Financial Performance Analysis of BMW: Accounting Ratios Report

This report provides a comprehensive financial analysis of BMW, a leading German automobile and motorcycle manufacturer, using various accounting ratios. The analysis covers key areas such as liquidity, profitability, efficiency, and gearing, employing financial data from 2017 and 2018. Liquidity ratios, including current and quick ratios, are examined to assess BMW's ability to meet short-term obligations. Profitability ratios, such as gross profit and operating profit ratios, are used to evaluate operational performance and revenue generation. Efficiency ratios, including average payable turnover and account receivable turnover ratios, are assessed to evaluate the company's operational effectiveness. Finally, gearing ratios, including debt-to-equity and debt ratios, are analyzed to determine the company's financial leverage and risk profile. The report provides calculations and interpretations of these ratios, offering insights into BMW's financial health and strategic decisions, highlighting changes in performance between the two years and providing recommendations for improvement.

Accounting and finance
analysis of a listed
company

EXECUTIVE SUMMARY
This report done the financial analysis with the help of various accounting ratios. It
further help the organization to analyse accounting information with the help of various
information. Managers of BMW company evaluate different types of ratios which effect the
business operations. So they have to develop their strategy accordingly and make sure to
maximise the production as well as profitability. With the help of financial ratios, managers able
to evaluate the efficiency as well as effectiveness.

Table of Contents
EXECUTIVE SUMMARY ............................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Accounting and financial analysis is the measurements which help the business to
organize their financial information and daily transaction. It will used for the further analysis
where management of the company develop various strategic decisions in order to achieve the
organizational goals & objectives (Loughran and McDonald, 2016). Accounting process include
the recording, summarizing, analysing and reporting which is beneficial for the owner as well as
their stakeholders for their future decisions. Financial analysis is the process of evaluating
business project, budget and the finance related activities. For the better understanding of this
concepts, this report select the BMW which is Germany based company and produce auto-
mobile & motorcycles. Company founded in 1916 by Camillo Castiglioni and in the 2015, BMW
is the world's 12th largest motor vehicle manufacturing units. This project report cover the
financial ratios of the company which help the internal as well as external parties to make
financial or strategic decisions.
MAIN BODY
Liquidity ratio:
Current ratio: It is one of the major used accounting ratio which help the organization to
meet their business obligations such as payment of suppliers, debt etc. All the required
information will be collected from balance sheet of the company which include the financial data
(Current ratio, 2019). With the help of current ratio, managers of BMW able to know about their
liquidity and pay its short term obligation to meet the operational requirements.
Formula:
Current ratio = Current Asserts / Current Liability
Calculation:
Liquidity ratio 2017 ( £ ) 2018 ( £ )
Current Assets 24280 28545
Current Liability 23712 27098
Current Ratio 1.02 1.05
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From the above mention it has been interpret that BMW report the 1.02 current ratio in
the 2017 and 1.05 in 2018. There is no such enough differences between the ratio of different
year. Ideal ratio is 2:1 which is near by the company but management have to analyse in proper
manner and make strategies accordingly. High current ratio indicate that company have huge
valued assets in comparison to liabilities. Or it is possible to have inventory in huge amount
which is not goods to store for longer period which can cause the wastage of material.
Quick ratio: It is the indicator which shows the short term liquidity position of the
organization. It is almost similar to the current ratio but exclude the inventory as well as prepaid
expenses (Purnomo, 2018). Ideal ratio is about 1:1 which can vary according to the different
industry and make sure to maintain the value of assets, so they can immediate pay their short
term obligations. Managers of BMW evaluate their business position with the help of ratio
analysis and it's calculation discussed below:
Formula: Quick ratio = (Current assets – inventory – prepaid expenses) / Current liability
Calculation:
Liquidity ratio 2017 ( £ ) 2018 ( £ )
Quick asset 19469 23902
Current liabilities 23712 27098
Quick ratio 0.8210610661 0.8820577164
Quick ratio of BMW was 0.821 in 2017 while in 2018 it was around 0.882 which is good
because ideal ratio is 1:1 which means company should have equal amount of assets to pay off
their obligations. Managers of the company have to make sure that it will maintain around its
ideal ratio otherwise company enable to meet their short term obligations. As per above results
BMW company is sufficient to perform their operational functions and meet the daily
requirements.
Profitability ratio:
Gross profit ratio: It is the profitability ratio which shops the relationship between gross
profit and the net sales revenue. With the help of it, business able to evaluate their operational
performance and develop strategies accordingly (Pangesty, 2016). BMW used to calculate this
ratio and measure their gross profit margin from the operations which is used for internal as well
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as external analysis. Below mention calculation shows the annual performance of the company
which is used by the managers to check the efficiency as well as effectiveness.
Formula:
Gross profit ratios = ( Gross profit / Net Sales ) * 100
Calculation:
Probability ratio 2017 ( £ ) 2018 ( £ )
Gross profit 14514 16398
Net sales 461 461
Gross profit ratio 31.4837310195 35.5704989154
Above mention calculation shows that gross profit of BMW company in 2017 was 31.48
and in 2018 it was 35.57 which increased. It is beneficial for the company to raise their gross
profit but they have to identify the reason and further applied in the future decision making
process. It helps in analysing the revenue of company from it's total sales. In 2018, company
make high profit in comparison to 2017 because higher the gross profit indicate the higher
revenue generated by the company for it's financial year.
Operating profit ratio: It is also a part of profitability ratio which indicate that how
much profit company have after deducting all the variable costs such as wages of labours, raw
material etc. It also represent in percentage form which indicant the efficiency to control the
production cost and other expenses (Khadafi, Heikal and Ummah, 2014). Managers of BMW
analyse the achieved return from the production what further actions required to maximise the
production as well as profitability of the company. It will be calculated below:
Formula:
Operating profit ratio = (Operating profit / Net sales) * 100
Calculation:
Probability ratio 2017 ( £ ) 2018 ( £ )
Gross profit 14514 16398
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Operating expenses 1026 303
Net sales 24563 24563
Operating profit 623353 46116
Operating profit ratio 54.911859301 34.901118918
From the above calculation, operating profit ratio represent that gross profit increases
from 2017 to 2018 which create the difference. It means company have to bear high operational
cost which reduce the operational profit which further impact the final results. Basically, in
BMW company, operational profit decreases due to decrease in operation expenses from 1026 in
2017 to 303 in 2018. With the help of this ratio, business able to evaluate their financial position
and make further strategies accordingly. Operating profit of the BMW company is decreases
from 54.91 to 34.90. So managers have to focus on various cost which related to the operations
and try to minimise it.
Efficiency and operation:
Average Payable Turnover ratio: It is an financial ratio which evaluate that how fast
company pay off their creditors and how much time period they will take to pay off the entire
amount (Lyngstadaas and Berg, 2016). Lower the period is beneficial and high period which
expand the duration. It help the managers of BMW to measure cash situation in the company. It
is also consider the payable turnover ratio of the company which used to evaluate that in how
many time period company pay off their creditors.
Formula:
Average Payable Turnover ratio = Total purchase / Average account payable
Calculation:
Efficiency ratio 2017 ( £ ) 2018 ( £ )
Net credit purchase 15787 15419
Average account payable 4811 4643
Account payable turnover ratio 3.2814383704 3.3209132027
It has been interpret that, Account receivable turnover ratio of the BMW company is
around 3.28 in 2017 and 3.32 in 2018 which almost same. It means company maintain the
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consistency in the credit purchase as well as in account payable. Management also ensure that
they have to pay off their liability as fast as they can.
Account receivable ratio: This ratio used to calculate the efficiency as well we
operational effectiveness to collecting debt. High ratio indicate that company is efficient to
collect its receivables and they enjoy high quality customer base which make them capable to
pay off their debt quickly (GANG and et.al., 2014). All the information founded in companies
income statement which used by the management to evaluate the efficiency as well as
effectiveness. Formula and calculation of ratio mention below which is based on the financial
information of BMW company. Further it is used for the internal as well as external analysis
make strategic decisions.
Formula:
Account Receivable Turnover ratio = Net credit sales / Average account receivable
Calculation:
Account receivable turnover ratio 2017 ( £ ) 2018 ( £ )
Net credit sale 24563 2456
Average accounts receivable 13112 11234
Account receivable turnover ratio 1.8733221477 0.2186220402
Account receivable turnover decreases which indicate that BMW can recover their
money more faster in comparison to previous year. Lower the recovery period is beneficial for
the company. High turnover expand the time period which make the company more depended on
debt. So management have to ensure that company recover their amount as soon as possible they
can do.
Gearing ratio:
Debt to equity ratio: This ratio used to evaluate the financial leverage of the company
and it is one of the important one which used in the corporate finance. It helps in measuring that
how company financing their operational activities through debt or wholly owned funds. This
ratio comes under the gearing ratio where organizations have to compare their total liability with
total equity shares (Nurfadillah, 2016). Formula and calculations of financial ratio of BMW
company is cancellated below which used by the management to make their strategic decisions
in order to maximise the productivity as well as profitability through reducing cost. All the
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information can easily available in the balance sheet which used to evaluate this ratio and
external parties such as stakeholders analyse the ratios because it helps in making decisions
regarding future investments.
Formula:
Debt to Equity ratio = Total Debt / Total Equity shares
Calculation:
Gearing ratio 2017 ( £ ) 2018 ( £ )
Short term debt 45352 42352
long term debt 42651 3265
Total Debt 88003 45617
Shareholder equity 15787 15419
Debt to equity ratio 5.5743966555 2.9584927687
It has been analysed that debt to equity of the company reduces from 2017 to 2018 and it
was around 5.57 to 2.95. Ratio decreases because total debt of the company also reduces and it
will indicate that BMW company have to face low risk which is good for them. Basically there
are low risk for BMW which create more opportunity to expand and maximise the production as
well as profit margin.
Debt ratio: Under this ratio, managers measure the leverage of the company and debt
ratio will be represented in decimal or percentage form. Debt equity ratio evaluate the proportion
of total assets that financed by the debt. If dent ratio is more than one then it means, liabilities are
more than total assets (Jin, Yang and Yin, 2015). In addition, high ratio means company have
high risk and low ratio indicate the low risk but grater assets of the company founded in terms of
high equity. This ratio also called debt to assets ratio and its formulate and calculation mention
below by using financial information of BMW company.
Formula:
Debt ratio = Total debt / total assets
Calculation:
Gearing ratio 2017 ( £ ) 2018 ( £ )
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Short term debt 45352 42352
long term debt 42651 3265
Total Debt 88003 45617
Total assets 195506 208980
Debt ratio 0.450129408 0.218284046
Above mention table represent that in 2018, risk of the company reduces in comparison
to previous year. In 2017, Debt ratio was 0.45 and in 2018 it was 0.21 which is lower than the
2017. It means company pay off their debt which is beneficial for the BMW company to reduce
their obligations.
Investment and market related ratio:
Return on equity:
It is a measure of business profitability to equity. Return on equity is also terms as assets
minus liabilities and net assets. In addition with this, it is mainly a financial performance which
is duly get calculated by dividing net income by shareholder equity. As shareholder is mainly
equal to organization assets minus debts of entity. ROE is mainly verbalised as percentage and
further be effectively calculated for any organization if their income as well as equity both are in
positive form of number (Ichsani and Suhardi, 2015). Thus, it has been determined that equity
ratio is mainly acts as profitability ratio that effectively measure organization ability as to further
generate profit form their shareholders investment within an entity. Further it has been stated that
Return of equity measures depicts the measure at which an organization can effectively utilize
their money from shareholders as top further generate grow as well as profitability for
organization.
Formula:
Calculation:
Investment and market related ratio 2017 ( £ ) 2018 ( £ )
Return on equity
Net income 24563 24563
Average shareholder equity 15241 15046
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Return on equity 1.6116396562 0.1632327529
Above calculation shows that return on equity of BMW company has reduces which may
have many reasons such as market condition, production reason and the low economy etc. As per
above table, return on equity decreases from 1.611 to 0.163. management have to analyse the
data and identify the reasons and make sure to implement it in well manner.
Profit to earning ratio:
Price-earning ratio mainly related company's share price mainly to their earning per
share. This ratio is basically for valuing an organization that significantly measures their current
share price relative to their per -share earnings. P/E ratio is also termed as earning multiple and
price multiple. In addition with this, it is determined that P/E ratio is mainly undertaken by
analyst and investors as to effectiveness evaluate relative value of organization share. With the
help of this ratio organization can further able to effectiveness make formative comparison
against their own historical record (Andansari, Raharjo and Andini, 2016) . Price earning ratio is
mainly the ratio of organization current share price to their earning per share. With the help of
this, investors can effectively able to identify the organizations those who have high growth of
stocks in marketplace. This significantly states that investors hold higher expectations for future
earning growth. While on the other hand, organizations those who have low price earning ratio
are mainly considered to be undervalued stocks.
Formula:
Profit to earning ratio = Market Share / Earning per share
Calculation:
Investment and market related ratio 2017 ( £ ) 2018 ( £ )
Market Share 8.84 8.05
Earning per share 1.2245518465 0.3247292302
Profit to earning ratio 7.245901639 24.78988416
Above table represent the profit to earning ration where business calculate the profit
margin which they earn due to increase in market share of BMW company. In 2017, price to
earning ratio was 7.24 approx and in 2018 it was around 24.78 there is huge difference in the
earnings because of difference in earning per share.
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Market ratio:
Earning per share (EPS) :
EPS is one of the most important financial measure that mainly states probability of
organization. Earning per share is calculated by dividing entity net income with overall number
of outstanding shares. This further indicated that higher the rate of earning per share of
organization that better the organization is. EPS metric acts as most essential variable with the
help of which effective determination of share price is being done in best effective manner.
Further it has been determined that it is major component that is mainly undertaken as to make
effective calculation of price-to-earning( P/E) valuation ratio (Nurfadillah, 2016). With the help
of this calculation investors can effectiveness able have overview of value of stock in terms if
how much market is willing to pay for each £ of earning. Earning per share can be calculated in
different manner like eliminating extraordinary items and discontinued operations on dilute
basis.
Formula:
Earning per share (EPS) = Net Income / Outstanding shares
Calculation:
market ratio 2017 ( £ ) 2018 ( £ )
Total Income 24563 24563
divided 5231 2551
shareholder equity 15787 15419
Net Income 19332 5007
Earning per share 1.2245518465 0.3247292302
Earning per share of BMW company in 2017 was 1.22 and in 2018 it was 0.32 which
reduces in comparison to last year. This ratio indicate that how much organizations earn through
selling their single share. Difference will created due to net income which was reduces from
19332 to 5007 in 2017 to 2018.
CONCLUSION
From the above discussion it has been concluded that accounting as well as financial
analysis are essential elements for the organization which make them capable to achieve business
goals & objectives. There are various types of financial ratios which provide different
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