Abstract In this report, we calculate and compare the financial performance between Daimler Group and BMW Group in two financial years 2010-2011. The objective is to analyse the financial performance of both groups and identify our company’s position, thus suggesting the potential areas for improvement for our company.
I) Introduction In this report, we analyse and compare the financial performance between BMW Group and Daimler Group in 2010 and 2011 using financial ratios analysis. The BMW Group and Daimler Group are two of Germany’s largest industrial companies and are among the most successful car and motorcycle manufacturers in the world. By doing comparisons, we will be able to identify the financial position and the potential areas of improvement for our firm. All the figures were taken from the firms’ annual reports.
II) Financial Ratio Analysis Financial ratios for BMW Group and Daimler Group are provided below.
| Ratios| BMW| Daimler Group| | | 2011| 2010| 2011| 2010| Profitability| Return on Capital Employed (ROCE) (%) | 10.5| 7.3| 9.4| 8.8| | Return on Equity (ROE) (%)| 18.1| 13.5| 14.6| 12.3| | Net Profit Margin (NPM) (%)| 11.7| 8.5| 8.2| 7.4|
| Gross Profit Margin (GPM) (%)| 21.1| 18.1| 24| 23.3| Efficiency| Sales Revenues to Capital Employed| 0.9| 0.86| 1.14| 1.18| | Sales Revenues to non-Current Assets| 0.92| 0.9| 1.22| 1.24| | Sales Revenues to Working Capital| 38.42| 20.0| 17.0| 25.3| | Inventory Turnover Period (days)| 65| 57| 77| 71|
| Trade receivables settlement period (days)| 17| 14| 27| 27| | Trade payables settlement period (days)| 36| 31| 43| 37| | The Operating Cycle (days)| 46| 40| 61| 61| Liquidity| Current Ratio | 1.04| 1.08| 1.11| 1.07| | Acid Test Ratio | 0.83| 0.88| 0.8| 0.8| | The Cash Conversion Cycle (days)| 46| 40| 61| 61| Solvency| Gearing (%)| 64.4| 65.8| 55.6| 54.1| | Debt-Equity | 1.81| 1.93| 1.26| 1.18| | Interest Cover| 8.5| 5.29| 6.94| 4.94|
1) Profitability The ROCE ratio measures how well the business has used the capital invested to generate profits while the ROE indicates the business’s ability to generate profits using shareholders’ funds. The GPM indicates how much a company earns taking into consideration the cost of sales.
The NPM shows the amount of each sales dollar left over after all expenses have been paid. Both groups have achieved significant increase in revenues in 2011 leading to improvements in all profitability ratios comparing to 2010. Both firms have been more efficient in using its resources to generate returns, where both ROCE and ROE ratios have showed significant increases in 2011.
It is also worth noticing that despite having higher GPM for both years, Daimler’s NPM figures were lower than that of BMW, indicating that Daimler has higher operating expenses than BMW. Overall, BMW has performed better than Daimler in terms of profitability.
2) Efficiency Efficiency ratios are typically used to analyse how well a company uses its assets and liabilities internally. The sales revenue to capital employed ratio indicates how well the organization used the capital invested in the business to generate revenue for the company as whole. Both companies have experienced an increase in the revenues over the past two years but both companies haven’t experienced an increase in the asset turnover ratio. It has increased with BMW probably as a result of the reduction in the non-current liabilities. The opposite has occurred with Daimler Group most likely as a result of the massive increase in the non-current liabilities. This ratio can be further explained using the sales revenue to non-current assets and sales revenue to working capital ratio.
The sales revenue to non-current assets ratio measures how well the managers invested the non-current assets of the company to generate revenue for the growth of the business. This ratio has most definitely been affected by the investment in new non-current assets by both groups but Daimler has managed to use these assets to generate more revenue than BMW but still has used its new non-current assets efficiently to generate a sales revenue which would in turn lead to a ratio higher than the previous year’s ratio figure.
The sales revenue to working capital explains how well the company is using its working capital to generate sales revenue. It is one of the best ways to watch the changes in cash overtime, this is important because the company needs cash to operate. Daimler has experienced a significant decrease in this ratio and BMW, the opposite occurred. This could be as result of fluctuations in the current assets and liabilities of both companies.
The inventory turnover period ratio measures the length of time stock is held within the business. Both companies are now holding stock for longer than they did in 2010. It takes Daimler 77 days to sell its products while it takes BMW 65days. Both results are quite high but BMW has an advantage. This means that BMW has fewer inventories in store than Daimler at the end of the year, which means lower holding costs for BMW.
The trade receivables period ratio calculates how long it takes the company to collect payments from its customers. A business will naturally be concerned with the amount of funds tied up in trade receivables and try to keep this at a minimum as it can have a significant impact on the cash flow of the business. This has not changed much for both companies over the past two years but has increased slightly for BMW in 2011. Daimler has more funds tied up in trade receivables.
The trade payables period indicates how long it takes the company to pay its suppliers. Most companies would prefer this to be as long as possible but this can be taken to far and result in the loss of goodwill of suppliers. Both groups have managed to increase the period it takes them to pay their creditors. Both companies take a longer period to pay their suppliers than it takes for their debtors to pay what they owe. This shows a good cash flow movement for both companies.
The operating cycle is expressed as an indicator of management efficiency. It has three components of inventory turnover period, trade receivables period and trade payables period. These come together to form the complete measurement of operating cycle days. This hasn’t changed for Daimler over the past two years and has increased slightly for BMW. It takes BMW a shorter period to generate revenue from its purchase of inventory than it takes Daimler.
3) Liquidity Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. In general, the greater the coverage of liquid assets to short-term liabilities the better it is, because it gives a clear signal to whether a company can pay its debts that are due in the near future and still be able to fund its ongoing operations. The current ratio measures a company’s ability to pay back its short-term debts in short notice. The acid test ratio is similar to the current ratio except does not include inventory and prepaid expenses as assets but only those that can be turned into cash easily. Therefore, it measures the firm’s ability to pay its current obligations immediately. Comparing the two companies, those figures are quite similar.
As for manufacturing companies like Daimler and BMW, current ratio of/more than 1 is desirable. Both companies did manage well to achieve the target figures in both years. Changes in the ratios between two years are not significant, but it is worth pointing out that Mercedes showed a small improvement in liquidity (from 1.07 to 1.22), whereas BMW got a minor decline (from 1.08 to 1.04).
Although the acid test ratios falls below 1 in both years for both firms, thus both firms are unable to pay back its short term debts immediately, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. In general, Daimler’s current and quick ratios showed a slightly better liquidity position, comparing to BMW’s.
In fact, liquidity ratios are remarkably affected by the company’s working capital management. That is why we should examine some working capital figures to fully analyze two companies’ liquidity circumstances. The Cash Conversion Cycle (CCC) is similar to the Operating Cycle. While the parts are the same – receivables, inventory and payables – in the CCC, they are analysed from the perspective of how well the company manages its cash, as opposed to their impact on operational capital assets.
The CCC measures the number of days a company's cash is tied up in the production and sales process of its operations and the benefit it gets from payment terms from its creditors. The shorter this cycle, the more liquid the company's working capital position is. In general, both firms have taken longer to shift their stocks, receive payments and pay out their creditors in 2011 comparing to 2010. This trend could mean the demand for the firms’ products has been decreasing.
Moreover, BMW performed better than Daimler with all of its figures being noticeably lower in both years. Therefore, the CCC of BMW is considerably lower than that of Daimler. Apparently, we can see that both companies had reasonable figures and good working capital management. Yet, overall, BMW seemed to have performed better than Daimler, as the processes were faster.
4) Solvency Gearing measures the proportion of a company’s finance which is provided from external sources. In theory, the higher level of gearing, the riskier the business, since interest and repayment of debts must be paid regardless of the situations. However, gearing can be a financially sound part of a business’s capital structure, especially if the business has strong, predictable cash flows.
Both companies have had a consistent gearing ratio of about 65% (for BMW) and about 55% (for Damlier Group) over the course of 2 years (2010 and 2011) which states that the companies are highly geared. Debt Equity Ratio is the ratio of the debt that a company has to the its shareholders’ equity.
A higher the percentage means that a company is using more leverage and has a weaker equity position. Optimally the debt equity ratio of a company should be 1. For most companies, the ratio is usually between 1.5-2. The debt equity ratio of BMW shows a slight fall this year and a slight increase in the case of Daimler Group. BMW’s gearing ratio and debt to equity ratio indicate that BMW is more leveraged than Daimler. Interest cover ratio is used to determine how easily a company can pay interest on outstanding debt.
There has been a good amount of increase in this ratio in BMW as well as in Daimler Group as it can be seen above. It can be said that the profit of BMW was 8.5 times and 6.94 times (for Daimler) greater than the amount of interest that it incurred on its respective outstanding debts. A higher interest cover ratio indicates that the business is easily able to meet its interest obligations. Usually any interest coverage ratio higher than 1.6 is considered safe which leaves us to the conclusion that BMW and Daimler Group both are safe companies in matters of Interest payable on outstanding debt.
III) Conclusion The 2011 financial year was an excellent one for the Daimler where sales volume, revenue and earnings figures all significantly improved. Daimler Group should control its operating costs and continue to invest in R&D to maintain and improve its profitability levels. It could also further improve its efficiency by better managing the Operating Cycle. In this paper, we have illustrated relationships between different aspects of the firms’ operations and provided relative measures of the firms’ conditions and performance.
By comparing two similar firms in the same industry in two years, we have found that BMW has performed slightly better than our firm (Daimler) despite being more leveraged. However, the financial ratios are pure mathematics and do not take into account other aspects of the business, therefore, users should approach them with caution.