This section of the paper will discuss the financial components of BMW’s business operations. To do this we will discuss the several different financial ratios concerning liquidity, leverage, activity, and profitability. We will begin by giving a brief overview of what the ratio tells an investor or creditor about the company. Next, we will examine how BMW’s performance has progressed over the past five years compared to itself. Finally, we will look at BMW’s ratios against their direct competitors.
Considering the fact that BMW creates luxury automobiles and does not merely make basic vehicles, we felt that it would not be fair to compare them to simple automotive ...view middle of the document...
When compared to the competition BMW is significantly lacking especially compared to Audi.
The next ratio to be examined is the quick ratio. This ratio has the same idea as the current ratio but leaves out inventory in the consideration. The reason inventory is chosen to be left out is that in most cases it is the most illiquid of the current assets. Therefore, if this is left out it gives a truer picture of the financial situation of the company. This ratio is calculated by dividing current assets minus inventories by current liabilities. When looking at BMW’s performance over the last five years in this area they have continually gotten worse. This also holds true when looking at the competitors. BMW would have came in fourth in this list of four competitors when ranked on this one liquidity measure. What this means for the company is that if a seasonal or cyclical sales drop occurs they may find themselves in need of short-term financing just to pay their currently maturing obligations.
The term leverage in this context refers to a company’s composition of debt and equity within the firm. The higher the amount of debt (leverage) the higher the potential profits or losses will be (Hull). The reason that this happens is that debt is paid back at a fixed interest rate on the amount borrowed regardless of profits. What this means is that when a company’s profits skyrocket they are only required to pay a fixed rate on the amount that they borrowed, thus leaving them with the profits to reinvest in the company. On the other hand, when a company is financed with more equity, the equity holders will require a piece of after interest profits leaving the company with less to reinvest. Therefore, with debt financing comes inherent risk because of the rate of interest being charged regardless of profit, but with that risk comes the potential for reward. There are three main ratios that we used to analyze BMW’s leverage position. The first is the debt to assets ratio. This ratio shows how much of a firm’s assets are financed with debt. It is calculated by dividing total debt by total assets. BMW’s debt to assets ratio has been very consistent throughout the last five years staying around the mid to high 70% range. When compared to Toyota and Audi they have about a 10-12% higher amount of leverage of debt in their firm. On the other hand if compared to Mercedes they have exactly the same amount of debt financing.
The next two ratios are the debt to equity and the equity multiplier ratios. Both of these ratios merely give different perspectives on the capital structure of a given company. Compared to Toyota and Audi BMW has a high amount of debt based on these ratios. While they remain closely matched to Mercedes which is no surprise when considering their close proximity with the debt to assets ratio. What this means for BMW and Mercedes alike is that when they have high sales years they will have much higher profits than do either...