion to €21.4 Billion by €3,764 Million. The decrease is 17.5% which shows that the decrease in the cost of goods sold is more than the decrease in the sales which represents a good prospect for the company as the proportionate cost of goods sold has also decreased. The company has shown an overall decrease in the cost of sales by 14.9% compared to last year. Gross Profit: The gross profit of the company has decreased due to the loss in sales as company managed a profit of €2,861 Million in the current year compared to the €3,061 Million in the prior year showing a decrease of €200 Million (7%). This shows the profitability of the company has increased on proportionality basis but the overall profit has decreased. Income before tax: The profit before tax amounts to €1,850 Million compared to last year’s profit of €2,031 Million showing a decrease of €181 Million. This makes an overall decrease of 9.78%. Overall: It can be said that the company has although shown a decrease in the sales but the percentage profit of the company has increased which signifies that the company is on the right track. The fixed assets and the current assets have also increased considerably showing good future prospect for the company. 3. Vertical Analysis The vertical analysis of the company is provided showing different percentages, comparing several head of the company with other heads of the company. Cash to current Assets: Cash x 100 = €210 x 100 = 2% Current Assets €10,413 The ratio indicates that the company has a low liquidity compared to the other current assets, which is an indication that company may face some problems incase it wants to meet any sudden obligation. Conversely, this is also an indication that the company doesn’t keep excess cash in hand and utilizes it rapidly. Account receivable to current Assets: Account receivables x 100 = €8,021 x 100 = 77.02% Current Assets €10,413 In comparison with the cash to current assets ratio, the accounts receivable ratio indicates the prospect of meeting the short term liabilities incase the company has a sudden obligation. Merchandise Inventory to current Assets: Merchandise Inventory x 100 = €1,322 x 100 = 12.7% Current Assets €10,413 The low ratio is a good sign because this shows that the company has low amount of ‘less liquid’ assets which are difficult to convert into cash. The low inventory also indicates the quick sale on part of the company. Current Assets to Total Assets: Current Assets x 100 = €10,413 x 100 = 61.86% Total Assets €16,832 This ratio is an indication of the excess of liquid assets with respect to the total assets which the company may apply in order to meet any necessities. Fixed Assets to Total Assets: Fixed Assets x 100 = €6,414 x 100 = 38.1% Total Assets €16,832 The low percentage has a positive impact on the company compared to the total assets. Current Liabilities to Total Liabilities: Current Liabilities x 100 = €4,074 = 78.1% Total Liabilities €5,216 The high percentage is a negative sign as the company has more of its current obligations compared to the total obligations. But since the company has a better ratio of assets to liabilities, this ratio doesn’t create much problem for the entity as a whole. Gross Profit to Sales: Gross Profit x 100 = €2,861 x 100 = 11.75% Sales €24,339 The company has a positive gross profit ratio as it show that the company generates over 10% profit before the operating expenses. Income before taxes to Sales: Income before Tax x 100 = €1,850 x 100 = 7.6% Sales €24,339 The income before tax for the company is quite good compared to the industry trends as the company generates a 7.6% pretax profit. 4. Benchmarks The company has performed relatively well compared to the auto industry. The overall sale of the auto industry was down significantly by 6% while the unit sale of the company showed a decreasing trend by only 5.4%. The debt to capital ratio was in line with the industry custom at 5.16%. The management of the inventory compared to the industry was not as reasonable to match that with the industry norms lingering at 42 days but the receivables management was distinctive compared to the industry being 27.5 days. The company, compared to the industry, has significant liquidity to overcome the current obligations. (Business Week, 2010) The company was also able to reduce the cost of goods sold by 14.9% compared to the industry. The gross margin and the earnings ratio is also an indication of the improved performance in the industry. B. Cash flow Analysis An analysis of the cash flows of the company referring to the cash generated from Operating, Financing and Investing Activities has been analyzed. Cash flow from Operating Activities: The total cash flow from operating activities, for the year end, amount to €2,876 Million which decreased by €471 Million compared to the €3,337 Million of last year. The decrease shows a sign of reduced sales and other operating activities. Cash flow from Investing Activities: The cash outflow from Investing Activities amounted to €1,397 Million compared to last year's €1,552 Million showing lesser investing activity by €137 Million this year. Cash flow from financing Activities: The company showed a considerable decrease in the financing activities as the cash outflow decreased by €610 Million for this year compared to the last year. Overall: The overall liquidity of the company during the current year was €6,879 Million compared to the €6,307 Million showing a good sign on liquidity and future prospect of the company. C. Overall Analysis An overall analysis of the company on the basis of different positions such as the investor, shareholder, management personnel and lender are provided. Shareholder: Being a shareholder of the company, it would be a good viewpoint to keep the shares of the company rather than sell it because the company has shown a positive trend over the past few years, decreasing the cost of goods sold as well as generating positive profit facing the crisis faced by the company in recent years. The assets and current ratios also indicate that the company possesses the capabilities to counter any sudden obligation and to generate good yield. Overall, the company is giving a good return to the shareholders and has no sign of negativity from shareholders’ point of view. Management: From the management’s point of view, I would be very satisfied with the performance of the company in the recent years as the company recovered from the crisis in due time and maintained a healthy profit. The number of unit’s sale in the car industry was down by 6% whereas the company only showed a decrease of 5.4%. Even though the sales was decreased compared to last year, the company managed to reduce the cost of goods sold by 15% and still provide an attractive pre tax profit. This year also showed symbols of stability and consistency. Lender: A lender would be satisfied with the stability of the company and the current ratios of the company which indicate that the company is generating positive cash flows and would be easily able to repay the loan back. The current ratio and the current liabilities are most considerable points for a lender in deciding whether the company would be able to repay the loan or not which indicate positivity for the company. Investor: As an investor, I would definitely invest in the company as it has shown rising trend following the recent economic crisis which has affected the car industry equally. The company has shown a great bit of progress and due to that the value of the shares has also increased rapidly ranging from €300/share to €500/share within one year. Even as a short term investor or a speculator, it would be a tempting prospect of investment. D. Other Analysis Information pertaining to the notes of the financial statement is discussed and any issues pertaining to the sector are discussed. Depreciation Methods: The depreciation method used by the company is straight line and declining balance method. A considerable point is that the company makes a changeover from declining balance method to the straight line method after the straight line method produces a greater level of deprecation. The depreciation commences from the date of acquisition or construction of asset. Intangible Assets: The intangible assets of the company comprise of industrial property rights, licenses, software and concessions which increased from €201 Million to €255 Million due to additions amounting to €129 Million this year. Inventory measurement Methods: The company recognizes raw material and supplies on the lower of updated average purchase cost or value of replacement while the material which is imported or invoiced on foreign currencies are valued on the day of the transaction at the prevailing exchange rate. The work in process and finished goods are valued at direct material, cost of conversion, direct labor and other costs that re required to be capitalized as per tax laws. Receivables and Allowance for bad debts: The company records the receivables at the cost of purchase or their nominal value. Provisions are made in form of value adjustments in order to general and non recurring risks. Losses from devaluation of foreign currency are also taken into account. Capital Structure: The company’s share capital €110,080,000 divided in to 43,000,000 no par bearing shares. About 99.55% of the shares of AUDI AG are held by its parent company Volkswagen AG which possesses the major control over the profit and decision making of the company. This is why a profit of €1,172 Million was transferred during the year. Provision: The company has provisions amounting to €6,304 Million concerning the warranty claims, product liability risk and legal expenses etc. E. Conclusion Overall, the company is in a good situation and condition after the recent crisis which has affected the auto industry significantly. The company has shown positive result and shown good developments in the last two years. Therefore it can be said that the company is on a road to recovery and good future prospect. F. References AG, Audi. "Financial Statements Decmber 31, 2009." 2009. Business Week. 2010. . Read More