Table of Contents
- Answer: 1. 3
- a) Working Capital Trade-offs. 3
- b) Strategies for Financing Working-Capital 5
- c) Analysis of Working Capital 6
- d) Comparative Analysis. 10
- Answer: 2. 11
- a) Analysis of the Balance Sheet 11
- b) Share Price Analysis. 17
- c) News. 17
- d) Comparative Analysis. 18
- References. 20
Answer: 1
a) Working Capital Trade-Offs
The concept of working capital trade-off is related to the relationship between profitability and liquidity. Trade-off simply means getting one opportunity at the cost of other. Companies applying the theory of risk and return, and decide whether they have the potential to undertake risk or they want to ensure guaranteed income. On the basis of these strategies the working capital is allocated or utilized by the companies. Based on the concept of working capital, it can be said that if the company chooses liquidity, then they would be willing to have adequate working capital in hand and less profit. On the other hand if the company wishes to take risk and generate more profit, then engagement of working capital is more in that case, so liquidity in terms of working capital in hand would have to be compromised (Ediindia, 2005). This section would be discussing the working capital trade-offs of three luxury car manufacturing companies Porsche AG, Daimler AG, and BMW.
Porsche AG is a German luxury car company which was established in the year 1931. The company generated €10,928 million in the year 2011 as revenue. The working capital of the company was estimated to be around €65.8 billion in 2011, which was derived from the receivable from the customers, increasing leasing and renting charges of assets, etc (Volkswagen AG, 2011). Porsche AG met its working capital requirement through credit from banks when they were in Volkswagen Group (Porsche Automobil Holding SE, 2013). However, now the net liquidity position has improved with a 15 percent rise in sales and about 21 percent rise in the return on equity. So it can be said that Porsche no more has to rely on bank credits for working capital, but the company in 2011 negotiated with banking syndicate for extending a credit of €2.5 billion. This reveals that Porsche AG has to trade profitability for liquidity because the working capital requirement for running operational function is more important than investing the working capital. The company was running short of cash or cash equivalents due to which they had to keep provisions for credit from banks (Porsche SE, 2011).
Daimler AG another luxury car company which has many luxury car brands under its business, such as Mercedes-Benz, Maybach, Mitscubishi Fuso, and many more. The company was established in 1998 in Stuttgart, Germany. Revenue generated by Daimler AG in 2011 was €106.54 billion, and it was able to earn a profit of €5.667 billion in 2011, during the ongoing economic slowdown. The liquidity amounted to €11.9 billion in 2011, while the same was €13 billion in 2010. The decreasing liquidity is due to the extensive cash outflow for the pension plan assets, and also for the acquisition of the share of Tognum AG. Daimler AG is defensive in this regard, as it chooses to maintain liquidity and control credit risk exposure (Daimler, 2011). The company traded liquidity for profitability and for this Daimler AG also raised funds to finance the cash requirements of the company (Daimler, 2011).
BMW is a German automobile company which was established in 1916. BMW stands for Bayerische Motoren Werke AG. BMW is also the parent company of the most luxurious car called Rolls Royce and it also produces Mini marquee. The revenue earned by the company in 2011 was €68.82 billion and the operating income was about €8.006 billion. The net profit of the company increased in 2011 by €4,907 billion, which lead to increased cash inflow of the company by €1,664 billion. However, the changing working capital has decreased the cash flow from the operating functions by €1,212 million. This is because of increase in stock and introduction of new models of cars. So the working capital trade-off of BMW revealed that liquidity was traded for profitability. The company minimized the amount of working capital in order to invest them for launching new models of cars, after witnessing an increase in profit and cash inflow. Since the cash inflow from the operating activities was positive in the year 2011, so the amount for investing activities was around €5,499 million in 2011, which was €309 million higher than 2010 (BMW Group, 2011).
b) Strategies for Financing Working-Capital
In order to analyze the strategies utilized by Porsche AG, Daimler AG, and BMW to finance their working capital, the probable strategies that companies generally apply for financing the working capital would be evaluated. Companies can sell their accounts receivable to the investors or financial institutions at discount to receive the amount immediately. This strategy also assists in eliminating the risk of non-payments by the customers. Suppliers can also be asked for credit extension, which means buying goods on credit. The third and most well know method is to issue equity shares and raise funds through investors. Also debt securities are issued in order to raise finance. The debt instruments are the bonds, commercial papers, etc. The corporate finance professional in companies also assist in getting hybrid financing through instruments like preferred shares and convertible bonds.
In order to maintain the liquidity of the company, Porsche AG negotiated with banks to line up credit of around €2.5 billion due by the end of June 2013. The company has been also assured by the European Central bank for a massive liquidity support. Moreover, the company has also expected a growth of around 7 percent in the Asian countries, which also indicates that the sales would be increasing considerably in next two years, generating an increasing return of 15 percent. An increase in cash flow funds have been recorded in 2011, which was €765 in 2010, as compared to €992 million in 2011.
On the other hand Daimler AG focused on refinancing due to the volatile market condition to support their working capital requirements, as an initiative of risk management. Since the suppliers of Daimlers AG always supported the company by providing them credit as a source for working capital, so the company also took initiatives to support their insolvent suppliers. Daimler AG utilized an array of financial instruments to finance their working capital, such as bonds, commercial papers, financial instruments, and by selling the receivables, etc. In the year 2011, Daimler AG had a first-class access to the capital markets too. So the company had also raised fund from customer deposits.
BMW also like Daimler AG and Porsche AG utilizes the general sources of financing their working capital. The increasing level of profit in the year 2011 also resulted in increase of cash inflow in the company. For financing the working capital of the company, BMW has undertaken various financial activities in order to boost their cash inflow, such as issuing bonds, and other financial instruments. The cash inflow was recorded to be €87 million in the year 2011, which is lower than 2010. The cash inflow derived from the commercial papers was €439 million, which is higher than the amount generated in 2010 (€260 million). In the year 2011, the cash generated from the operating activities was around €241 million, while in 2010, there was a shortfall of €871 million. So it can be said that the strategies for financing the working capital were optimum and also reaped positive results compared to 2010 (BMW Group, 2011).
c) Analysis of Working Capital
In order to evaluate the short-term liquidity of the company, ratios like quick ratio, current ratio, receivable and payable ratios, working capital leverage and turnover ratios are utilized (Planware, n. d.). Through the fund flow analysis, the sources of extra funds can be identified, and a working capital budget is also helpful in determining the amount of working capital to be allocated for the financial year and its implementation. However, in order to analyze the working capital efficiency of the three luxury car companies, the ratios and the cash flows would be taken into consideration.
Considering the liquidity ratios of Porsche AG from 2007-2011, it is evident that the current ratio in the year 2007 is 1.30, in 2011 it is 2.13. The current ratio reveals that Porsche AG has sufficient amount of liquidity, and if compared to 2010, the liquidity position of the company in 2010 reveals that the company was in a dangerous position because the current ratio was 0.13. The quick ratio in 2011 is 0.06, which means the inventory portion is high in current assets. However, quick ratio in 2008 was 0.76, which reduced in 2009. The working capital calculated in Table 1 shows that the working capital of Porsche AG in 2007-2009 was increasing positively, but a sharp decrease was seen in 2010, leading to negative working capital balance. Further a positive growth in 2011 indicates the movement of the company towards stability (Morningstar, Inc., 2012b).
Table 1: Working Capital Calculation
| Porsche AG | |||||
| 2007 | 2008 | 2009 | 2010 | 2011 | |
| Current Asset | 10,791 | 31,200 | 87,959 | 933 | 704 |
| Current Liabilities | 8,281 | 22,748 | 77,953 | 7,460 | 330 |
| Working Capital | 2510 | 8452 | 10006 | -6527 | 374 |
The working capital that is calculated from 2007-2011, included the current assets and the current liabilities and it reveals a growth in the working capital from 2007 to 2009, as can be identified from Figure 1. However, a drastic drop has been also seen in 2010, which has improve in 2011, but the inventory accumulation is higher than cash or cash equivalents.
Figure 1
The current ratio Daimler AG in 2007 was 1.27 and in 2011 was 1.11, which represents a slight decrease in the level of liquidity. However, the quick ratio of Daimler AG in 2007 was 0.93, while in 2011, it was0.73. The difference in the ratio reveals the percentage of inventory that the company holds. However, compared to the quick ratio of 2011, the company was in a better position in 2007. This might be probably due to financial crisis around the world. However, the leverage ratios reveal that the company has been able to decrease its debt portion when compared to equity in its capital structure. In 2007 the debt-equity ratio is 0.86, which increased to 1.10 in 2009, which the company could control and reduce in 2010, and 2011 to 0.94. The working capital calculated in Table 2 reveals that working capital of Daimler AG had dipped considerably in 2008 from 2007, as in 2007 it was £13,275, which reduced to £3,219 in 2008.
Table 2: Working Capital Calculation
| Daimler AG | |||||
| 2007 | 2008 | 2009 | 2010 | 2011 | |
| Current Asset | 62,156 | 55,602 | 54,280 | 57,003 | 61,118 |
| Current Liabilities | 48,881 | 52,383 | 47,538 | 53,139 | 54,855 |
| Working Capital | 13,275 | 3,219 | 6,742 | 3,864 | 6,263 |
However, Daimler AG has pulled themselves up through refinancing and issuing financial instruments to raise funds for working capital. Though Figure 2 shows highly liquid position of the company in 2007, but the company is still in a better position after the dip from 2008-2010.
Figure 2
The current ratio of BMW reveals a better position since 2007 because in 2007 the current ratio was 0.96, which was 1.04 in 2011. Quick ratio in 2007 was 0.15, which has further reduced to 0.23. The result shows an increasing accumulation of inventories in BMW. The financial leverage is high, as it was 4.10 in 2007, and has increased to 4.55, so this presents that the debt percentage in the capital structure of the company is higher compared to its equity. Perhaps liquidity position of the company shows a positive trend, but it is highly volatile (Morningstar Inc., 2012a). On the basis of the working capital calculated from the balance sheet of the company in Table 3, it can be seen that 2007 and 2008 shows negative working capital.
Table 3: Working Capital Calculation
| BMW | |||||
| 2007 | 2008 | 2009 | 2010 | 2011 | |
| Current Asset | 32,378 | 38,670 | 39,944 | 43,151 | 49,004 |
| Current Liabilities | 33,784 | 39,287 | 36,919 | 40,134 | 47,213 |
| Working Capital | -1,406 | -617 | 3,025 | 3,017 | 1,791 |
Though the condition improved in 2009 and 2010, but again a decline can be seen in 2011. Figure 3 demonstrates the trend of working capital of BMW in the recent five years.
Figure 3
d) Comparative Analysis
After a comprehensive analysis of the working capital, financing sources, strategies and liquidity position of the three luxury automotive companies, it was found that on the basis of the working capital efficiency, Daimler AG can be considered the most sustainable and competent in the case of working capital because though the company has to face liquidity crunch 2007, but Daimler AG has opted for several strategies to skilfully finance its working capital and maintain its liquidity. Porsche AG on the other hand was processing positively in terms of liquidity, however, based on the negative results of working capital in 2010, it can be said that the liquidity condition can be considered sustainable though it can be addressed as an improving state for Porsche AG. Finally BMV would be considered last because BMW had negative working capital, which means the company had to go through extensive liquidity crunch. Further, it is still not in a very good position to be considered sustainable.
Answer: 2
a) Analysis of the Balance Sheet
Volkswagen AG
The balance sheet of 2011 has been considered to discuss the assets, liabilities, and shareholders’ equity of Volkswagen AG. The total asset of the company amounts to €253,626 million in which the current asset is €105,640 million, and fixed assets of €147,986 million. The amount of inventories is €27,551, which is higher than that of the cash or cash equivalents amount as can be seen from Table 4. As far as the liabilities are concerned, the total liabilities of the company amount to €253,626 million. The shareholders equity is the net worth or also called the share capital. The shareholder’s equity or total equity can be seen in Table 1, which includes the subscribed capital, capital reserves, and other element which amounts to €63,354. The shareholder’s equity of Volkswagen AG is better than the other two companies.
Table 4
| Balance Sheet of the Volkswagen Group as of December 31, 2011 | |
| € million | |
| Assets | |
| Noncurrent assets | |
| Intangible assets | 21,992 |
| Property, plant and equipment | 31,916 |
| Leasing and rental assets | 16,626 |
| Investment property | 340 |
| Equity-accounted investments | 10,249 |
| Other equity investments | 3,049 |
| Financial services receivables | 42,450 |
| Other receivables and financial assets | 14,405 |
| Noncurrent tax receivables | 627 |
| Deferred tax assets | 6,333 |
| Total Noncurrent assets | 147,986 |
| Current assets | |
| Inventories | 27,551 |
| Trade receivables | 10,479 |
| Financial services receivables | 33,754 |
| Other receivables and financial assets | 8,796 |
| Current tax receivables | 623 |
| Marketable securities | 6,146 |
| Cash, cash equivalents and time deposits | 18,291 |
| Total current assets | 105,640 |
| Total assets | 253,626 |
| Equity and Liabilities | |
| Equity | |
| Subscribed capital | 1,191 |
| Capital reserves | 9,329 |
| Accumulated comprehensive income | 47,019 |
| Equity attributable to shareholders of Volkswagen AG | 57,539 |
| Non-controlling interests | 5,815 |
| Total equity | 63,354 |
| Noncurrent liabilities | |
| Noncurrent financial liabilities | 44,443 |
| Other noncurrent liabilities | 6,940 |
| Deferred tax liabilities | 4,125 |
| Provisions for pensions | 16,787 |
| Provisions for taxes | 3,721 |
| Other noncurrent provisions | 13,201 |
| Total Non-current asset | 89,216 |
| Current liabilities | |
| Current financial liabilities | 49,090 |
| Trade payables | 16,325 |
| Current tax payables | 844 |
| Other current liabilities | 16,097 |
| Provisions for taxes | 2,888 |
| Other current provisions | 15,812 |
| 101,057 | |
| Total equity and liabilities | 253,626 |
Daimler AG
The balance sheet of Daimler AG indicates that the total assets of the company are €148,132 million, which includes the current asset of €61,118 million. In case of Daimler Ag too the inventory is €17,081 million, which is more than the cash equivalents. The shareholder’s equity or total equity as can be calculated as in Table 5 is €41,337 million, which is less compared to Volkswagen AG, but in a better position than Renault SA. The current liabilities are €54,855 million, which is less than the current assets. This means that the company has enough liquidity to pay off its short-term liabilities.
Table 5
| Balance Sheet of the Daimler AG as of December 31, 2011 | |
| € million | |
| Assets | |
| Noncurrent assets | |
| Intangible assets | 8,259 |
| Property, plant and equipment | 19,180 |
| Equipment on operating leases | 22,811 |
| Investments accounted for using the equity method | 4,661 |
| Receivables from financial services | 25,007 |
| Marketable debt securities | 947 |
| Other financial assets | 2,957 |
| Deferred tax assets | 2,772 |
| Other assets | 420 |
| Total Noncurrent assets | 87014 |
| Current assets | |
| Inventories | 17,081 |
| Trade receivables | 7,849 |
| Receivables from financial services | 20,560 |
| Cash and cash equivalents | 9,576 |
| Marketable debt securities | 1,334 |
| Other financial assets | 2,007 |
| Other assets | 2,711 |
| Total current assets | 61,118 |
| Total assets | 148,132 |
| Equity and liabilities | |
| Equity | |
| Share capital | 3,060 |
| Capital reserve | 11,895 |
| Retained earnings | 24,228 |
| Other reserves | 441 |
| Treasury shares | – |
| Equity attributable to shareholders of Daimler AG | 39,624 |
| Non-controlling interest | 1,713 |
| Total equity | 41,337 |
| Current Liabilities | |
| Provisions for pensions and similar obligations | 3,184 |
| Provisions for income taxes | 2,498 |
| Provisions for other risks | 5,626 |
| Financing liabilities | 35,466 |
| Other financial liabilities | 1,911 |
| Deferred tax liabilities | 1,081 |
| Deferred income | 2,118 |
| Other liabilities | 56 |
| Total non-current liabilities | 51,940 |
| Trade payables | 9,515 |
| Provisions for income taxes | 1,030 |
| Provisions for other risks | 6,799 |
| Financing liabilities | 26,701 |
| Other financial liabilities | 7,782 |
| Deferred income | 1,548 |
| Other liabilities | 1,480 |
| Total current liabilities | 54,855 |
| Total equity and liabilities | 148,132 |
Renault SA
In case of Renault SA the current assets amounts to €39,654 million. Here as can be seen in Table 6 that the amount of inventories is less than that of cash or cash equivalents, which is €8,672 million. This implies that Renault have sufficient liquidity to meet its short-term obligations. The current liability amounts to €38,954 million. This does not indicate a very good position with regards to the working capital of the company. As far as the shareholders’ equity is concerned, it can be seen in Table 6 that the total shareholders’ equity of Renault is calculated to be €24,567 million. So if a comparison among all the three companies is done, then it can be analysed that Renault SA has the minimum net worth or shareholder’s equity, which means that the debt portion in the company is high.
Table 6
| Balance Sheet of the Renault SA as of December 31, 2011 | |
| € million | |
| Assets | |
| Non-current assets | |
| Intangible assets | 3,718 |
| Property, plant and equipment | 11,357 |
| Investments in associates | 15,991 |
| Nissan | 14,931 |
| Other associates | 1,060 |
| Non-current financial assets | 1,068 |
| Deferred tax assets | 566 |
| Other non-current assets | 580 |
| Total non-current assets | 33,280 |
| Current assets | |
| Inventories | 4,429 |
| Sales financing receivables | 21,900 |
| Automotive receivables | 1,275 |
| Current financial assets | 1,244 |
| Current tax assets | |
| Other current assets | 2,068 |
| Cash and cash equivalents | 8,672 |
| Total current assets | 39,654 |
| Total assets | 72,934 |
| Shareholders’ equity and liabilities | |
| Shareholders’ equity | |
| Share capital | 1,127 |
| Share premium | 3,785 |
| Treasury shares | -201 |
| Revaluation of financial instruments | -129 |
| Translation adjustment | -155 |
| Reserves | 17,567 |
| Net income – parent-company shareholders’ share | 2,092 |
| Shareholders’ equity – parent-company shareholders’ share | 24,086 |
| Shareholders’ equity – non-controlling interests’ share | 481 |
| Total shareholders’ equity | 24,567 |
| Non-current liabilities | |
| Deferred tax liabilities | 135 |
| Provisions – long-term | 2,227 |
| Non-current financial liabilities | 6,327 |
| Other non-current liabilities | 724 |
| Total non-current liabilities | 9,413 |
| Current liabilities | |
| Provisions – short-term | 866 |
| Current financial liabilities | 3,230 |
| Sales financing debts | 21,996 |
| Trade payables | 6,202 |
| Current tax liabilities | 126 |
| Other current liabilities | 6,534 |
| Total current liabilities | 38,954 |
| Total shareholders’ equity and liabilities | 72,934 |
b) Share Price Analysis
The share price of Volkswagen is €161.7 which is down by £1.05 according to the market. But if the historical share price is taken into consideration then the share price can be concluded to be rising in future. (Yahoo finance, 2012c).
The share price of Daimler AG is €41.76. It is up by 48% in the market. The historical price shows that though there have been little fluctuations in the price level but the price is moving towards a rising trend from the last few months (Yahoo finance, 2012a).
The share price of Renault AG is €40.99 which is up by 48% (Bloomberg Businessweek, 2012). From the historical studies it can be inferred that the share price of the company is volatile. If the recent share price is compared with the previous year then it is found that the share has considerably come down and is expected to continue the downward trend (Yahoo finance, 2012b).
c) News
In the future Volkswagen AG will face competition from the other automobile industries as the automotive future depends upon the social condition and the trend followed by the society, but still it has pledged to become the leading automaker in the world by 2018. The technological challenges which may arise will be overcome by intensive research and development by the internal and external of the company (Volkswagen AG, 2012).
In case of Daimler AG, there objective is to innovate and use green technologies as well as safe and superior automobiles that will fascinate its customers. Now Daimler AG has successfully achieved to have the broadest variety of range of vehicles. These vehicles are emission free and powered by batteries and free cells as to go with their policy of promoting greener technology. Daimler AG accepts the challenges and tries its level best to meet its responsibilities towards the society that it has committed to achieve. The head of the company’s motor sport division will leave his position due to which the successful position of the company might be hampered. Due to his absence the company may face some problems.
Renault SA is progressing in many countries though its core market is in Europe. The organisation is poised to enter various new markets so as to boost its fortunes and increase its market capitalisation among the world automakers. The organisation is coming up with innovations and more value added with existing products. Renault selects GT Nexus, to provide the organisation a platform for cloud supply chain. This platform will help the organisation to serve better to its fast growing customers and at the same time will reduce the inventory and transportation cost which would add to its fortunes.
d) Comparative Analysis
According to my opinion, the best option to invest is in Volkswagen AG. The reason behind that is the share prices are showing upward movement. At the same time the turnover has also increased by 10% if compared with the same month of the previous year. The increase in the turnover percentage was not within the expectation of the company. They made a great progress during this time and will continue to certain extent. Exel which is a global leader in supply chain management had extended the contract with the company for another three year to manage the aftermarket logistics of the company. The company was awarded for this contract. So from every aspect, it will be better to invest in Volkswagen AG.
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