Automobile Centric Organizations - Research Paper Example

Introduction: This paper will look at Daimler AG Corporation and the BMW group; two automobile centric organizations that operate in competition with each other, in complete detail with insight into the background of the company and its sectors and recent activities. Then, a full scale financial analysis by means of financial ratios will be conducted in order to analyze the most recent operating performance of both groups in contrast with each other. Before moving onto the financial aspect of this paper, it is critical to highlight the companies that are under observation. Daimler AG Corporation: 'Daimler AG (formerly Daimler-Benz AG, DaimlerChrysler AG) is a German car Corporation (not to be confused with the British Daimler Motor Company) and the world's thirteenth largest car manufacturer as well as the largest truck manufacturer in the world. In addition to automobiles, Daimler manufactures trucks and provides financial services through its Daimler Financial Services arm. The company also owns major stakes in aerospace group EADS, high-technology and parent company of the Vodafone McLaren Mercedes racing team McLaren Group, and Japanese truck maker Mitsubishi Fuso Truck and Bus Corporation. Daimler produces cars and trucks under the brands of Mercedes-Benz, Maybach, Smart, Freightliner and many others.' (Daimler AG, 2009) BMW Group: 'Bayerische Motoren Werke AG (info) (BMW), (English: Bavarian Motor Works) is a German automobile, motorcycle and engine manufacturing company. Founded in 1916, it is known for its performance and luxury vehicles. It owns and produces the MINI brand, and is the parent company of Rolls-Royce Motor Cars.' (BMW Group, 2009) In order to understand the complete picture that are depicted by the numerical financial ratios, it is critical to understand the key economic and business indicators that are essential for the operation of any organization in the business world: including the two under observation here. Key economic and business drivers Increasing demand trends International and local demand for cars is a main driver of the company's business and financial performance. Both organizations' diverse set of products and offerings is designed to provide more consistent results in both strong and weak economic environments. The company accomplishes this by not only having a mix of offerings with long-term cash and income streams, as well as cyclical transaction-based sales, but also by continually developing competitive products. In addition, both organizations continues to transform itself to take advantage of shifting demand trends, focusing on client- and industry-specific opportunities, and business performance. (Lev et al, 1979) Internal Business Transformation and International Integration Initiatives As indicated by their latest financial reports, control of costs and efficiency of management are the prime considerations for both these organizations at the current point in time and are committed towards the seamless transformation to an internationally integrated enterprise. The companies continue to drive greater productivity, flexibility and cost savings by transforming and globally integrating their own business processes and functions. This integration has improved their capacity to innovate by providing greater clarity of key priorities around shared goals and objectives and led to a sharper focus for the company on learning, development and knowledge sharing. (Lev et al, 1979) Investing in Growth Opportunities Both companies continue to significantly invest in growth opportunities as a way to drive revenue growth and market share gains. Daimler AG has announced that new capacities are to be created in Kecskemt, Hungary for the future expansion of the model range of premium compact cars. The first cars are to be assembled there in 2012 at this said facility. In addition, Daimler also became a key shareholder in Tognum in April, 2008. Daimler AG takes a 22.3% equity interest in Tognum AG. This acquisition is intended to secure long-term supply relations. Additional Tognum shares are later acquired on the stock exchange. However, both organizations have been affected by economic slowdown caused by the global financial crisis. (Lev et al, 1979) Changes in macroeconomic variables It is a generally accepted notion that firm performance fluctuate with changes in macroeconomic variables. Ultimately, it is argued that firm performance reflect underlying real economic activity, therefore, in the long run, one would expect to observe a relationship between macroeconomic activity and corporate value. For instance, a rise in inflation reduces the purchasing power of investors and thus should have an impact on equity investment decisions of local investors. Since an increase in inflation increases the discount rate, it should affect firm value negatively. Moreover, the rapid expansion in international trade and the adoption of freely floating exchange rate regime by many countries, heralded a new era of increased exchange rate risk and volatility. Not surprisingly, the economic exposure of firms to exchange rate risks has increased. In the economic sense, firms should respond to the excess movement and increasing volatility of exchange rates. For instance, appreciation of the NZD against USD negatively affects the exports to US and increases import of US goods. This factor had to be taken into account for both organizations especially with the increasing automobile countries to car companies with disparate currency valuations. (Lev et al, 1979) Financial Ratio Analysis: The key financial ratios, indicative of the financial performance of a firm shall be analyzed to understand the financial position of the companies under observation. Profitability BMW Daimler Return on Assets 0.12% 1.07% Return on Equity -1.48% 4.32% Margin Analysis Gross Margin 15.17% 25.60% Levered Free Cash Flow Margin -58.02% -4.08% EBITDA Margin 5.10% 2.20% SG&A Margin 9.58% 20.10% Asset Turnover Total Assets Turnover 0.5x 0.7x Accounts Receivables Turnover 15.4x 3.8x Fixed Assets Turnover 4.6x 1.25x Inventory Turnover 3.7x 4.3x Credit Ratios Current Ratio 1.0x 1.1x Quick Ratio 0.8x 0.7x Long-Term Solvency Total Debt/Equity 3.11% 2.03% Total Liabilities/Total Assets 0.81% 0.75% The first set of ratios under observation is the profitability ratios which show the success of a company at different points in time. Return on assets, the first ratio in this section determines how effectively a firm is using its assets to generate profits. BMW has a return on assets ratio of 0.12% whereas that of Daimler AG Corporation is 1.07%; now even though the ratio is positive for both these organizations, it can be clearly seen that Daimler AG has done particularly better than their counterparts in this category over the past year. Return on equity, the next ratio of choice is quite simply the bottom line measure for shareholders. BMW has a return on equity ratio of -1.48% whereas that of Daimler AG Corporation is 4.32%. This ratio clearly shows the great divide between the two organizations where one has been able to increase the value of the shareholder's whereas the other not only failed to increase this value but rather ended up diminishing it as compared to its performance over the previous term. Our first ratio in the margin analysis is the gross profit margin which simply shows that part of the revenue generated that is going back to the business as profit. BMW has a gross profit margin of 15.17% whereas that of Daimler AG Corporation is 25.6%. This shows the considerable profitable position the companies find themselves in with regards to profit regeneration. Levered Free Cash Flow Margin is the next ratio in line: this basically is the amount of cash available to stockholders after interest payments on debt are made. This ratio shows the greatest effects of the global financial crisis as the liquidity of both the organizations has suffered i.e. BMW group has a levered free cash flow margin of -58.02% whereas Daimler AG Corporation has a ratio of -4.08%. It is critical to note the difference between the two ratios as Daimler has been able to sustain the problem somewhat whereas the BMW Group has been completely ravaged by it; however, it must be noted that BMW Group's aggressive share buy-back strategy has a lot to do in this regard. The EBITDA Margin ratio is the next ratio of analysis which basically measures the extent to which cash operating expenses use up revenue. BMW group has an EBITDA margin of 5.10% whereas Daimler AG Corporation has a ratio of 2.20%. Herein, BMW shows it superior cost-effective and optimization technique of business operations as compared to the Daimler AG Corporation. The last ratio in this section is the SG&A margin which basically shows what portion of the overall revenue were appropriated to operational activities such as selling, general and administrative expenses. BMW group has an SG&A margin of 9.58% whereas Daimler AG Corporation has a ratio of 20.10%. This ratio could have either of two implications i.e. Daimler AG is an organization greater in size than BMW, hence, has greater operational expenses or the obvious result that Daimler's operational expenses are less optimal as compared to the BMW group. Now, we will look at some asset turnover ratios. These ratios depict how efficiently a firm is utilizing its assets. Our first asset management ratio is the fixed asset turnover ratio which shows how quickly our capital investments are being converted into profits. BMW group has a fixed asset turnover ratio of 4.6x whereas Daimler AG Corporation has a ratio of 1.25x which is certainly not a healthy sign for the company as it is indicates somewhat diminished abilities to convert its capital expenditures into profits. However, BMW's performance has been roughly three and a half times better than its competitor shows its superiority in this regard. The other asset management ratio i.e. total assets turnover which shows the ability of a company in changing its entire asset base into profits shows a completely different picture: BMW group has a fixed asset turnover ratio of 0.5x whereas Daimler AG Corporation has a ratio of 0.7x which shows BMW moving towards drastic measures of asset management. However, a key reason of this has been an increased expansion of asset base due to the acquisitions completed in 2008 by BMW; however, the consistency of Daimler AG Corporation's figures cannot be ignored in this regard. Liquidity ratios are next: these ratios provide information about the ability of a company to meet its short-term obligations. They are of particular interest to the short term lenders of the firm. BMW group has a current ratio of 1.0x whereas Daimler AG Corporation has a ratio of 1.1x which generally shows that both the companies have a decent amount of current assets to pay off their current liabilities. However, due to the industry that this company is in: a current ratio of 0.9-1x is considered as a safe position to be in so both organizations are considerably safe in this financial year. Secondly, we have the quick ratio or the acid test ratio. This is an alternative method of obtaining liquidity that does not include inventory in the current assets. BMW group has a current ratio of 0.8x whereas Daimler AG Corporation has a ratio of 0.7x. However, due to the industry that this company is in: a current ratio of 0.9-1x is considered as safer position so both organization's are fairly well saved on this count as well; even though it must be noted that Daimler AG has a greater inventorial base as compared to BMW, largely due to its overall firm size. Our final goal is to look at some financial leverage ratios. Financial leverages ratios are an indication of the long term solvency of the firm. In contrast to liquidity ratios, financial leverage ratios look at how the firm is using its long-term instruments. We first take a look at the debt ratio which shows the part of the business that is financed by debt. BMW group has a debt ratio of 3.11% whereas Daimler AG Corporation has a ratio of 2.03% which shows that only a small part of the business is financed by debt which is a good omen for both the companies; in addition, these similar figures show that both have almost similar expansion via corporate debt policies for the present and immediate future. Next is the total liability over total assets ratio; which is simple terms is the measure that if the company was to shut down today, would it be able to payoff its liabilities BMW group has a liabilities ratio of 0.81% whereas Daimler AG Corporation has a ratio of 0.75% which intimates the reader that both the companies are in safe financial position in case their specific going concern assumption is violated at any point in time: Daimler AG Corporation being in the better position of the two at the current point in time. (NetMBA, 2009) Bibliography: 1. Daimler AG Corporation, (2009) "Company Information" Retrieved from http://www.daimler.com/ [Accessed August 1, 2009] 2. BMW Group, (2009) "Company Information" Retrieved from http://www.bmwgroup.com [Accessed August 1, 2009] 3. NetMBA (2008 "Financial Ratios" Available at http://www.netmba.com/finance/financial/ratios/ [Accessed August 1, 2009] 4. Lev, B., and Sunder, S. (1979) "Methodological Issues in the Use of Financial Ratios "Journal of Accounting and Economics 1/3, 187-210. Read More