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Financial Statement AnalysisThe Bmw Group
155575201295Financial Statement Analysis:The Bmw Group
Charlotte Gross
6900096000Financial Statement Analysis:The Bmw Group
Charlotte Gross
5673725201295Business Finance II
2420096000Business Finance II
Table of Contents
TOC o “1-3” h z u HYPERLINK l “_Toc386971986″Executive Summary PAGEREF _Toc386971986 h 3
HYPERLINK l “_Toc386971987″Introduction PAGEREF _Toc386971987 h 4
HYPERLINK l “_Toc386971988″The BMW Group PAGEREF _Toc386971988 h 4
HYPERLINK l “_Toc386971989″The History PAGEREF _Toc386971989 h 4
HYPERLINK l “_Toc386971990″Corporate Governance PAGEREF _Toc386971990 h 5
HYPERLINK l “_Toc386971991″Organizational Structure PAGEREF _Toc386971991 h 5
HYPERLINK l “_Toc386971992″The Business Strategy PAGEREF _Toc386971992 h 6
HYPERLINK l “_Toc386971993″The Product Lifecycle PAGEREF _Toc386971993 h 7
HYPERLINK l “_Toc386971994″Competitor Analysis PAGEREF _Toc386971994 h 7
HYPERLINK l “_Toc386971995″Competitiveness PAGEREF _Toc386971995 h 8
HYPERLINK l “_Toc386971996″Financial Analysis PAGEREF _Toc386971996 h 8
HYPERLINK l “_Toc386971997″Financial Performance PAGEREF _Toc386971997 h 8
HYPERLINK l “_Toc386971998″Sales PAGEREF _Toc386971998 h 9
HYPERLINK l “_Toc386971999″Profitability PAGEREF _Toc386971999 h 10
HYPERLINK l “_Toc386972000″Capital Structure PAGEREF _Toc386972000 h 11
HYPERLINK l “_Toc386972001″Ratio Analysis PAGEREF _Toc386972001 h 11
2) Describe the capital structure of the company, what kind of debt is used, calculate and comment on debt ratios. Benchmark with main competitors of the company.3) Explain the company’s policy in terms of leasing and whether it uses operating and/or financial lease.4) Ratio analysis: Apply techniques learnt in class, trying to include added value comments related to the ratio result (suggestion: benchmark with main competitors and try to reach conclusions related to differences). Evaluate Company’s leverage, liquidity, efficiency, profitability and market value.5) Evaluate company’s working capital management, as well as short-term and long-term financial policies.6) Finally, give your view on the following question: If you were the new Company’s CFO, what changes would you suggest, in terms of financing strategy and financial policies or choices? Explain your recommendations.
The BMW Group: Executive Summary
This report seeks to provide the overall performance of BMW group and the strategic measures put in place by the company to survive in an environment that is very competitive. The company has a rich history of success in the motor industry as it involves services such as developing, assembling, selling cars, manufacturing, and a variety of financial services. The company has in the past been ranked the most valuable car brand name in the whole world as it has 140 global sales offices and employing over 100,000 people across the world. The report will provide the basic organizational structure of the company and how corporate governance has contributed to the success of the company. Due to the fact that the company has a target market whose customers vary greatly in their tastes and preferences, the company has put in place strategies that will ensure that all its customer needs are satisfied across the world. The report also explores the strategies that the company has put in place to project and forecast the future in order to improve the efficiency of the company in the dynamic global market.
The number one determinant of success of any company is the maintenance of leadership and efficiency through innovation. This report presents the measures adopted by BMW to counter its major competitors in the motor industry. Proper financial analysis and investment in development and research are some of the factors identified to give BMW a competitive advantage and thereby making it continue being the market leader. The company has also used the strategy of brand acquisitions to diversify its operations in different target markets. The report also presents a summary of financial performance and most notably how its sales volume has performed globally. The financial report also presents the company’s profitability compared to its performances in the previous years. The last part of the report focuses on the company’s management of its capital in relation to its objectives and the mission statement.IntroductionThe Bavarian Motor Works were launched in 1916. It is a German automobile, motorcycle and engine manufacturing company, headquartered in Munich. Their automotive segment consists of developing, manufacturing, assembling, selling cars, off-road vehicles & spare parts and accessories, while they as well offer financial services such as car leasing, retail customer & dealer financing and insurance activities.
The BMW GroupBMW is part of the “German Big 3” among Mercedes and Audi, however as well is a global company as it was recognized and awarded by many market research companies such as Frost & Sullivan or Forbes to be the 1st global company of 2013. Further, BMW was ranked by MillwardBrown as the world’s most valuable brand name in the car industry. It is one of Germany’s largest industrial companies.
It has 140 global network sales offices worldwide and employs over 100,000 people in engineering, manufacturing, R&D and sales. The company has 29 production and assembly line sites in 14 countries on 4 different continents. Its main sites are found in German cities such as Leipzig and Munich and in Shenyang, China.Additionally, BMW Groups global supplier network consists of more than 1200 suppliers.The HistoryThe company first produced airplane engines until it switched to a car production in 1929. However, BMW was forced into the production of airplanes during the WWII. The early expansion of subsidiaries and plants into foreign countries made the company internationally known from the early beginning of existence. BMW launched its first production plant in a foreign country in 1972. It was in South Africa, in Pretoria where the plant was named Rosslyn. With this plant BMW back then began to produce vehicles to provide them to the British, Indonesian and Australian market. One year later they established a distribution center in France. 1975 BMW North America was established. In 1998 they constructed their first production plant in the U.S. Since then the company has been growing with some ups and downs however constantly, being present in.
In the year 1994 BMW took over the British Rover Group, which they sold a few years later again. However, keeping the brand MINI, which belonged to the Rover group. In 2002, then they took over Rolls Royce as well. Through these 3 brands, MINI, Rolls Royce and BMW the group covers the premium and luxury market segment well and strong. Additionally, this targeted three different types of customer types. MINI targets through its advertising campaigns an urban, modern and young audience, whereas Rolls Royce targets the top 1% of the social class and BMW all premium segment interested audiences. In 2012 and 2013 the automotive company introduced the BMW i3 and i8 as well as the electric and first hydrogen vehicles. These achievements made them the leading sustainable car company worldwide due to their fuel efficiency.
Corporate GovernanceBMW AG is a stock corporation based on the German Stock Act. It consists of three representative bodies: The annual general meeting, the supervisory board and the board of management.
Organizational Structure
As demonstrated above, BMW consists of three main divisions, the automotive, the motorcycle and the financial services division.
The automotive division is divided up into three individual sectors. These sectors present individual car brands such as BMW, Mini and Rolls Royce. The motorcycle division consists of BMW and Husqvarna motorcycles. The last sector is the financial one. It offers among other activities car leasing and car sharing programs, insurance activities and customer deposit business.
Target Market
The overall target audiences of the BMW Group are customers found and interested in the premium car segmentation. The main importance of the company is the customer satisfaction, as the customer is the base of their existence and for all their actions. Depending on the individual brands, meaning Rolls Royce, MINI and BMW, the specific target audience varies to a certain extent. The different target market of the individual brands creates diversity and differentiation in the company itself.
The Business StrategyThe BMW Group mainly focuses every approach and decision on sustainability, looking at the long term effects in the future. Their forecasting and projecting of market trends, individual economies and continually increasing company efficiency is their key to success, belonging to the premium products and services providers worldwide.
Therefore, as the world continues to change at a rapid pace, individual mobility remains a focus of political regulation and national industrial policy. BMW Groups mission statement is: “The BMW Group is the world’s leading provider of premium products and premium services for individual mobility.” This already underlines the drive of wanting and maintaining to be the best and the number one company in the car industry worldwide.
In year 2000 BMW developed of new strategy specializing on premium segment in German & international automotive market. The launching of that new business strategy, the “Strategy Number One” was in 2007.
The strategy “Number One” consists of a common automotive platform strategy, where the BMW group shares strategic alliances with Alfa Romeo & Fiat to decrease manufacturing costs. It focuses ultimately on profitability and to enhance long-term value in times of change. It applies to technological, structural as well as cultural aspects of our company. The model below demonstrates each step by step factor of the “Number One” strategy. The ultimate factor, the access to technologies and clients is achieved through their continuous heavy in investing in research and development (R&D). This allows the company to maintain and increase its efficiency and leadership through innovation, new and improving technology and guarantees its future sustainability.
2104390554990The Product LifecycleThe constant introduction of new and existing models can be seen to avoid a negative ROI.
Competitor AnalysisBMW’s strongest and main competitors are Audi, Mercedes and Smart. Further competitors are Porsche, Toyota, Jaguar and Lexus. The return on investment (ROI) comparison graph below indicates the steady growth after the crisis, whereby the BMW Group is the second best performing next to the Audi Group.
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CompetitivenessThe strong investment in research and development provides a strong advantage due to the coming up with innovative and technological development of products and tools before its competitors. This long term thinking makes them continuous market leaders. An example would be the development and launching of increasingly sustainable vehicles such as the first Hydrogen car worldwide.
The quick and response and long term thinking towards changes in the market are essential to remain market leaders. BMW has expanded into foreign markets way before the crisis and were one of the first automotive companies to invest in Asia. However, they saw the potential in Asia and the BRIC countries (Brazil, Russia, India & China) as well as the recognition of the saturated European market and its high risk due to the PIGS countries (Portugal, Italy, Greece & Spain).
Another aspect is their constant introduction of new and current products together with their unique design creating permanent market penetration.
Further, through the acquisition of various brands, such as Mini Rolls Royce and BMW the BMW group has achieved a strongly diversified market presence with completely different target markets and marketing approaches.
Financial AnalysisFinancial PerformanceThe past, recent and current financial performance is shown in the table below. One can see that despite the minor reduction in numbers of the year 2008, one year after the crisis, the numbers in revenues and especially in the net profit have recovered and increased constantly throughout the 5 years. The revenue of the BMW Group of 2012 was €76,848 million.
Sales-2952751094740The BMW Group financial performance is not only reaching a yearly all time high overall, the company also achieves that in each sector when one takes a closer look at the sales. The automobile brands sector increased by a total of 10.6% having sold 1,845,186 units from 1,668,882 units in 2011. The motorcycle sector grew by 3.1% as well breaking the sales volume record with 117,109 BMW and Husqvarna units.
The financial services sector also made progress in the number of retail customer contracts worldwide by 12.1% to 1,341,296 units and the leasing and financial contracts with retail customers and dealerships by 7.1% to 3,846,364 units.
Profitability3810001316355The profitability over the time frame of 2000 until the third quarter of 2013 is demonstrated in the table below in Earnings before interest and taxes (EBIT). After the economic crisis, the BMW Group had a profit all time high performance of over approximately 4% above the normal average. However, this peak is fading off slowly, when one takes the quarterly EBIT percentage into account of the year 2013.
Capital StructureWhen it comes to the management of BMW’s capital the company is focusing as mentioned in their objectives and mission statement above on the long term approach, which is also mirrored in their Number One strategy. Additionally to its objectives the company has the goal to provide their shareholders with a fair return.
-2019303781425The capital structure can be influenced by the amount of risk of their assets and certain economic conditions. However, the BMW group takes a large amount of financial instruments and factors into account to find the optimal capital structureand “matching maturities” for the financial management.The debt is managed by having a fixed target debt ratio of the capital. Below in the table is the current structure comparison of the end of the year 2012 and 2011. One can see that the total capital has increased by €4,787. The proportion of the total capital however has shrunk minimally. The target debt ratio is nowhere exactly stated, but it can be assumed that it lies by 60%.
Ratio AnalysisThe added value is a very valuable financial performance indicator. It measures whether the BMW Group is “meeting its minimum requirements for the rate of return expected by capital providers”. In other words, it measures the financial success of the company.
1304925472440The added value formula is the following:
Working Capital Management
Working capital management is an essential function of especially short term and long term financing of a company. The BMW Group has an efficient working capital management, as when many companies struggled due to the economicsovereign debt crisis in the year 2008 and 2009. However, BMW recovered in the year 2010 almost fully again. The company even had the importance of the working capital management stated in their annual report of the year 2009, saying “Stringent working capital management is a further key parameter for managing the business”.
Working capital management basically exists to manage the highly important and essential key to survival of a business, the liquidity of a company. It further is responsible for the management of the cash in- and outflow, cash funds, investments and equity.
Features of the United States Healthcare System
SOC/HSP 355
Contemporary Health Care Systems
Name
Institution
Contemporary Health Care Systems
Features of the United States Healthcare System
This part looks at the features of the U.S. healthcare system and creates a better understanding of how it works. Some of these features are changing slowly but surely especially with the introduction of the Affordable Care Act. Ten primary areas distinguish this system (Papanicolas, Woskie, & Jha, 2018). One feature is that the U.S. healthcare system is not governed by one central agency which means there is limited integration and coordination. The government, in contrast to most systems around the world, does not authorize financing, payment and the delivery of services to the public. The privately-owned practices work independently. It is important to note that the lack of coordination results in high costs of healthcare. It would be less complex if the system was coordinated centrally for cheaper healthcare options. The government is only but a subsidiary of the private sector. The government’s financial obligation remains to cover the gaps left by private entities. These gaps include but are not limited to clean water and sanitation, care for vulnerable people and funding for research and training.
The U.S. healthcare system is very technologically focused with a lot of emphasis on critical care. The United States is a center for research and innovation and growth in science and technology results in increased demand for new services without regard to the diminishing resources and stretched finances. The system is also characterized by extreme costs, imbalanced access and mediocre outcomes. Compared to other developed nations, America spends the most when it comes to medical services (Obama, 2016). Despite this much spending, a huge number of U.S. citizens have restricted access even to the most basic medical care. Access is restricted to those that have employment insurance, those covered under the Affordable Care Act, those capable of purchasing private cover, those able to pay the services after every visit, and or those that can access through safety net. Although insurance in this system is primary to obtaining care, it is not necessarily sufficient. This inadequacy and inequality in access to health care mean that residents of the United States do not record desirable health outcomes as compared to other developed nations.
The United States healthcare system operates under imperfect market conditions. Although the system is controlled by private entities, free-market forces to an insignificant extent only govern the market. Patient choice does not determine the prices through the forces of demand and supply. This may be explained by the fact that the patient is not the actual payer for the services as MCO, Medicaid and Medicare pay for the services instead. Agencies that are external to the market set the prices and not the forces of supply and demand as it is in a free market. In certain parts of the country, one giant medical system controls healthcare services restricting competition.
The system is one where the concepts of market justice and social justice are fused together. These two philosophies are contrasting on how healthcare services can be generated and circulated. The concept or theory of market justice put the obligation for the rational distribution of medical services on market forces. This means that health care services are distributed basis on willingness and capacity to pay for them. Contrary to this, social justice puts emphasis on the welfare of the public over that of the individual. For this reason, social justice does not condone the restricted access to medical services because of the inability to pay and considers it unjust. The U.S. healthcare system blends these two principles benefiting from the ideals of each. To put it into context, employed persons bringing home middle-class incomes have healthcare insurance sponsored by their employers. The lower class on the other side are reliant on government-sponsored programs. The theories, however, also create conflict. A good example is that some small employers cannot afford to provide insurance for their employees or when offered, these employees cannot afford to pay for it from their salaries. Yet, they are not eligible to obtain government support owing to their income surpassing the required minimu (Shi & Singh, 2010).
The other feature includes multiple players such as physicians and administrators of institutions that have a direct interest in the system and balance of power. Large companies, insurance providers, hospitals and physicians constitute a set of commanding and civically aggressive special interest groups that are represented in Congress by expensive lobbyists (Shi & Singh, 2010). The pursuit of integration and ability also characterizes the system. The other thing is the access to healthcare services selectively on the basis of insurance coverage. The system provides one of the best medical services in the world. However, these services are available to those that can afford insurance coverage that can offer sufficient coverage or those able to cover the costs of the procedures themselves. The system is also characterized by legal risks that guide applied behaviors. Americans are quick to drag alleged medical offenders to court motivated by the possibility of enormous jury awards. As a result, medical practitioners are becoming increasingly vulnerable to legal process and the risk of malpractice claims influences how they practice medicine.
Comparison with other models in Europe
Germany, Canada and the United Kingdom represent three basic models with which care systems are structured in Western Europe and of course, Canada. Canada uses a model where the government finances health care through using tax revenue while the actual care delivery is left in the hands of private providers. In comparison to the United States quad-function model, which is loosely coordinated, The Canadian arrangement necessitates tighter consolidation of funds, insurance and imbursement functions, which are all harmonized by the Canadian government while distribution is left to disconnected private arrangements. Provinces and territories in Canada have put in place some enterprises to increase incorporation and coordination of care for people with chronic conditions and compound needs. Provincial and territorial governments granted to strengthen healthcare as part of a 10-year plan by providing about 50 percent of their residents with access to prime care teams across all disciplines. The 10-year plan was enacted in 2004, and by 2007, almost three-quarters of primary care physicians operated under physician-led, multi-disciplinary practices. Across the provinces, the use of electronic health records had reached a level where, by 2015, almost 60 percent of primary care physicians were using it.
Canada also has the Federal health transfer where federal funding is dispersed to provinces on a per-capita basis only, which replaced earlier compensation for disparities in taxes bases, which benefited that provinces that were considered less privileged. The aim of this new funding policy is to increase equity. Provinces also put effort to decrease the cost of generic drugs. Primary care reform has been rolling in Canada since 2000 after the government injected CA$800 million over a period of 6 years through what is known as the primary care transition fund (Marchildon, & Mou, 2018). Restructuring of principal care systems continues in each province like provider payment methods and the issue of incentives to shift to a team-based approach from the individual one, management of chronic cases, and the coordination of care with other providers.
In Germany, the government mandates employees and employees to contribute in order to fund healthcare. Delivery of care is left in the hands of private providers. The contributions made by employers and employees are handled by sickness funds which are non-profit insurance entities that reimburse hospitals and pay physicians. This system closely integrates insurance and payment functions. There is also better coordination of the payment functions as compared to those in the U.S. The government controls the overall exercise by the distribution of care is left to private entities.
The General Law on Patient’s Rights was enacted in 2013 citing measures tailored to strengthen the rights of patients most importantly the integration of these rights into the Civil Code of Rights, duties and protocol relating to the relationships between patients and care providers.
Germany also enacted a bill that redefines the way Social Health Insurance is contributed in terms of rates and who they are distributed between company and employee to cater for ancillary labor costs. As of 2015, Germany resolved to maintain the 14.6 percent general contribution rate but abolish the employees’ special contribution rate of 0.9 percent as well as supplementary premiums (Mossialos, Wenzl, Osborn, & Anderson, 2014). In the place of supplementary premiums, there will be a extra income-dependent contribution rate, informed by individual sickness funds.
The United Kingdom healthcare system is such that the government finances an insurance program that is supported by tax revenue and controls the infrastructure required for the delivery of care. The government operates numerous medical institutions and employs the majority of the care providers. The few that do not fall under the government payroll are closely systematized in a publicly managed setup. As compared to the quad-function in America, the British system exerts more close consolidation of these functions, usually by the government.
The Social Care Act of 2012 eliminated primary care trusts and put in place clinical commissioning groups across the country (National Audit Office, 2013). These commissions are mandated to ensure effective use of capitals in making resolutions about the planning and purchase of various services for their local dominions. Overall practices fall under the control of commissioning groups and should be governed by a chairperson who must be a general practitioner alongside other clinicians and managers.
Ethical Guidelines for Medical Research and Practice in the U.S.
The aim of clinical research is to create the general knowledge intended to improve human health and better understanding the human anatomy. The participation of individuals in research programs enables the acquisition of this knowledge. Without ethical guidelines, the rights of volunteers, as well as the integrity of science, may be at risk of abuse. An issue of notable controversy is genetic testing. Genetic testing has been considered the future of medicine, but its implementation has been associated with various challenges to the individuals involved on the basis of their genetic characteristics (Wilson, Miller & Rousseau, 2017). Some genetic discoveries many not go well with insurance providers resulting in genetic discrimination, which may hinder the recruitment of individual for genetic testing.
The ethical argument is that genetic discoveries should not be used for the intent to cause harm. It is integrally prejudicial to discriminate based on genetic characteristics because each genome is inherited from parents, including variants that increase the chance for contracting diseases or those that are protective. Because this is a biological process based on chance, it is clearly beyond the power of individuals meaning that all people should be exempted from discrimination or favoritism based on their personal ancestry or genome.
Employers and insurance companies are notorious for discriminating people because they possess a genetic mutation that increases susceptibility to diseases, inherited disorder or familiar history of a specific health condition. The Genetic Information Nondiscrimination Act protects individuals from insurance discrimination as well as discrimination in title I and title II, respectively. Because of the risk of discrimination, stakeholders have debated whether to inform or not to inform a third party about the genetic features of an individual.
Another controversial research topic is stem cell research. Stem cell research is associated with great promise for increased knowledge on the basics of human growth and differentiation. It also generates hope for new treatments for illnesses such as diabetes, Parkinson’s disease, spinal cord injury and myocardial infarction. Nonetheless, human stem cell research attracts controversies and raises strident ethical questions.
The method of conducting stem cell research that includes the use of aborted fetuses is criticized in terms of the end does not justify the means. Arguments against the methods maintain that life is life, and it should not be compromised for any end. A fertilized egg should be considered as human life and valued in the same manner; it does not matter if it is in its first weeks. There is no ethical ground in destroying human life to save human life. Critics suggest that stem cell research should be put on hold until methods that will enable the use of adult stem cells become available. The scientific value of stem cell research has been exaggerated or include flaws; for example, there is no concrete evidence that stem cells can be used to clone organs that can be transplanted.
The available guidelines for stem cell research do not cover these arguments but instead take a more general view. These guidelines include (International Society for Stem Cell Research, 2016):
The veracity of the research initiative
Primary focus on patient welfare
Respect for volunteers and research subjects
Transparency
Social justice
The advancement of medical technology has resulted in tasks for examining the ethical dilemmas that arise as a result. The principles of bioethics are applied to the field of medicine to investigate and research how various parties arrive at health care decisions. In general, bioethics ensures that medical practices and procedures are beneficial to society.
Ways in Which Contemporary Healthcare Systems May Inform Contemporary Bioethical Guidelines
Contemporary medicine can inform bioethical guidelines for issues such as end-of-life care advancement in treatment allows for the ability to prolong life, although the quality of life may be significantly affected. Elderly people and their loved ones face the dilemma as these individuals become too old and near the end of life. Medical providers overseeing these decisions are also faced with the task of considering the legal, practical, medical and spiritual nature of these decisions (Hussung, 2017). These decisions may be informed by the level of pain management offered the possibility of delivering care at home, the kind of professional or caregiver required, among other issues.
Another aspect of the contemporary health care system that can be used to inform bioethics is the increased availability of medical resources. However, a level of complete sufficiency has not been attained yet, meaning sometimes medical resources require rationing. The availability of resources should inform the patients that should be considered for treatment first and the amount of time and resources to be dedicated. A good example is patients in the ICU that may be transferred out to accommodate more serious patients when they can still benefit from ongoing monitoring.
References
Hussung, T. (2017, June 2). Bioethical Issues in Healthcare Management | CSP Online. Retrieved from https://online.csp.edu/uncategorized/bioethical-issues-in-health-care-managementInternational Society for Stem Cell Research. (2016). Guidelines for stem cell research and clinical translation.
MARCHILDON, G., & MOU, H. (2018, May 11). The funding formula for health care is broken. Alberta’s windfall proves it. Retrieved from https://www.theglobeandmail.com/opinion/the-funding-formula-for-health-care-is-broken-albertas-windfall-proves-it/article14764089/Mossialos E, Wenzl M, Osborn R, Anderson C. (2014) international profiles of health care systems. The Commonwealth Fund. Pub. no. 1802. http:// www.commonwealthfund.org/~/media/files/publications/fund-report/2015/ jan/1802_mossialos_intl_profiles_2014_v7.pdf. Published January 2015. Accessed May 2015.
National Audit Office. (2013). Managing the transition to the reformed health system. Department of Health, United Kingdom, pp. 1–46.
Obama, B. (2016). United States health care reform: progress to date and next steps. Jama, 316(5), 525-532.
Papanicolas, I., Woskie, L. R., & Jha, A. K. (2018). Health care spending in the United States and other high-income countries. Jama, 319(10), 1024-1039.
Shi, L., & Singh, D. (2010). Major characteristics of U.S. health care delivery. Essentials of the U.S. health care system. Sudbury, MA: Jones and Bartlett Publishers, 1-25.
Wilson, B. J., Miller, F. A., & Rousseau, F. (2017). Controversy and debate on clinical genomics sequencing—paper 1: genomics is not exceptional: rigorous evaluations are necessary for clinical applications of genomic sequencing. Journal of clinical epidemiology, 92, 4-6.
Financial Statement Analysis
Financial Statement Analysis
The ratio analysis has been a very useful tool to carry out an evaluate analyses of information performance’s of the company. Thsese ratios are calculated from current year figures and then compared to past years, other companies, the industry and so on. The ratio analysis does provide a basis for the investors to make investment decisions. Another important aspect of the financial ratio is that it highlights the performance of the company in the industry, its weakness and is also the basis for the comparison of the company’s performance with the competitors and also compare the past performance of the company with the current performance.
There are numerous ratios thar can be estimated from the financial statements of a company’s activity. The ratios are divided among Profitability, Liquidity, Efficiency and Capital Structure Ratios.
The proposed report will be conducted with the objective of investigating the financial analyses of John Lewis in 2013 and 2012. In particular, the study will include the financial ratios profitability, Liquidity, Efficiency and Capital Structure Ratios.
Different aspects of the performance of the company have been highlighted. Thus the ratios calculated for the company are analysed and based on the interpretations of the comparison between the performance of the both years has been made. In order to provide an insight into the key areas of the company and the also the performance, the recommendations are made in the end of the report. Furthermore, the reccomendations analyse the way in which the John Lewis could improve its performance in the market.
Profitability Ratio Analysis
The profitability ratio analysis of the company has been divided into two parts, margins and returns. The margin analyses involves ratios such as gross profit margin, net profit margin and interest to sales ratio. Return of Capital Employed (ROCE), Gross Profit Ratio, Net Profit Ratio, Administrative Expenses to sales Ratio. The formulas and the calculator of these ratios are shown below and expressed as a percentage.
1 – Gross Profit Ratio (GP Ratio) : Gross Profit x 100/ Sales
2013 – 449.70 x 100 /8.465,50 = 5.31%
2012 – 391.00 x 100/7.758,60 = 5.04%
2 – Net Profit Ratio (NP Ratio) : Net Profit before tax x 100/Sales
2013 – 151,50 x 100/8.465,50 = 1.79 %
2012 – 136,20 x 100/7.758,60 = 1.76%
3 – Interest Expenses to Sales Ratio : Administrative Expense (interest) x 100/ sales
2013 – 81,00 x 100/8.465,50 = 0.96%
2012 – 70,50 x 100/7.758,60 = 0.91%
Based on the ratios it can be said that the gross profit and the net profit of the John Lewis has been quite low. This can be attributed to the sector where in due to fierce competition the margins can be quite low. Thus highlighting the need to improve the operational efficiency as well as the financial cost of the company as it will impact the returns which have been discussed further in this section. Also it can be seen that the profits in 2013 have improved in comparison to the previous year showing that the company has been successful.
The second aspect of the profitability ratios are the returns. These include return to shareholders equity, capital employed and the total assets. The calculations for these ratios have been based on the formulas shown below.
Return on capital employed: Profit before Interest and tax (Gross Profit) x 100 / capital employed
2013 – 449.70 x 100/3.642,20 = 12.35%
2012 – 391.00 x 100/3.633,60 = 10.76%
As the profit of the companies have increased the returns have also improved.
The analysis for the return on assets and the capital employed highlights that John Lewis have employed huge assets and thus the return on asset value is quite low. Also the performance of John Lewis in terms of return on capital employed is appreciable and have increased from 2012 to 2013.
Efficiency Ratio Analysis
The efficiency ratios highlights that how efficient the company has been in utilizing the assets of the company. The following ratios have been included in the efficiency ratio analysis of the company and are expressed in number of days.
Debtor Turnover Ratio (DTO) : Trade Receivables x 365/Credit Sale
Sales Revenue to Capital Employed : Sales/Capital employed
Total Asset Turnover : Sales/Total Assets
Inventory Turnover Ratio (ITO) : Inventory x 365/Cost of Sales (or purchases)
Inventory Turnover Ratio (ITO) : Inventory x 365/Credit
It is very important to analyse these ratios as these highlight the ability of the company to efficiently utilize the resources. The various ratios that have been shown above contribute differently to the performance and utilization of the resources.
The sales revenue to capital employed ratio highlights that for John Lewis the sales have increased considerably in comparison to the capital employed. This has been the reason for the increase in the returns on the capital employed that has been shown above. In case of Marks and Spencer it can be seen that the sales to capital employed ratio has come down. Thus the operational expenses of the company have come down considerably as although sales to capital employed ratio has come down the returns on capital employed has improved.
The debtor turnover ratio of both the companies have been high and that the creditor turnover is quite low. Thus the cash flow contribution from the trade receivables and the payables has been efficiently utilized by the company. This can be encouraging as both the companies have maintained this level however it can also be said that the companies are not in a position to impove cash flow further by increasing the trade payables and reducing debtors. Thus it can be said that John Lewis has been able to improve the cash flow as the creditor ratio has come down and the debtor ratio has increased.
The inventory turnover ratio shows that the inventory levels have been maintained by John Lewis whereas that of marks and Spencer has increased the inventory levels. Howver the level of inventory levels is estimated by analyzing the liquidity ratios of the two companies. Overall the efficiency ratios highlight the efficient performance of the two companies.
Liquidity Ratio Analysis
The liquidity ratios of the company shows the ability to convert the current assets of the company into current liabities. This is considered as the ability of the company to meet the short term needs of the company. The liquidity ratios that have been included in the analysis have been shown below.
Current Ratio = Current Assets/ Current Liabilities
Acid Ratio = (Current Assets – Inventory)/ Current Liabilities
The current ratio of the companies have been quite low and alarming. Since the value of current ratio has been lower than one the current assets of the company are less than the current liabilities. This means that the assets of the company will be utilized to meet the current liability requirements. In case of John Lewis the inventory levels have considerable contribution in the current assets. This has been highlighted by the acid ratio of the company.
The acid ratio of the two companies also highlight the issue which means that the two companies will be in very difficult liquidity position. The inventory levels has been quite high. This has been the case for both the companies as well.
In case of the operating cash flows ratio to the current liabilities it has been seen that operating cash flow ratio of John Lewis has been quite low and also in comparison to Marks and Spencer it has been lower further. This can be the major issue as the company is already having lower current ratio and also the operating cash flow of the company isn’t sufficient enough to fulfill the current liabilities requirements of the company.
Overall the liquidity ratios of both the company isn’t quite encouraging and further in case of John Lewis it has been a greater issue for the reasons that have been discussed above.
CAPITAL STRUCTURE RATIO
The Capital Structure ratios provide the information on the debt level of the company. This is very important as it will impact the returns to the shareholders and also provides information on the option available for the company to have additional leverage. The ratios that have been calculated are as below.
Debt to Equity Ratio: Long Term Borrowings/ Shareholders equity
Debt to Total Assets: Long Term Borrowings/ Total Assets
Debt to Capital Employed: Long Term Borrowings/ Capital Employed
Interest Coverage Ratio: Gross Profit/ Interest Expense
The gearing ratio of John Lewis shows that the debt to equity ratio of John Lewis has been quite optimum and that in case of marks and Spencer the the debt level has been quite high. The high debt level generally would mean that the returns of the company would be impactd but in case of Marks and Spencer the returns have been maintained but generally there has been quite a issue for returns to shareholders and the decision making.
John Lewis has maintained the interest paid to the sales ratio. Marks and Spencer has although reduced the interest cost. This has been done by reducing the debt levels which can be seen by the debt to equity ratio. Thus reducing the debt levels by 1% the interest cost has reduced considerably.
One more consideration is that although the debt levels of John Lewis has reduced the interes paid by the company has increased as the sales have also increased. Thus the company will have to consider this as the debt levels have reduced but the interest rate would have gone high.
Overall the gearing ratio for John Lewis has been optimal and further the company will have to maintain it so that the considerations can be made to the other ratios that have been discussed above.
Interpretation and Recommendations
The above discussion highlights information regarding John Lewis. The interpretation of the various ratio shows that the company has quite strong financial statements. However there are quite considerations that the company company has to amend. Firstly the liquidity ratio of the company has not been strong enough and that the interest paid by the company.
However for John and Lewis the profit margin could be improved. Thus highlighting the need to improve the operational efficiency as well as the financial cost of the company as it will impact the returns which have been discussed further in this section. Also with respect to the profit, it be seen that it has improved in comparison to the previous year.
The sales revenue to capital employed ratio highlights that for John Lewis the sales have increased considerably in comparison to the capital employed. This has been the reason for the increase in the returns on the capital employed that has been shown above.
The debtor turnover ratio of John Lewis have been high and that the creditor turnover is quite low. Thus it can be said that John Lewis has been able to improve the cash flow as the creditor ratio has come down and the debtor ratio has increased.
John Lewis has maintained the interest paid to the sales ratio.
Thus John Lewis need to reduce the current liabilities so that the non current assets developed by the company are not impacted. Secondly although the interest paid by John Lewis has reduced the rate at which interest is paid has increased. This has been highlighted by the gearing ratios of the company.
References
Helfert E.A., (1996), Techniques of Financial Analysis: A Practical Guide to Measuring Business Performance
Palepu, K.G., Healy, P.M. and Bernard, V.L., (2007), HYPERLINK “http://www.flipkart.com/business-analysis-valuation-8131501515/p/itmdytsda6hdtezx/search-books-valuation/30?pid=9788131501511&ref=166cce82-5dd5-45f7-aedf-bb4383eb246c&_l=THjGib6Q4EgfaGQbpMwtiQ–&_r=2KsT0cDpCiHgzyrBF1lBvQ–“Business Analysis and Valuation: Using Financial Statements, Texts and Cases,
Leo Troy, (2012), Almanac of Business & Industrial Financial Ratios
HYPERLINK “http://www.amazon.com/s/ref=ntt_athr_dp_sr_1?_encoding=UTF8&sort=relevancerank&search-alias=books&ie=UTF8&field-author=Charles%20K.%20Vandyck”Charles K. Vandyck, (2006), Financial Ratio Analysis: A Handy Guidebook, Trafford Publishing
Benedict, A and Elliot, B (2008) Financial Accounting an Introduction. Edinburgh gate: Pearson Education.
John Lewis 2013 2012 Gross Profit £449.70 £391.00 Net Profit £151.50 £136.20 Sales £8,465.50 £7,758.60 Capital employed £3,642.40 £3,633.60 Total Assets £5,363.60 £5,245.90 Fixed Assets £4,116.00 £4,014.00 Current Liabilities £1,721.20 £1,612.30 Current Assets £1,247.60 £1,231.90 Total Liabilities £3,462.40 £3,237.00 Total Equity £1,901.20 £2,008.90 Total Liabilities+Equity £5,363.60 £5,245.90 Loans £627.70 £726.70 Interest Paid £81.00 £70.50 Account Receivable £191.90 £213.20 Account Payable £1,451.30 £1,207.30 Inventory £514.00 £465.20 Operating cash flows £644.00 £544.00