Bmw's Liquidity And Other Debt Management Ratios example essay topic

-vs-Management Analysis December 12, 2002 George Kantor&Julianne Crum BMW and Audi, two German automobile manufacturers, have a reputation for making some of the best cars in the industry. Not only are both companies superior in their production, but their financial statements also indicate stability and efficiency. Looking at financial ratios, we will compare both companies on a basis of management efficiency and debt status. As a bank analyst, we will make a recommendation as to which company would be better to approve a loan for. A recommendation will also be made regarding management effectiveness and which company would make a better investment. BMW has captured the attention of automobile drivers from all around the world with their "Ultimate Driving Machine".

The BMW Company was originally established in Germany and has extended nationally reaching over 12 countries. With Germany and the United States being the top two target countries, BMW has established their products as a combination of luxury, safety, and comfort with product lines to suit all styles of living. Revenues have been increasing each year since before 1996 with profits coming from product line of automobiles and motorcycles. In 2001, BMW came out with a new product group, the Mini. The Mini also contributed to the revenue increase in 2001. BMW has current developments in their sports cars, the Z 8.

BMW has created a trustworthy name for the automobiles they produce and has all the potential to continue their success in the future. Audi, one of Germany's first automobile producers, has been designing and building cars since August H orch, its founder, completed his first car in 1901. Over the years following, a series of innovations and mergers have led Audi to the position it is in today. Audi's subsidiaries include companies to facilitate international operations, part manufacturers, a vehicle customization company, a technology research company, and Lamborghini Corp, a successful sports car manufacturer. Audi's current developments include its holding the EU Seal of Environmental Protection, and a number of technological advancements, including new car designs and a "seeing car" technology that has been nominated for the German Future award for Technology and Innovation.

BMW Audi Profitability Ratios Return on Equity 0.173 0.034 Profit Margin 0.048 0.068 Return on Assets 0.036 0.177 Asset Utilization Ratios Inventory Turnover 8.545 15.061 Total Asset Turnover 0.750 1.957 Liquidity Ratios Current Ratio 4.46 0.737 Quick Ratio 3.82 0.429 Debt Utilization Ratios Debt to Total Asset 0.638 0.614 Times Interest Earned 29.439 14.296 Profitability Ratios: measure the percentage returns a company makes relative to its sales, equity, and assets. Return on Equity: (Net Income / Equity) The Return on Equity ratio is extremely important to the analysis of the management of a company. Measuring the percentage of income that a company actually makes from its equity, it gives a clear indication of how well management uses the funds available to it. Breaking down the RoE into its components is called Dupont analysis. This will be done later to better explain both Audi and BMW's management effectiveness. When the basic RoE results are compared, it seems that BMW's management is using its funds to create more sales than Audi's.

With Dupont analysis we will find if this is true by analyzing debt levels, capacity utilization or cost effectiveness. Profit Margin: (Net Income / Sales) The Profit Margin of a company measures how much of its sales are actually converted into income. If this number is high, it is also a good barometer for management effectiveness. Low profit margins could indicate large interest payments, or poor asset management. BMW and Audi are relatively close with this ratio, but Audi's higher number probably indicates better asset management. Return on Assets: (Net Income / Total Assets) RoA measures the income resulting from a company's total assets.

Audi seems to make better use of its assets, producing much more earnings relative to its assets than BMW. This reinforces the poor asset utilization as a possible reason for BMW to have a low profit margin. Asset Utilization Ratios: show the amount of times a year a company turns over its assets. Inventory Turnover: (Sales / Inventory) Inventory turnover is a good gauge for the efficiency of a company at managing its inventory. High amounts of inventory result in holding costs that can cause lower profits for a company. Audi's high inventory turnover shows that it creates and sells its inventory almost twice as fast as BMW.

Total Asset Turnover: (Sales / Total Assets) This figure is another good measure of management effectiveness. It shows the amount of times a company's assets can generate their value in sales over a year. We can see that Audi is more than twice as efficient as BMW at asset management. Liquidity Ratios: examine a company's ability to pay off its short-term debts with its liquid assets. Current and Quick Ratios: (Current Assets / Current Liabilities and Current Assets - Inventory / Current Liabilities) These ratios are comparisons of short term assets and liabilities that measure a company's ability meet its obligations.

A low current or quick ratio could indicate the inability of a company to pay off its debts should it have the need to liquidate. Audi's figures are both less than 1, meaning it relies heavily on income and cash flows to pay off its current liabilities. BMW on the other hand would be able to pay these debts off right away with its current assets. This analysis would place much more risk on an investment in Audi. Debt Utilization Ratios: evaluate the total debt position of a firm, relative to its assets and profits. Debt to Total Assets: (Total Debt / Total Assets) This ratio, very basically, measures the amount a company takes advantage of debt, rather than their stockholder's equity.

If well managed, this number should be the company's optimal amount of debt taking into accounts its environment and market. Because both BMW and Audi are in a similar industry and market, the fact that this figure is close for both is not a surprise. Times Interest Earned: (Earnings before Interest and Taxes / Interest) This ratio measures how many times a company can pay off its interest with its operational earnings. This is an excellent measure of debt utilization and the ability of a company to pay its interest payments. Both Audi and BMW have very high earnings relative to interest, but BMW is clearly a less risky investment as it can even more easily pay back its interest. As bank loan analysts, basing our decision only on the calculations made from the liquidity and debt utilization ratios, we would rather lend money to BMW.

Comparing the debt to total asset ratio of BMW and Audi, . 638 and. 614, respectively, we find that BMW and Audi are extremely close in the amount of debt they take on. Both companies, being in the same industry, probably have a very similar optimal level of debt. Audi's lower percentage makeup of debt would usually indicate that it is less risky. These numbers are close, however, and BMW's liquidity and other debt management ratios indicate more control over their debt, BMW is probably a less risky investment.

This makes BMW seem to be less of a risk and more stable. BMW clearly shows less risk when BMW's and Audi's times interest earned ratios are compared. BMW can pay off its interest payments with its yearly operating earnings 29.439 times. Although Audi also has a high ratio, it would be more risky to lend money to when compared to BMW.

As the liquidity ratios specify, BMW can pay back current debt and liquidate easier than Audi. BMW's figures are both greater than 1, indicating that it probably has no problem paying off its debts as they come due with current assets. As bank analysts, BMW would be less risky because if situation called for BMW to immediately pay off their debt to our bank, they currently have the ability to do so easily. On the other hand, Audi has a very low ratio that leads us to believe that the company relies heavily on income and cash flows to pay off its current liabilities. This illustrates a huge risk that investing in Audi would pose for our bank.

Basing our bank lending decision on risk, BMW is clearly the better choice, and the choice that we would make as a bank manager. Its low financial risk would be a safe investment for our banks money. It can easily pay its debts off and has more than enough money to safely make its interest payments. It should be noted, however, that due to Audi's management effectiveness, and the fact that higher interest rates can be charged, Audi, although more risky, could also be a wise investment. Considering the stable management of Audi, a bank manager that is less interested in risk, and more interested in profits, might want to invest in Audi, as their current debt status might facilitate a higher interest rate being charged, even though Audi's strong management would keep a relatively low level of risk. Dupont Analysis BMW Audi Profit Margin 0.048 0.068 Asset Turnover 0.750 1.957 Equity Multiplier 4.759 2.592 From breaking down Return on Equity into a Dupont Analysis, we can see how Debt and Asset management can influence the performance of these companies.

As was discussed before, Audi's slightly higher profit margin over BMW shows that it makes more income from its sales. This can easily be a result of better asset management or lower interest payments by Audi. These ideas are all related to cost efficiency, and it seems that Audi holds the edge over BMW with cost management. The idea that BMW has trouble managing its assets resurfaces again in their asset turnover ratio. BMW creates sales from its assets less than half as much as Audi. This basically means that BMW has more expensive operating costs to produce relatively fewer sales.

Audi and BMW show a fairly large difference in equity multiplies as well. This number is simply a measure of the amount of debt and equity in a company relative to sales. BMW's higher number indicates a higher amount of debt in the company. BMW's Debt to Asset ratio also shows this at 63% against Audi's 61%. This higher debt in BMW can be a reason for its profit margin figure.

With high debt, and therefore high interest payments, high sales will be reduced to a lower profit. The profit margin reflects this. This again shows BMW's less efficient cost management than Audi. Through Dupont analysis, we have been able to see the specific strengths and weaknesses of BMW and Audi's management. BMW's lower profit margin and asset turnover indicate less efficient cost management and asset management. Their debt multiplier indicates that they " re taking advantage of debt, but the benefit of this isn't realized because of their problems with cost and asset management.

Due to Audi's more efficient use of their assets, and better cost efficiency, it can be said that their management has performed better than BMW's over the past year. BMW and Audi both build cars that have a reputation for security, reliability and quality. These traits transcend into their financial statements, making both of them a good investment due to their debt status, and management effectiveness. Our recommendation as a bank loan analyst would be for BMW due to its superior liquidity and low risk. When evaluating management performance for equity investment, Audi is clearly a better investment.

This is primarily due to its superior asset management, debt allocation, and inventory management.