Improving Financial Position of Volkswagen Group

From a solvency and liquidity perspective, the Volkswagen Group is positively positioned in the market. To improve its financial condition, it is suggested that the company introduce eco-friendly cars with low carbon emissions. Additionally, investing in small car designs can help improve inventory turnover. The analysis also recommends investors to invest in BMW group as their profitability is better than Volkswagen's and their valuation of shares is eight times P/E ratio as per forecast earnings, offering a dividend yield of over 4%.

Financial statement Analysis
(Financial Comparison between Volkswagen Group and BMW)
V/S
1

Table of Contents
INTRODUCTION ..........................................................................................................................3
OVERVIEW OF VOLKSWAGEN ...............................................................................................3
INTERNAL AND EXTERNAL MARKET ANALYSIS OF VOLKSWAGEN ..........................4
SWOT analysis of Volkswagen..............................................................................................4
Porter's Five force analysis ....................................................................................................5
FINANCIAL RATIONS ANALYSIS ............................................................................................6
Profitability ratios .................................................................................................................8
Liquidity ratios ....................................................................................................................10
Efficiency/ Activity Ratios...................................................................................................12
Solvency ratios.....................................................................................................................14
CONCLUSION .............................................................................................................................16
RECOMMENDATIONS FOR INVESTORS ..............................................................................17
REFERENCES .............................................................................................................................18
2

INTRODUCTION
Financial analysis is the most crucial aspect of comparing performance of competitor
companies. In this regard, financial ratio analysis is the most flexible method to evaluate
financial health of companies as well as it also supports investment decisions (Contributions
Published in Strategic Analysis, 2013). The report herewith is going to analyse recent
performance and position of Volkswagen group in the market. Further, the internal and external
market analysis is done while using various strategic tools such as SWOT and Porter's five forces
analysis. To compare the financial position of the company, BMW a leading competitor of
Volkswagen is taken into consideration. The ratios analysis of both companies is done and the
performance is compared on the basis of activity, liquidity, solvency and profitability ratios. The
reasons behind financial performance are presented in the section while recommending investors
and shareholders for a better option to invest among both mentioned entities.
OVERVIEW OF VOLKSWAGEN
Volkswagen is the renowned automotive manufacturing company which is based on
Germany. The company was founded in the year 1937 and it is headquartered in Wolfsburg,
Lower Saxony, Germany. At present, the mentioned car manufacturer is the second-largest auto-
maker in the world. This company is the largest car manufacturer in Europe. The number of
vehicles delivered to consumers has been increased from past years and has reached to 10.137
million in the year 2014. Volkswagen captures market shares of 12.9% of whole world's
passenger car market. In the years 2014, the group revenue of mentioned entity was €202 billion
while earning the profit of €11.1 billion. The Volkswagen Group include different brands
including Audi, SEAT, ŠKODA, Bentley, Scania and MAN, Porsche, Ducati, Bugatti,
Lamborghini, Passenger and Commercial Vehicles.
UK luxury car market
The luxury car market of UK is continuously booming however, UK is among one of the
few European countries where people are willing to buy luxuries car. In other words, it can be
said as a place where people incentivised themselves to purchase a new car. As per the
investigation of Society of Motor Manufacturing Traders the car market of UK launched 2.4
million cars in the year 2014 so it could be said that the demand of luxurious car is backed in
3

Europe before the recession. In UK, number of early registrations of upcoming models of cars is
witnessed. For Volkswagen, the Europe market is the second biggest market after Germany for
Volkswagen. The UK market share for Volkswagen and BMW is as follows:
ARQUE 2014 sales % Market share 2013 sales % Market share Up or down?
Volkswagen 214,828 8.67 194,085 8.57 +10.7%
BMW 148878 6.01 135583 5.99 9.80%
INTERNAL AND EXTERNAL MARKET ANALYSIS OF VOLKSWAGEN
SWOT analysis of Volkswagen
In order to assess the current performance of company and to analyse the internal
strengths and weaknesses and external opportunities and threats SWOT analysis of the company
is presented in following points:
Strength: The firm has strong global presence which is known as the biggest strength of
Volkswagen. The operations of company are based in more than 160 countries and are
considered to be the second largest auto- manufacturer all around the world. The company is
well known for its quality products. It has strong brand portfolio as there are total 12 brands
which are selling under Volkswagen Group. The largest selling brand of Volkswagen in UK is
Bentley and Audi. Hence, it could be said that the company has created product portfolio while
considering the needs of each and every customer (Bragg, 2000). The research and development
and engineers team of company is very strong in making effective cars that is significant to keep
competition in global market. Audi is the most demanded car under Volkswagen Group.
Weaknesses: The biggest weakness of Volkswagen is that the company has limited
presence in emerging market whereas the competitive brands have captured significant market
share. The company is also having weak presence in US passenger car market as it has capture
only 5% market share in the year 2012. Many of the products such as Porsche, Lamborghini and
Bugatti are not environmental friendly as these cars are not fuel efficient and emits high amount
of CO2 (Carbon roof tops BMW. 2006).
4

Opportunities: Volkswagen Group has various opportunities to enhance the business
growth. The foremost opportunities for Volkswagen are that company is able to create long run
relations with German motors. Through putting investment in R&D, company can come up with
innovative models and more efficient cars that can lead to differentiation from competitive
brands. The emerging market can be the opportunity for business to expand operations as well as
earn huge profits and revenues. Furthermore, the company can produce some environmental
friendly cars so that, customers can be attracted towards the business (Gowthorpe, 2008).
Threats: The fluctuation in fuel prices is the biggest threat for the company which
directly impact the cost of business. The company invest in hybrid and electronic cars that could
be seen as a huge loss in case of increasing fuel prices. If the fuel prices increase, customer
demands for smaller cares that consumes less fuel.
Porter's Five force analysis
Porter five force models is an analysis model that helps in assessing external marketing
forces of the company which impacts the business. The points below represents the five forces
and relative ranking (High, Moderate and Low) of Volkswagen.
New Entry Barriers to industry (Low): Volkswagen is the leading group of Luxury
market and it has captured a brand reputation in the global marketplace. In UK, the entity is the
first biggest dealers of luxury cars. It is required to highly invest to enter in the market (Muro,
1998).
Intense Rivalry (High): The UK auto mobile industry is competitive as there are leading
German and Japanese manufacturers who have captured the market. However, the major
composition of Volkswagen is seen with BMW and Mercedes (Rodgers, 2008).
Bargaining power of Supplier (Low): The supplier’s posse’s low bargaining power as
there are very few Auto dealers in UK for luxury cars and these suppliers are heavily reliant to
few auto-makers and they known in case of unfavourable decisions the leading auto companies
can switch to other supplier
Bargaining power of consumers: (Low-Medium) - There is very less population who is
attracted towards luxurious and costly car. The organization has developed its good brand image
in market and this is the major reason for which customers will not switch to others (Lampe, and
Hofmann, 2013).
5

Substitute power (Medium): The substitute product is quite medium as customers
seems to be brand conscious, however, many factors such as rising fuel prices and government
strategies designed for promoting environmentally friendly transportation, as major threats
because people are opting to take public transit/walk/cycle (Massey, 2015).
FINANCIAL RATIONS ANALYSIS
Ration analysis for Volkswagen for 3 years
(Euro million)
Ratios Formula 2014 2013 2012
Profitability ratios
Gross profit 36524 35600 35154
Operating profit 12697 11671 11948
Net profit 11068 9145 21881
Net Sales 202458 197007 192676
Gross Profit Ratio (Gross Profit/ Net Sales) *100 18.04%
18.07
% 18.25%
Operating Profit Ratio (Operating Profit/ Net Sales) *100 6.27% 5.92% 6.20%
Net Profit Ratio (Net Profit/ Net Sales) *100 5.47% 4.64% 11.36%
Liquidity ratios
Current Assets 131102 122192 113061
Current Liabilities 130706 118625 105526
Closing Stock 31466 28653 28674
Current Ratio
Current Assets / current
Liabilities 1.00 1.03 1.07
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.76 0.79 0.80
Efficiency/ Activity
Ratios
Net Sales 202458 197007 192676
Total Assets 0 324333 309518
Total Assets Turnover
Ratio Net Sales/ Total Assets 0.62 0.64 0.62
Cost of goods sold 165934 161407 437
Inventory 31466 28653 28674
Inventory Turnover ratio COGS/Inventory 5.27 5.63 0.02
Solvency ratios
Debt 76608 68349 70675
Equity 90189 90037 81995
Debt Equity Ratio Debt/ Equity 0.85 0.76 0.86
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Net income 11068 9145 21881
Annual Interest Expense 84 52 169
Times Interest Ratio Net Income/ Interest expense 131.76 175.87 129.47
Ration analysis for BMW for 3 years
(Euro million)
Ratios Formula 2014 2013 2012
Profitability ratios
Gross profit 17005 15268 15494
Operating profit 9118 7978 8275
Net profit 5817 5329 5111
Net Sales 80401 76059 76848
Gross Profit Ratio (Gross Profit/ Net Sales) *100 21.15% 20.07% 20.16%
Operating Profit Ratio (Operating Profit/ Net Sales) *100 11.34% 10.49% 10.77%
Net Profit Ratio (Net Profit/ Net Sales) *100 7.23% 7.01% 6.65%
Liquidity ratios
Current Assets 56884 52184 50530
Current Liabilities 59078 51134 43637
Closing Stock 11089 9595 9725
Current Ratio
Current Assets / current
Liabilities 0.96 1.02 1.16
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.78 0.83 0.94
Efficiency/ Activity Ratios
Net Sales 80401 76059 76848
Total Assets 154803 138377 131835
Total Assets Turnover
Ratio Net Sales/ Total Assets 0.58 0.58 0.58
Cost of goods sold 63396 60791 61354
Inventory 11089 9595 9725
Inventory Turnover ratio COGS/Inventory 5.72 6.34 6.31
Solvency ratios
Debt 47442 43053 43696
Equity 37437 35600 30606
Debt Equity Ratio Debt/ Equity 1.27 1.21 1.43
Net income 5817 5329 5111
Annual Interest Expense 519 469 375
Times Interest Ratio Net Income/ Interest expense 11.21 11.36 13.63
7

The financial ratio analysis is a technique to assess performance of company in monetary
terms. It is also a comparison tools that helps in comparing the financial performance of two
corporations, in this section the financial performance of Volkswagen and BMW is evaluated on
the basis of profitability, activity, solvency and liquidity ratios.
Profitability ratios
Comparing profitability through Gross Profit Ratio
The ratio represents the relationship between sales and gross profits earned by the
company. It has been witnessed that the gross profit of Volkswagen is lower than BMW's gross
profit for all the years. However, the net sales of Volkswagen are higher as compared to BMW
but the cost of goods sold is too huge in percentage terms (Annual report BMW, 2013). The
major reason for this decrease is that the Volkswagen is paying higher for suppliers purchase.
The more environmentally friendly approaches of Volkswagen directly affect its cost of
production which decreases gross profit. .
8
04/07/1905 05/07/1905 06/07/1905
0.16
0.17
0.18
0.19
0.2
0.21
0.22
18.04%18.07%
18.25%
21.15%
20.07%20.16%
Gross profit ratio
Volkswagen
BMW

Comparing profitability through Operating Profit Ratio
The operating profit margin includes the percentage of administrative expenses, selling
and distribution expenses over the sales of company. In this respect, operating profit of
Volkswagen is fluctuating for respective three years. Furthermore, it can be stated that the
company has earned decreased profits as compared to BMW due to its increased distribution and
transportation charges. However, introduction of Porsche has given opportunities to earn sales
but simultaneously it increases the distribution cost as there were many advance bookings. The
operating profit ratio was higher as compared to previous years so it has been said that company
was able to reduce operating cost (Annual report Volkswagen, 2014).
Comparing profitability through Net Profit Ratio
9
2014 2013 2012
0
0.02
0.04
0.06
0.08
0.1
0.12
6.27% 5.92% 6.20%
11.34%
10.49% 10.77%
Operating profit ratio
Volkswagen
BMW

The net profitability of business can be seen higher as compared to the BMW which is a
positive sign for improved business performance (Lampe and Hofmann, 2013). In 2012, there
was total higher net profit earned by Volkswagen as the company has introduced new branded
car in the marketplace. The success of Porsche, a brand of Volkswagen is the major reason of
earning profits continuously. In the years 2013 and 2014, the sales decreased because of
competitive strategies which was put by others car manufacturers. The major reason for
declining profits was that the company protested for not designing ozone-friendly car. However,
BMW has earned good net profit in the year 2013 and 2014 as compared to previous years as the
market conditions were favourable.
Liquidity ratios
Comparing liquidity performance through Current Ratio
10
2014 2013 2012
0
0.02
0.04
0.06
0.08
0.1
0.12
5.47%
4.64%
11.36%
7.23% 7.01% 6.65%
Net profit ratio
Volkswagen
BMW

The current ratio is the indication of ability of company to meet short term financial
needs of business. In other words, this ratio represents relationship between current assets and
current liabilities. The unfavourable current ratio is 2:1 where current assets need to be double
from liabilities (Murphy And Yetmar, 2010). In respect with, the two cars manufacturing
companies Volkswagen is having better position to pay short term financial obligations as
compared to BMW. However, in the year 2014 the ability of Volkswagen to pay current
obligation is decreased because it did not maintained enough cash in hand.
Comparing liquidity performance through Quick Ratio
11
2014 2013 2012
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1 1.03 1.07
0.96 1.02
1.16
Current ratio
Volkswagen
BMW

The graph above represents the quick ratio of Volkswagen and BMW and no difference
was found between both of them. The quick ratio indicates the firm’s liquidity position and it can
be seen as a complementary ratio to current ratio. However, in current assets the inventory is not
included (Annual report Volkswagen, 2014). The quick ration of BMW is higher than
Volkswagen is higher that represents the ability of BMW to convent assets in cash quick. Let's
see, the quick ratio of Volkswagen is continuously decreasing for all three years, this is not a
positive sign for future growth in respect with maintaining day to day business operations.
Efficiency/ Activity Ratios
Comparing efficiency of business through Total Assets Turnover Ratio
12
2014 2013 2012
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.76 0.79 0.80.78 0.83
0.94
Quick Ratio
Volkswagen
BMW

The assets turnover ratio represents the ability of the firm to generate sales from
available financial resources those are bound up with total assets. The total assets are divided by
total sales of the business. The ratio is too high for Volkswagen as compared to BMW in all the
years, hence it could be said that the assets of the company are making good use to earn
revenues. In other words, the reason behind increased assets turnover ratio is that Volkswagen is
going with good management or production policies. In other words, it can be said that
Volkswagen is capable of
earning sales through effective use of assets as per industry standards (Massey, 2015).
Comparing efficiency of business through Inventory Turnover ratio
13
2014 2013 2012
0.54
0.56
0.58
0.6
0.62
0.64
0.66
0.62
0.64
0.62
0.58 0.58 0.58
Total Assets Turnover Ratio
Volkswagen
BMW

Turnover is the major component that is used to evaluate performance of companies. This
is called as ratio which measures how effectively the stock is managed through comparing the
cost of goods sold and average inventory for a period. From the analysis made in the above
section it represents that company is selling average inventory for more times. From the analysis,
it can be seen that the inventory turnover ratio of BMW is higher than Volkswagen hence, it
could be said that Volkswagen is bearing huge holding cost as the inventory is stored in large
amount in business (Annual report Volkswagen, 2014). However, the company has to sell greater
amounts of stock for improving turnover. On the other hand, it could be said that BMW is good
at selling greater amounts of inventory as this reduces the holding and storage costs. The major
reason behind improved turnover for BMW is the focus of company to manufacture small cars.
Solvency ratios
Comparing solvency of business through Debt Equity Ratio
14
2014 2013 2012
0
1
2
3
4
5
6
7
5.27 5.63
0.02
5.72
6.34 6.31
Inventory Turnover ratio
Volkswagen
BMW

The major aim of calculating debt/Equity Ratio is to measure the financial leverage of
companies that is derived through calculating total liabilities over stockholders' equity. From the
analysis, it can be said that the debt to equity ratio of Volkswagen is low as compared to BMW
indicating that company has taken less debt financing options as compared BMW that indicates
low risk on business. It has also been witnessed that BMW mostly relies on debt financing
sources as it uses less equity sources (Annual report Volkswagen, 2014). It can be said that
Volkswagen is able to generate more earnings than in outside financing. The company also
increases profits while balancing the debt and equity sources as it has to pay few amounts in the
form of interest and it will also lead to increased shareholders benefit as well as they entitled to
earn more dividends.
Comparing solvency of business through Times Interest Ratio
15
2014 2013 2012
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
0.85
0.76
0.86
1.27 1.21
1.43
Debt Equity Ratio
Volkswagen
BMW

The time interest ratio is also renowned as interest coverage ratio that is used for
measuring the income of business to cover the interest expenses in the near future. From
analysing, time interest ratio of Volkswagen is much higher compared as to BMW hence, it
represents that the firm has an ability to make interest and debt service payments (Annual report
BMW, 2014). The higher times interest ratio is a good indication to Volkswagen Company as the
creditors can be made happier in the organization as it represents the ability of the company to
pay interest when it is due. It can be said that the solvency performance of Volkswagen is good
as compared to BMW.
CONCLUSION
The report presented in above section discussed the internal and external factors that
affects the business performance of a leading car manufacturing company namely Volkswagen.
From the analysis made through SWOT and Porter's it could be said that company has good
market image for offering affordable luxury car and it has less threats from new entrance but the
existing competition in the market is high which had led to huge threats. The financial
comparison made between both the entities represented that the profitability situation of
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04/07/1905 05/07/1905 06/07/1905
0
20
40
60
80
100
120
140
160
180
200
131.76
175.87
129.47
11.2111.3613.63
Times Interest Ratio
Volkswagen
BMW

Volkswagen in terms of net profit is not sound as compared to BMW. On the other hand, from
solvency and liquidity point of view the organization is positively positioned in the market. The
company has to improve its business practices through introducing eco-friendly and low carbon
emission cars. Volkswagen Group is also suggested to make investment for designing small cars
so that inventory turnover can be improved. These can be some ways through which the entity
can improve the financial condition.
RECOMMENDATIONS FOR INVESTORS
The financial analysis of corporate entities is important to make decisions in respect with
the investing money in respective companies. The investors and shareholders are the people who
invest money in the Volkswagen Group to earn good returns. The company is seen using large
amount of equity financing that can be good opportunities for shareholders to earn huge profits
however, the profitability of BMW group is better than Volkswagen Group on which basis the
potential investors are recommended to invest in BMW group. Recently in 2015, the emissions
scandal of Volkswagen has significantly influenced the BMW shares as they dropped to 2-year
low. The investment decision of investors is based on the fact that how much eco-friendly cars
are going to be produced by Volkswagen as per emissions standards (Shing, 2015). On the other
hand, it could be said that BMW is the only luxury car manufacturing company that provides
opportunity to own cheap share, and the valuation of shares is eight times P/E ratio as per
forecast earnings. Hence, the investors are recommended to invest in BMW group as investors
will surely get generous income in terms of dividend yield of over 4%.
17

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