Bmw - Audi Case Study

-vs-

Management Analysis

December 12, 2002

George Kantor

&

Julianne Crum

BMW and Audi, two German automobile manufacturers, have a reputation for making some of the best cars in the industry. Not only are both companies superior in their production, but their financial statements also indicate stability and efficiency. Looking at financial ratios, we will compare both companies on a basis of management efficiency and debt status. As a bank analyst, we will make a recommendation as to which company would be better to approve a loan for. A recommendation will also be made regarding management effectiveness and which company would make a better investment.

BMW has captured the attention of automobile drivers from all around the world with their "Ultimate Driving Machine." The BMW Company was originally established in Germany and has extended nationally reaching over 12 countries. With Germany and the United States being the top two target countries, BMW has established their products as a combination of luxury, safety, and comfort with product lines to suit all styles of living. Revenues have been increasing each year since before 1996 with profits coming from product line of automobiles and motorcycles. In 2001, BMW came out with a new product group, the Mini. The Mini also contributed to the revenue increase in 2001. BMW has current developments in their sports cars, the Z8. BMW has created a trustworthy name for the automobiles they produce and has all the potential to continue their success in the future.

Audi, one of Germany's first automobile producers, has been designing and building cars since August Horch, its founder, completed his first car in 1901. Over the years following, a series of innovations and mergers have led Audi to the position it is in today. Audi's subsidiaries include companies to facilitate international operations, part manufacturers, a vehicle customization company, a technology research company, and Lamborghini Corp, a successful sports car manufacturer. Audi's current developments include its holding the EU Seal of Environmental Protection, and a number of technological advancements, including new car designs and a "seeing car" technology that has been nominated for the German Future award for Technology and Innovation.

BMW Audi

Profitability Ratios

Return on Equity 0.173 0.034

Profit Margin 0.048 0.068

Return on Assets 0.036 0.177

Asset Utilization Ratios

Inventory Turnover 8.545 15.061

Total Asset Turnover 0.750 1.957

Liquidity Ratios

Current Ratio 4.46 0.737

Quick Ratio 3.82 0.429

Debt Utilization Ratios

Debt to Total Asset 0.638 0.614

Times Interest Earned 29.439 14.296

Profitability Ratios: measure the percentage returns a company makes relative to its sales, equity, and assets.

Return on Equity: (Net Income/Equity) The Return on Equity ratio is extremely important to the analysis of the management of a company. Measuring the percentage of income that a company actually makes from its equity, it gives a clear indication of how well management uses the funds available to it. Breaking down the RoE into its components is called Dupont analysis. This will be done later to better explain both Audi and BMW's management effectiveness. When the basic RoE results are compared, it seems that BMW's management is using its funds to create more sales than Audi's. With Dupont analysis we will find if this is true by analyzing debt levels, capacity utilization or cost effectiveness.

Profit Margin: (Net Income/Sales) The Profit Margin of a company measures how much of its sales are actually converted into income. If this number is high, it is also a good barometer for management effectiveness. Low profit margins could indicate large interest payments, or poor asset management. BMW and Audi are relatively close with this ratio, but Audi's higher number probably indicates better asset management. Return on Assets: (Net Income/Total Assets) RoA measures the income resulting from a company's total assets. Audi seems to make better use of its assets, producing much more earnings relative to its assets than BMW. This reinforces the poor asset utilization as a possible reason for BMW to have a low profit margin.

Asset Utilization Ratios: show the amount of times a year a company turns over its assets.

Inventory Turnover: (Sales/Inventory) Inventory turnover is a good gauge for the efficiency of a company at managing its inventory. High amounts of inventory result in holding costs that can cause lower profits for a company. Audi's high inventory turnover shows that it creates and sells its inventory almost twice as fast as BMW.

Total Asset Turnover: (Sales/Total Assets) This figure is another good measure of management effectiveness. It shows the amount of times a company's assets can generate their value in sales over a year. We can see that Audi is more than twice as efficient as BMW at asset management.

Liquidity Ratios: examine a company's ability to pay off its short-term debts with its liquid assets.

Current and Quick Ratios: (Current Assets/Current Liabilities and Current Assets - Inventory/Current Liabilities) These ratios are comparisons of short term assets and liabilities that measure a company's ability meet its obligations. A low current or quick ratio could indicate the inability of a company to pay off its debts should it have the need to liquidate. Audi's figures are both less than 1, meaning it relies heavily on income and cash flows to pay off its current liabilities. BMW on the other hand would be able to pay these debts off right away with its current assets. This analysis would place much more risk on an investment in Audi.