Financial Analysis of Volkswagen: Impact, Ratios, and Performance

This report presents a comprehensive financial analysis of Volkswagen, examining the impact of external factors such as political, economic, social, technological, legal, and environmental influences on the company's operations. It delves into the application of ratio analysis, including activity, liquidity, solvency, and profitability ratios, to assess Volkswagen's financial health and performance over a three-year period (2012-2014). The analysis covers key ratios like inventory turnover, fixed asset turnover, asset turnover, current ratio, quick ratio, debt-to-equity, net profit ratio, gross profit ratio, earnings per share, price-to-earnings ratio, and return on equity. The report interprets the trends and implications of these ratios, providing insights into Volkswagen's efficiency, liquidity, solvency, and profitability, while also considering the company's ability to manage its assets and liabilities. The analysis aims to provide a detailed understanding of Volkswagen's financial position and its response to various external factors and market dynamics.

FINANCIAL ANALYSIS

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
Impact of external factors upon the activities and operations of Volkswagen............................3
Ratio analysis..............................................................................................................................6
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Financial analysis can be defined as a process through which various stakeholders and
organization itself assesses the financial performance of the company. It enables the finance
manager to make better financial decisions which contributes in achieving organizational aims
and objectives. Financial statements consist of income statement, cash flow statement and
balance sheet of an organization. It provides deeper insight to an organization regarding its
financial activities and performance. Through this, finance manager is able to frame competent
strategies and policies (Robinson and et.al., 2015). This report will discuss impact of external
factors upon the business operation and functions of Volkswagen. It also depicts the analysis of
liquidity and financial performance of Volkswagen as compared to its competitors. This report
compares the two automobile companies with the help of ratio analysis.
Impact of external factors upon the activities and operations of Volkswagen
There are various external or macro environmental factors which closely affect the
activities and operations of Volkswagen. These factors include political, economical, social,
technological, legal and environmental factors. Company has no control over these factors and it
closely impacts the decision making of an organization (Wahlen, Baginski and Bradshaw, 2014).
Besides this, it also affects the productivity and profitability aspects of the firm. External factors
which affect the performance of Volkswagen are enumerated below:
 Political factors: Political factors differ from country to country and impact the strategies
and policies of an organization. Thus, Volkswagen faces high level of political issues as it
operates in more than 150 countries. Therefore, individual strategy and policy in not
suitable for achieving success in all over the world. Besides this, government and
financial institution closely affects the sales and gross margin of Volkswagen. In the
present era, people prefer to buy car by taking loan. Thus, if financial policies in relation
to the loan and advances made by the government are not favorable then it negatively
impacts the sale of an organization (Hoskin, Fizzell and Cherry, 2014). Volkswagen faces
difficulty in understanding the political issues or policies which are imposed by
government of different country. For instance: policies made by Canada are different
from India. In this, Volkswagen is required to make efforts to understand political aspects
of the country to attain success.

 Economical factors: Automobile industry plays a vital role in the growth and
development of the country. It is one of the main sectors which highly contribute in the
national income of the country. Volkswagen also contributes in GDP of the country in
which it operates. Volkswagen also provides assistance in the growth and development of
other industries such as steel, glass etc. In addition to this, economical conditions such as
inflation and deflation also affect the sales revenue of the organization.
In inflation, purchasing power of the customers increases which proves to more profitable
for an organization. In case of deflation customers are not in the situation to invest money for
their luxurious life style. In order to cope up with deflation Volkswagen needs to focus on
production of car which meets the demands of the lower segment. Along with that, prices of fuel
also impact the sales of the car (Wang, 2014). Therefore, Volkswagen is required to undertake
research and development activity to assess alternative of fuel and diesel. It provides help to
Volkswagen to build and sustain competitive advantage over others.
 Social factors: Society closely affects strategies and policies of the automobile industry.
Social factors play a crucial role in the success of an organization. Volkswagen offers
several direct and indirect employment opportunities to people of the society in which it
carry out its business operations. Volkswagen employs more than 502000 employees and
thereby, raises the living standard of people of the nation. Through this, Volkswagen
fulfills its social responsibility and contributes in the development of country.
In contrary to this, religion, perception and income also affect the marketing strategies
and policies of an organization. Thus, Volkswagen needs to be taken into consideration all these
factors while taking marketing decisions. Besides this, high percentage of road accidents
negatively affects buying decision of potential customers. In order to resolve this issue
Volkswagen needs to produce car which contains proper health and safety aspects. Through this,
Volkswagen is able to build and sustain competitive advantage over others.
 Technological factors: In automobile industry, technology plays an important role in
getting strategic advantage over the competitors. In the present scenario, technological
changes take place very quickly in business environment. Volkswagen posses the best
technology and offers classical and sports car to the high income segment (Radebaugh,
2014). Technology is the main factor on which the success of an organization depends.
Besides this, after sales service of Volkswagen is highly advanced as uses technology in

their services. Through this, company is able to build and maintain satisfaction among
customers. It provides more benefit to the organization in terms of high level of sales and
profit.
 Legal factors: Laws and legislation also differs from one country to another which
imposes great challenge in front of Volkswagen. Various laws such as consumer
protection law, labor laws, intellectual property law and laws in relation to the taxation
are not same in every country. These laws and legislation closely impacts the functioning
of an organization. Volkswagen performs its business activities and functions in more
than 150 countries. Volkswagen needs to import raw material and export its produced
cars to build its strategic presence in the world. In this, legal policies and regulations
affect the strategies of an organization (Liddle, 2014). In order to deal with legal aspects
more effectively and efficiently Volkswagen is required to understand these policies
before entering in the market.
 Environmental factors: Automobile industry place big impact upon on the environment
of nation. Car manufacturing techniques closely affect the environmental aspects as
companies thrown waste materials in the water and open area. Car uses diesel and petrol
which is one the main cause of the pollution. Besides this, car manufacturing companies
uses steel, glass and other raw material. Thus, companies who produce steel through the
transformation of iron may cause the pollution of air and water. Along with it, use of cars
also affects roads and other elements of the environment. In order to maintain healthy and
safe environment Volkswagen needs to produce eco-friendly cars. Besides this, firm is
required to make investment in research and development activity to find out ways
through which it can reduce the pollution. It is the responsibility of organization that they
should pollute the environment.
Apart from it, competition also impacts the financial performance of an organization.
Volkswagen faces stiff competition in the market in relation to the price, technology and other
aspects. To survive in the competitive business environment, Volkswagen needs to set optimum
price of the cars as compared to the rival firms. As per the competition act, no firm can create
monopoly situation in the market (Lochhead and et.al., 2015). This act also restricts the
automobile firm to exploit the customer base by charging high prices. It also helps in developing
healthy competition in the market which proves to be more fruitful for the customers.

Ratio analysis
Ratio analysis can be defined as a tool which helps in analyzing the financial statement of
an organization. It provides valuable information to the firm on in relation to their liquidity and
financial position. It summarizes the financial statement such as income statement, cash flow
statement and balance sheet a company (Ratio Analysis, 2015). Ratio analysis enables the
manager of an organization to assess its financial health as well as performance and take
corrective action at appropriate timing. Besides this, it also provides information regarding the
efficiency of an organization in carrying out its business practices (Yannoutsos and et.al., 2014).
To assess the financial position and performance of Volkswagen, various ratios are calculated
which are enumerated as below:
Ratio analysis of Volkswagen
Particulars Formula 2012 2013 2014
Activity or Efficiency
Ratios
Inventory turnover Costs of goods sold / Average
inventory at cost
5.60 5.63 5.52
Fixed assets turnover Net sales / average fixed assets 4.22 3.87 4.57
Asset turnover Net sales / average total assets 0.68 0.62 0.60
Liquidity Ratios
Current Ratio Current Assets / Current 1.07 1.03 1

Liabilities
Quick ratio Liquid Assets / Current
Liabilities
0.79 0.78 0.75
Solvency Ratios
Debt to equity ratios Total Liabilities / Stockholder’s
equity
0.82 0.70 0.75
Current Asset to
Equity Ratio
Current Assets / Stockholder
equity
1.16 1.13 1.08
Profitability Ratios
Net Profit ratio Net profit after tax / Net sales 7.11 2.79 5.36
Gross profit ratio Gross Profit / Net sales 18.2 18.1 18.0
Investment ratio
Earnings per share Net income – Preferred dividend 9.28 3.73 4.37

/ Weighted average no. of shares
outstanding
PE ratio Market price of share/ EPS 13.90 31.17 42.07
Return on equity 0.28 0.1 0.12
Activity or efficiency ratio: It states the way in which company performs its activities by
using the assets of an organization. Besides this, it also indicates the ability of firm in relation to
the management of its liability as well (Knizley, Mago and Tobermann, 2015). Activity ratio
states the revenue which firm generates by making optimum utilization of its assets. Inventory turnover ratio: It helps in assessing the efficiency of an organization in
managing its inventory level. Inventory turnover ratio states the time period during which
the inventory of organization is sold (Huang and et.al., 2014). On the basis of above
mentioned figures, it has been interpreted that Volkswagen manages its inventory
effectively and efficiently. In 2012 and 2013, inventory turnover ratio is 5.60 and 5.63,
however, in 2014; it is 5.52 which shows decreasing trend in the inventory turnover ratio
year by year. On the basis of this, it can be assessed that customers of Volkswagen are
more satisfied and loyal towards the brand. Fixed asset turnover ratio: This ratio will help in assessing the firm's ability in generating
sales by making effective utilization of fixed assets (Fixed Asset Turnover Ratio, 2015).
Through this, company can assess the effectiveness of its policies and strategies. As per
the above calculation, it can be interpreted that in 2014, Volkswagen generates high sales
revenue as compared to 2013 in which it is 3.87. In 2014 and 2012, fixed asset turnover
ratio is 4.57 and 4.22 which shows that business strategies of Volkswagen are sound.

 Asset turnover ratio: It is a financial ratio which provides deeper insight to the
organization about the effectiveness of its strategies and policies (Zhang and et.al., 2014).
It indicates the sales revenue which company generates by utilizing total assets of an
organization. Asset turnover ratio of Volkswagen lies in between .68 to .60 in the past
three years. This ratio is decreasing and in 2014, it was .60. It states that Volkswagen
fails to utilize its assets to the optimum level.
Liquidity ratio: Liquidity ratio helps company in assessing its own ability in order to
meet the financial obligations to cover the current assets. It helps company in understanding that
it has sufficient fund and not required to meet its short term debt which are due to the firm
(Viswanathan and et.al., 2014).
 Current ratio: This ratio indicates the firm’s ability to meet its current obligations over
the current assets of an organization (Garnier and et.al., 2015). Ideal current ratio is 2:1
which entails that company needs to have 2 current assets to meet its 1 current liability.
In 2014, current ratio of Volkswagen was 1 as compared to the previous years. It is not a
good sign for Volkswagen so it needs to frame competent strategies to manage its current
assets.
1 1
Current assets
Current liabilities
 Quick ratio: It helps the firm in assessing the level of current assets which can be easily
converted into cash. In 2012 and 2013, quick ratio of Volkswagen was .79 and .78 which
is a good sign for company. It indicates that firm has enough marketable securities and
other liquid assets which helps Volkswagen in meeting its short term debt. In 2014, quick
ratio of the firm is .75 so, it needs to make efforts to maintain the ideal quick ratio by
framing effectual strategies.

0.75
1
Liquid assets
Current liabilities
Solvency ratio: It indicates the firm's ability to meet its long term debt or obligation. It
places more emphasis upon the long term sustainability of company rather than the payment of
short terms debt (Bay, Chan and Walczyk, T., 2015).
 Debt to equity ratio: It is a measure through which organization and other stakeholders
can assess the financial structure of an organization. Ideal debt-equity ratio is .5:1 which
represents that company needs to raise more finance through equity rather than debt
sources. In 2014, debt-equity ratio of Volkswagen is .75 which is lesser than the previous
year. It is more profitable for the firm if it raises finance through equity sources.
0.75
1
Debt
Equity
 Current asset to equity ratio: It represents the use of equity sources which company
makes in order to buy the current assets. Current asset to equity ratio of Volkswagen
shows consistency in the use of shareholder’s equity to buy the current assets.

0.15
1
Current assets
Stockholders equity
Profitability ratio: This ratio helps the organization in assessing profitability aspects of
the firm. It enables company to compare its profit with the previous years and to evaluate the
strategies adopted by an organization (Brand and et.al., 2014).
 Gross profit ratio: GP ratio of Volkswagen shows consistency in its profitability
condition. In 2012, 2013 and 2014, GP ratio of company was 18 which show that
company adopts similar strategies in all the years. In 2014, GP ratio of Volkswagen
shows minor difference in the profits, thus, organization needs to frame effective
strategies to raise the sales revenue of company.
 Net profit ratio: In 2012, net profit ratio of Volkswagen was 7.11 whereas, in 2012, it was
2.79. Net profit of organization shows decreasing trend in the performance of business. In
2014, NP ratio was 5.36 which was improved from the previous year. In order to attract
shareholders and to improve the profitability aspects, Volkswagen needs to frame cost
effective strategies and policies.
 Earnings per share: Earnings which shareholders get by investing money in Volkswagen
in continuously decreasing from 9.28 to 4.37. It places a negative impact upon the
shareholders.

Net Profit ratio Gross profit ratio Earnings per share
0
2
4
6
8
10
12
14
16
18
20
2.79
18.1
3.73
5.36
18
4.37
Column C
Column D
Column E
Ratio analysis of Toyota
To assess the competitive position of Volkswagen as against to its competitors, ratio
analysis of Volkswagen is taken into consideration which is as follows:
Activity or Efficiency Ratios 2012 2013 2014
Inventory turnover 11.17 11.17 11.52
Fixed assets turnover 2.96 3.37 3.55
Asset turnover 1.13 0.67 0.67
Liquidity Ratios
Current Ratio 1.05 1.07 1.07

Quick ratio 0.86 0.89 0.9
Solvency Ratios
Debt to equity ratios 1 0.6 0.59
Current Asset to Equity Ratio 1.17 1.14 1.09
Profitability Ratios
Net Profit ratio 11.27 4.6 5.33
Gross profit ratio 18.24 18.07 18.04
Investment ratio
Earnings per share 180 607 1150
PE ratio 0.48 0.19 0.1
Return on equity 0.03 0.08 0.13
Activity or efficiency ratio:

 Inventory turnover ratio: In 2012 and 2013, inventory turnover ratio was constant as it is
11.17. Whereas, in 2014, it is 11.52 which depicts that sales strategies and policies of
Toyota is less effective as compared to the previous one.
 Fixed asset turnover ratio: In 2012, fixed asset turnover ratio was 2.96 whereas, in 2014,
it was 3.55. It shows upward trend in the performance of Toyota. On the basis of this, it
has been assessed that Toyota attains success in making optimum utilization of its assets
which makes high contribution in the revenue.
 Asset turnover ratio: Toyota fails to make effective utilization of its assets in 2013 and
2014. As compared to 2012 in which it was 1.13, in the upcoming years, it will be
decreasing. It states that there are few assets which become obsolete so Toyota needs to
replace it to increase the sales of corporation.
Liquidity ratio:
 Current ratio: Current ratio of Toyota is 1.07 in 2013 and 2014, whereas, in 2012, it is
1.05. Current ratio of company is increasing which is good for the firm but still it is very
far from the ideal ratio. Thus, organization needs to make focus upon increasing the sales
of an organization. To increase the current ratio, Toyota needs to avoid the sales on credit
basis.
 Quick ratio: Quick ratio of company exceeds the ideal ratio in 2012, 2013 and 2014. It is
good but Toyota should make investment in other productive activities rather than
retaining the high amount in terms of quick assets.
Solvency ratio:
 Debt to equity ratio: As compared to previous year, in 2014, debt equity ratio of Toyota
is .59 which meets the ideal debt equity ratio. It indicates that financial structure of an
organization is sound.
 Current asset to equity ratio: On the basis of above mentioned analysis, it has been
interpreted that Toyota uses less money of shareholders for purchasing the current assets
as compared to previous years. It develops goodwill of the organization in the minds of
investors.
Profitability ratio:

 Gross profit ratio: GP ratio of Toyota is consistent in the above mentioned financial year.
Thus, company needs to make focus upon the marketing strategies to raise the sales of
organization. Net profit ratio: NP ratio of Toyota shows heavy fall in the net profit of company. NP
ratio of the firm is 11.27 in 2012, whereas, in 2014, it was 5.33 which are not good for
the organization.
Comparison
On the basis of above mentioned analysis, it can be interpreted that efficiency ratio such
as inventory, asset and fixed asset turnover ratio of Volkswagen is good as compared to Toyota.
In contrary to this, liquidity position and performance of Toyota is sound as against to
Volkswagen. It can be assessed that Volkswagen is less able to meet its financial obligations in
comparison to Toyota. In addition to this, GP ratio of both companies shows consistency in their
performances. However, net profit of Volkswagen is high as compared to Toyota which entails
that Volkswagen has the fund to make investment in the other productive purposes. Through this,
Volkswagen can build an effective image in the minds of investors. Higher profitability states
that company is able to pay dividend to its shareholders. Further, existing or potential
shareholders get very less return by investing in the share of Volkswagen as compared to Toyota.
CONCLUSION
From this project report, it has been concluded that macro environmental factors highly
impact the business activities and operations of Volkswagen. Company needs to take into
consideration all these factors before making any business decision. It can be seen in the report
that financial position and performance of Toyota is not very sound as compared to Volkswagen.
Thus, Volkswagen needs to frame competent strategies in order to improve its liquidity and
profitability aspects. It helps company in building and sustaining distinct image in the minds of
target market. It can be summarized that earning per share of Volkswagen shows high level of
decreasing trend such as from 9.28 to 4.37. It creates a negative image in front of the existing
and potential shareholders.

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