Detailed Financial Analysis of PSA Groupe and Recommendations

This report provides a detailed financial analysis of PSA Groupe, a major European car manufacturer, examining its performance from 2012 to 2016. The analysis includes the calculation and interpretation of various financial ratios, such as working capital efficiency, profitability, solvency, and investor perspective ratios. The report highlights areas of concern, such as the company's declining profitability and poor interest coverage ratio, while also noting strengths like a good quick ratio and long-term debt management. The report also compares PSA Groupe's production processes with those of Toyota and Volkswagen, providing recommendations for improvement and strategies to enhance market share and customer satisfaction. The conclusion emphasizes the importance of improving financial performance to attract investors and satisfy stakeholders, especially shareholders, by increasing profitability and potentially paying dividends.

Accounting ratios and
analysis

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK ONE......................................................................................................................................1
Performance of PSA Groupe and financial ratios' analysis....................................................1
TASK TWO.....................................................................................................................................6
Advices and Recommendations to investors of the company................................................6
TASK THREE.................................................................................................................................8
Contrasting production process of PSA Groupe with Toyota Organisation..........................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Accounting ratios are important for the organisation as through this it may be able to
review performance with much ease and if performance is not good, then certain steps may be
taken by it to provide efficiency. The enclosed report deals with PSA Groupe which is the
European car manufacturer giant which is facing poor performance over the past years. The
report aims to provide computation of financial ratios and provide recommendations to company
so that it may be able to enhance performance in the most proficient way. Investors may be
attracted to organisation for investment in the company and this will lead to increase in market
price of shares. The financial ratios of five years are calculated and provided in the report.
Moreover, proper production system should be adopted by organisation to reduce wastage of
resources.
TASK ONE
Performance of PSA Groupe and financial ratios' analysis
Ratios Formula 2016 2015 2014 2013 2012
Working
capital
efficiency ratios
Current ratio
Current Assets/
Current
Liabilities 1.03 0.84 0.71 1.01 1.03
Quick ratio
CA- Stock -
Prepaid
Expenses /
Current
Liabilities 0.82 0.67 0.57 1.01 0.88
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Profitability
ratios
Gross Profit
margin
Revenue - Cost
of goods sold /
Revenue 19.10% 18.60% 16.60% 14.40% 14.20%
Operating
Profit margin
Operating
profits / Net
sales x 100 4.80% 3.60% 0.20% -2.90% -8.40%
Solvency ratios
Debt to Equity
ratio Debt / Equity 2.08% 2.69% 4.08% 6.62% 5.13%
Interest
coverage ratio
EBIT / Interest
expenses 0 3.65% 0 0 -10.57%
Long term
financial ratios
Long term
debt to Total
assets' ratio
Long term debt /
Total assets 0.22% 0.20% 0.19% 0.21% 0.19%
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Debt coverage
ratio
Operating
income / Debt
payments 0.31% 0.08% 0.07% 0.11% 0.04%
Investor's
perspective
ratios
Dividend
payout ratio
Dividends / Net
income 0 0 0 0 0
Earnings per
share
Net income/
Outstanding
shares 1.93% 0.96% -1.15% -6.80% -12.90%
The financial ratios represent company financial strength which is much vital to various
stakeholders' including external and internal as well. They represent position of the business and
are valuable to investors and creditors who constantly seek for financial position of the
organisation and assess whether they should provide funds to it or not (Benjamin, Mohamed and
Marathamuthu, 2017).
The financial ratios are calculated above for five financial years from 2012 to 2016 of
PSA Groupe which is the biggest European car manufacturer often competing with German car
manufacturer Volkswagen. The financial ratios are computed which shows that financial position
of company is not good over the past five years. It is not able to perform well in the global
market. It is worth mentioning that despite of valuable brand name, it is not performing better
than is expected from such firm.
The financial ratios calculated are working capital efficiency ratios, profitability ratios,
solvency ratios, long term financial ratios, investor's perspective ratios. These are important to
calculate so that efficiency of the company may be interpreted with much ease. Starting from
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working capital efficiency ratios which consists of current and quick ratio. The current ratio
highlights how company effectively pays it short-term liabilities which are to be paid within one
year. The values are 1.03, 1.01,0.71, 0.84, 1.03 of past five years ranging from 2012 to 2016.
The working capital efficiency of PSA Groupe is not better but as far it is not bad either.
Moreover, it should be able to enhance efficiency so that it may able to pay short-term
obligations within stipulated time (McCall, 2017). Ideal current ratio is 2 : 1. Coming to quick
ratio, it can be interpreted that it is quite good in five financial years as ideal quick ratio is
considered as 1 : 1 and organisation has good ratio. It may be implied that it may be able to pay
extreme short-term liabilities on time to creditors with much ease.
Furthermore, coming to profitability ratios of PSA company. It may be conveyed that
gross profit margin is good and higher the margin, better for the company. However, net profit
margin is very bad. It is negative in the financial years 2012 and 2013. It is increased after 2013,
but company has to make effective profits so that it may beat competitors. For this, it should
have a strict control on the various costs and expenses so that profit may not be hampered (Boyas
and Teeter, 2017).
The solvency ratios indicates that how much debt a company is using to meet
requirements of it. High ratio is not good as it shows that company is unable to pay debt as cash
gets reduced and low ratio is also not good as it shows that organisation is not utilising debt.
However, debt ratio of the company is good and is utilising debt completely. However, interest
coverage ratio is poor as it is negative in 2012 and less than 5 in 2015 financial year. Interest
coverage ratio is considered better if it is more than 5 as it is ideal ratio conveyed by market
analysts. Solvency should be increased so that it may take debt and also repay it within stipulated
time.
The long term ratios such as Long term debt to Total assets' ratio is better in all five years
as it is lower than 0.4 % and company is performing well in long term financing. In addition to
this, debt coverage ratio of PSA is not good as ideal ratio is considered to be not less than 1 by
market analysts. Over the five years, debt coverage ratio is not good and company should
increase performance so that it may make debt payments with much ease.
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Moreover, investor's perspective ratios such as dividend payout ratio and earnings per
share is not good as company has not generated high profits. The dividend payout ratio is 0 in
past five years which shows that company has not performed well and as a result, dividends are
not paid to shareholders'. It should produce profits so that it may satisfy shareholders' by giving
their part of profit (Vladu, Amat and Cuzdriorean, 2017). In addition to this, earnings per share
are also negative as performance is declined and it should increase profits so that investors' may
grant investments in the company and then consecutively, market price of shares may be
increased up to great extent.
Benchmarking is a process by which comparison is made by the company from the
industry's best performing company. PSA organisation faces competition from German car
manufacturer giant Volkswagen. It faces ample of competition from Volkswagen as processes,
production techniques and various other tactics made by it to inject sales is remarkable. PSA
Groupe has to make effective strategies so that it may beat Volkswagen and may lead the market
with much efficiency. The production procedure of Volkswagen may be followed by PSA so that
it may enhance performance and can succeed in quality production with much ease.
The company has an enabled technology regarding hybrid cars are implemented by it and
as a result, it is competing with Volkswagen company as well (Maynard, 2017). The strategies of
Volkswagen organisation are well-structured to customers' needs and demands and this has
helped it to be efficient in the market. This has led to more profits and in turn enhanced brand
value. PSA Groupe has to benchmarked production process by implementing automated
machines which are already initiated by it so that production may be achieved within stipulated
time and of utmost quality.
PSA Groupe has to enhance its performance by competing with Volkswagen so that
market share may be accomplished in effective manner. For this, well-structured strategies are
required to be implemented so that customers' may be provided with faster delivery of cars
within stipulated time with much ease. Proper production mechanism should be followed by it so
that new orders may be accomplished quite satisfactorily. Materials from suppliers are required
to be purchased in anticipation of demand which is likely to raise in the future. Moreover, it has
adopted automated checking of parts which are required to undergo checking by implementing
laser pointing mechanism. It is done so that any defect if found out may be removed before
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assembling parts of the car. By this technique, it is able to achieve production within stipulated
time and customers' are delivered car accordingly.
The ratios are changing on constant basis and this has serious bad implications on the
stakeholders' of the company (Paul and Mukherjee, 2017). The company need to adopt strict
strategies to control various direct and indirect expenditures so that it may perform well. It is
important as investor's perspective is in contrast to profitability and efficiency of the company. it
is therefore vital for PSA to perform well so that market price of shares may be effectively
increased. Another stakeholder are shareholders' which are satisfied when dividends are paid to
them in accordance with divisible profits. It may be revealed from the financial ratios that no
dividends are paid to them over the past five years. PSA should perform well so that part of
profits may be provided to shareholders which are real owners of the organisation.
By analysing the above chart, it may be said that though company has not earned well in
the past but is anticipating growth in the coming years so that it may be able to satisfy customers'
by providing them better quality cars. The potential growth up to 2021 financial year is
anticipated by the company (Performance potential). This is also beneficial for the stakeholders'
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Illustration 1: Source: autocar.co.uk

of PSA company which may invest in the company. This will provide it with sustainable profits
so that it may beat rivals.
TASK TWO
Advices and Recommendations to investors of the company
The financial condition of PSA Groupe is not favourable in the current scenario as it has
more debt and earnings on shares are bad. This implies that it is going through bad phase as
performance is not up to the mark. It should be able to perform better by forming effective
strategies so that it may be able to maintain effective share prices and in turn may satisfy various
stakeholders' as they constantly review company's performance (Mulyadi and Budiawan, 2018).
PSA Groupe has formed various strategies so that production may be done in effective
manner and thus, it can satisfy investors' as well. The share prices of company is lower down in
past years but is undergoing changes and as such, it is advised to investors' that it may start
buying shares of PSA Groupe as it will provide benefits in the long run. Moreover, it is
recommended to investors' that they should analyse overall performance of the company and it
can be interpreted that organisation is not performing bad and it may be able to perform better in
the future as well.
It may be conveyed that PSA is regularly researching ways to improve car performance
so that customers' may be provided innovative cars. It is analysing market conditions and
anticipating demands and needs of customers' so that they may be satisfied with much ease. It is
also implementing well-structured production mechanisms so that goods may be produced in the
most productive way (Yap, 2017). The company has around 17 euro share price in current
situation which has grown from the past years as it was also reduced to 3.69 per share value in
2012. The company is satisfactorily performing well and has adopted well-mannered strategies
to subscribe more investment from the stakeholders'.
The net income is increased to 71.77 % from 1.01 billion to 1.74. This is a great watch
for investors' as shares are purchased by them by analysing net income of the organisation. This
implies that performance of the company is gradually increasing towards positive trend and
investors must buy securities of company as constant returns will be imparted to them with much
ease. Moreover, market share is consecutively increased and this is evident from the fat that
market price of shares is increased up too much extent.
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The organisation has now adopted production mechanism which is performed when
customer places order for the car and this information is readily available to production
department in real time. This helps company to have an eye on every order and in this
anticipation, customer is provided with provisional delivery date. Then parts required for
production is automatically ordered from the suppliers so that production may be eased.
Transport facilities are automated and also freely traceable. Moreover, plant is also fully
automated and as such, production is achieved in fast and effective manner. Then parts are
checked comprehensively with laser pointing and if defect is identified then is resolved on the
production site (Testa, Testa, D’Amato, 2017). Furthermore, assembling is accomplished and
then operation team design car in real time. As such, customer is provided with car within
stipulated time.
By analysing trends of ratio analysis, it may be advised to investors' that they should buy
policies of PSA Groupe as it will be able to perform better in coming future. Investors' will get
better returns on their investment and as such, it may be said that investors' will be profitable by
buying policies of company. They will get constant returns as share prices of organisation is
gaining good pace. It is recommended to buy policy so that returns may be accomplished by
investors' in the best possible way.
TASK THREE
Contrasting production process of PSA Groupe with Toyota Organisation
The production process is important aspect as company is highly affected by it. Various
philosophies and concepts are formulated which guides company to channelise production
effectively (Lins, Servaes and Tamayo, 2017). TPS (Toyota Production System) which was
developed by Toyota corporation is widely used by many organisations. The main element of
this system are Just in time approach and lean manufacturing. These two should be followed by
PSA Groupe as it is important for it to have effective attainment of production in the most
proficient way.
Just in time approach is a mechanism which is concerned by the philosophy that
production need must be analysed first and then accordingly, materials may be purchased or
acquired by the business to manufacture goods with much ease. This is vital as if materials are
acquired in the factory without anticipation of demand then it will lead to wastage of resources
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which should not be done by organisation as it adds to additional cost. This system is usually
meet customer demand exactly with reference to quantity and quality so that chances of waste is
minimised too much extent. The several wastes are minimised such as waste of waiting time,
processing waste, inventory waste and many more which directly hampers production.
Lean manufacturing is another philosophy which also states that production may be
accomplished by organisation without wasting any resources in the production process. It also
lay emphasis on reducing wastage without compromising with the quality of production of goods
(Xing, Howe, Anderson and Yan, 2017). This concept adds value to production process as goods
are manufactured without spoilage and moreover of utmost quality.
The two concepts which are followed and developed by Toyota are much relevant to PSA
Groupe as through this, it may be able to minimise wastages and spoilages which occurs in
production process. It is also important as PSA company is following new generation EMP2
platform which is utilised for line up of high and mid range vehicles to boost the production
process. By following this system, PSA is able to reduced 70 kg of weight by using innovative
light material. It also helps to reduce 22 % fuel consumption and this interactive feature is
helpful for customers' who purchase cars of this technology.
The company has also launched a platform which named CMP which also reduces
emission of harmful gases. However, for more effective production, it should adopt TPS system
that will lead to reduce in wastage related to inventory and also processing waste will be
minimised (Goldmann, 2017). Just in time and lean manufacturing approach should be followed
by PSA company to channelise and accomplish effective production.
The production system are however not easily attainable in current turbulent
manufacturing environment of vehicles. Just in time approach is suitable when production
system works with stable components. The delivery time for materials and that of finished goods
are known in advance which is practically impossible as suppliers may delay in providing raw
materials and as a result, production flow is hampered and suspended. Thus, the philosophy does
not work in dynamic conditions (Gómez‐Bezares, Przychodzen and Przychodzen, 2017).
Employed are resistant to implement lean production as constant monitoring takes place
and this also adds cost to the company and this is not a effective technique as well. Moreover, if
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it is implemented in the company, training is required to be imparted to workers as set ups are
different from earlier used production system. Moreover, it is highly dependent on supplier
efficiency to provide raw materials and any delay in providing goods to the production site may
disrupts entire supply chain. As a result, these philosophies and concepts are practically
unattainable in current environment.
CONCLUSION
Hereby it can be concluded that accounting ratios are useful for guiding company to
evaluate its performance. By computing financial ratios, organisation is able to have idea of
performance and if it is not up to the mark, then strategies are formulated and implemented by it
to resolve the same. PSA Groupe is not performing well in the market over the past years which
is reflected by the financial ratios and as a result, well-structured strategies need to be
implemented by it so that efficiency may be gain by it effectually. Moreover, production process
should be followed by it so that real time track of orders may be made effectively of customer's
orders. This will lead to better performance and investors will be attracted to invest their money
in the organisation. This will eventually lead to enhanced market price of shares.
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