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BMW Financial Analysis

BMW Financial Analysis

Abbreviation BMW stands for Bayerische Motoren Werke AG, a German motorcycle, automobile, engine and bicycle manufacturing company. The company was founded in 1913 by Karl Freidrich Rapp and became an officially registered manufacturer of aircraft engines in 1917. After the World War I, BMW became the manufacturer of train decelerators due to prohibition of the Treaty of Versailles against manufacturing aircrafts. Eventually, the company overtook arrears and after the World War II fully reconfigured itself as an auto manufacturer.

Nowadays, BMW AG is one of the biggest and the most successful companies in the world. CEO of BMW AG is Robert Reithofer and the lead designer is Karim Habib. Under BMW brand such legendary models as Dixi (1929), BMW Isetta (1955), BMW 700 (1959), the famous after James Bond film BMW Z8 (1995) and of course BMW X5 were produced (1999). Also BMW has their legendary BMW R71 motorcycle that has been copied by many other manufacturers numerous times.

In 1998, Rolls-Royce Motor Cars Limited was established as a subdivision of BMW AG. It points to the fact that BMW AG has enough power to hold multinational brands. The other subsidiaries of the BMW AG are Mini, BMW M and BMW I. In October 2007, the company acquired Husqvarna Motorcycles, which is a major supplier of sport off-road motorcycles. For several times BMW Group was the sponsor of Olympic Games including the 2012 Summer Olympics in London. The BMW Pavilion built on an elevated site above the waterworks river in 2012 hosted approximately 8,000 visitors per day. There are also other BMW Pavilions in many countries.

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BMW Group was also in charge of inventing such new marketing strategies as selling autos via Internet and finding more adaptable approach to test-drive. They initiated BMW I project, i.e. new ecological-safe sub brand and the first model of which (i3) is now on the stage of production (BMW Group (a), 2013).

 The brand is well known worldwide, however, the only country where the three of BMW Group brands – BMW, Rolls-Royse Motor Cars and Mini – are represented is the United Kingdom. In fact, MINI Plant in Oxford and Rolls-Royce Motor Cars Limited in Goodwood are the only places in the world where Mini and Rolls-Royce are built. Contribution by the BMW Group in its UK operations is about £800 million; since 2001 the company has significantly rouse its economic status (BMW Group (b), 2013).

In 1971, the BMW Group Financial Services was founded in Munich and in 1973 GmbH leasing was added. Today, BMW Bank GmbH is represented in 53 countries with 26 affiliated companies and 27 unities.

The range of BMW Bank GmbH operations includes wholesale, funding and financing of vehicles and the storage of spare parts for BMW and Mini dealers as well as financing of cars and motorcycles for BMW and Mini customers (financial instalment for up to three options to choose from).

The leasing sector includes the range of leasing deals with objects of all kinds for BMW and Mini dealers. BMW Bank also provides complimentary services such as insurance, maintenance and repairing. Sales are held under the auspices of the BMW Group, as well as direct sales in asset management and Direct Finance.

Activity of the Bank meets BMW Group global strategy to support local dealers and gain profit from providing financial services.

To develop some recommendations regarding possible investment opportunity there is a need to analyse financial statement of BMW Group for the past three years and create DuPont model according to its basic formula (ROE).

Analysis of the company major financial indicators

Value of the company total assets turnover for the past three years is lower than the industry standards. In 2013 total assets of BMW Group was 136,368 million euros, however, it is less than Toyota total assets, which is 248,754 million euros. Now BMW comes next after the most valuable car brands worldwide including Toyota,  according to the brand value 2014 top list. The company has sidestepped its major rivals such as Mercedes-Benz and Volkswagen for far more steps, however, it still has perspectives for growth.

The reasons for such low total assets turnover are the excess of production capacity, poor inventory management, lax collection methods, decreasing working capital and decreasing fix assets.

In 2012, the market capitalization of BMW has been increased up to 45 billion euros in comparison with 42,2 billion of Daimler. Thus, if we subtract from the Daimler’s index the value of its production of commercial vehicles units (about 20 billion euros) then investors assessed Mercedes-Benz in 22 billion euros; it was less than a half of the cost of the BMW AG. As for today, the market capitalization of Daimler has considerably increased; however, BMW AG is also succeeding in this business. In May 2013, BMW market capitalization was 53,9 billion euros and the company shares continue to grow. In the first quarter of this half-year period the growth was 1% (MSN, 2014).

The main stockholders of BMW AG are Quandt family. Stefan Quandt holds 17,4% Joanna Quandt – 16,7% and Susanne Klatten - 12,6%. The other 53,3% of shares are in free circulation. The price of shares grew from 56,84 till 83,33 euros for past three years, however, the 13th of July 2014 the index was 94,47 euros. This critical price loss on shares could be caused by difficult political situation in Ukraine and Russia, and by the sanctions which were imposed after. Russia and Ukraine are the large market for BMW Group, and drop in sales in these regions leads to fallout to the Company.

For the first nine months of 2014, BMW increased its net profit by 11 % to 4,547 million euros. Revenue of the company for the posting period increased by 4,5% to 57,74 million euros. Net profit slightly felt down to 1,314 million euros over the third quarter of the year. Revenue amounted to 19,6 million euros for the three months increasing by 4,5%. The sales of the Group amounted to 1,529 million vehicles for the first nine months, which shows positive trend in comparison with the same period in 2013 The sales of BMW AG went up by 5,8% to 509,700 vehicles for the third quarter.

As for the annual dividend and dividend yield, today BMW AG has 2,90€ for 2014 period; and it is estimated there will be 3,28€ in 2015 and 3,51€ in 2016 cash dividends. In 2011 there was 1,30€ amount, in 2012 – 2,30€ and in 2013 – 2,50€ respectively. As for Year-end Yield index, it is 1,94% for 2011, 2,38% for 2012 and 2,12% for 2013 (Bayerische Motoren Werke AG, 2014).

DuPont Analysis

Return on Equity for BMW for the past three years has been decreased from 21,77% in 2011 to 16,36% in 2014. In the second quarter of 2011 the company finally recovered after a sharp drop in 2009. However, in the first quarter of 2012 the return on equity begun to drop again. It could be explained by decreasing European stocks that are flinched from the five-year high, because the European Commission has lowered the growth forecast for the euro zone and the companies reported about the results that were below expectations. The European Commission has reduced the forecast for the eurozone growth for 2014 and increased the estimate of unemployment for the same year, saying that growth will remain subdued, while the risks and uncertainty remains elevated.

Commission reduced the forecast for gross domestic product of the Eurozone in 2014 to 1,1 percent from 1,2 percent as has been assumed previously; it also raised its forecast for the unemployment rate to 12,2 percent from 12,1 percent. The greatest influence on the growth of the index of business activity in the US service sector does the sub-indices of employment and business activity. The sub-indices of new orders and prices showed reducing. National benchmark indexes fell in all 18 western European markets, with the exception of Portugal and Ireland.

That is why BMW shares dropped by 2,7%, showing the largest decline since August 27, 2013, after the company profit decreased by 3,7% in the third quarter.

Today BMW Return on Equity is 16,36%, it is much lower than in 2011, however, it is still better than that of the rival companies.

Dividing net income by revenue allows calculating BMW profit margin, which stands at 6,67% as for today. The highest level of the company profit margin for the past three years was seen in 2011, estimated at 9,92%. After significant drop in the last quarter of 2011, the level of profit margin begun to recover only in June 2014, and was amounted to 8,87%.

As for the total assets turnover, its amount is 0,54 for the last year. In comparison, the whole branch asset is 0,62.

By 2016, the BMW Group is planning to sell more than two million cars. To achieve this goal, the company has made optimistic sales volume and profit margin forecasts till interest and taxes in the amount of 8-10% for the automotive segment. In the automotive segment BMW Group still aims for the level of profit margin till interest and taxes in the amount of 8-10% in accordance with long-term objectives of the Group. According to the forecasts of the BMW Group, the return on equity in 2012 was to be more than 18%, because of the strategy «Number ONE» which was adopted in 2007 and was aimed at ensuring successful future for the concern. Strategy «Number ONE» meant that the BMW Group would continue to give priority attention to the premium segment which turned the major mistake. Political crisis in Eastern Europe in 2013-2014 was difficult to predict, and this is probably why the company was unable to hit the necessary stride.

As for banks, it is possible to highlight the two problems for which some of them are losing their position in the car loans market. The first issue relates long duration of auto loans, hence, they are not as profitable as, for example, cash loans which bring a 40% per return per annum. Car loans have smaller margin. Additionally, only big dealers selling auto loans can be effective, since they have the biggest share of margin. Additionally, building a system of sales is a complicated task. Therefore, the market wins those banks that have managed to do all the above at the early stages, and those that are affiliated with automakers such as Toyota Bank, Mercedes-Benz Bank or BMW Bank.

For the period of 2010-2012 the equity ratio showed the tendency to increase, which indicates that the growth rate of equity capital exceeds the growth rate of debt capital. Since the index of financial independence in formation of current assets takes the standard value, the company has enough own funds to finance working capital. Financial independence of the formation of stocks ratio takes the standard value of 2,18 which suggests that the company has enough own sources of funds for financing. Coefficient of maneuverability (mobility) also tends to increase. The higher the value of this index, the greater is the opportunity for the asset management company. While studying the structure of the balance of the BMW Group it may be noted that the balance, and therefore, the company itself, is not liquid absolutely, because its slowly realizable assets (inventories and other current assets) are less than the long-term liabilities (long-term debt loans and other long-term liabilities) (Bayerische Motoren Werke AG, 2014).

Summarizing financial analysis of the BMW Group it can be concluded that the company performance can be assessed as effective. Efficient product policy attracted many adherents of BMW cars around the world.   In total, BMW customer’s loyalty is high enough; mainly due to successful product and marketing policy.

Summary and Recommendations

Bayerische Motoren Werke AG was founded in 1913 by Karl Freidrich Rapp and became an officially registered manufacturer of aircraft engines in 1917. After the World War II the company fully reconfigured itself as an auto manufacturer.

Nowadays, BMW AG is one of the biggest and the most successful companies in the world. CEO of BMW AG is Robert Reithofer and the lead designer is Karim Habib. Currently, a number of well-known and popular among customers cars are manufactured under the BMW brand 

The BMW Group was also in charge of inventing a few new marketing strategies such as selling autos via Internet and more adaptable approach to test-drive. They initiated BMW I project, i.e. new ecological-safe sub brand, the first model of which (i3) is now at the stage of production. Additionally, in 1971 BMW Bank GmbH was founded; nowadays the bank is represented in 53 countries with 26 affiliated companies and 27 unities.

In order to develop some recommendations regarding possible investment opportunity this paper provides an analysis of financial statement of the BMW Group for the past three years and DuPont model according to its basic formula (ROE).

The company major financial indicators and the analysis of the value of the company total assets turnover for the past three years prove it to be lower than the industry standards. In 2013, total assets of the BMW Group was 136,368 million euros, however, it is less than Toyota total assets, which is 248,754 million euros which positioned BMW on the 2nd place among the most valuable car brands in the brand value 2014 top list. The company has sidestepped its major rivals such as Mercedes-Benz and Volkswagen, however, it still has perspectives for growth.

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People choose BMW as it is one of the most prestigious, high-quality and functional car brand. However, putting at stake production of premium cars could lead manufacturers to substantial losses. The company urgently needs to expand production of cars for the middle class consumers, since this step will  generate  additional income and secure the company presence on the word market. In other words, this strategy will provide higher revenues and respectively, higher net profit for the company.

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