Volkswagen (VW). Financial Performance and Financial Position

Table of Contents

List of Figures and Tables III

List of Abbreviations IV

1 Introduction

2 Theoretical background
2.1 About the Volkswagen Group
2.2 The relevance of the Due Diligence

3 Financial statement analysis of the Volkswagen Group
3.1 Financial Due Diligence
3.1.1 Profitability ratios based on the income statement
3.1.2 Asset and capital structure based on the balance sheet
3.1.3 Liquidity ratios based on the cash flow statement
3.2 Commercial Due Diligence
3.3 Summary of FDD and CDD

4 Proposal to the client

References

Appendix
Appendix A: Volkswagen share performance
Appendix B: Calculation formulas
Appendix C: Essential pages of used statistics

List of Figures and Tables

Figure 1: Shareholder structure of VW in 2019

Table 2: Profitability KPIs of VW

Table 3: Asset structure and capital structure of VW

Table 4: Liquidity ratios of VW

Figure 5: Five Forces framework, with estimation regarding the car industry

Figure 6: EBIT margins in the car industry in 2019

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

In this assignment, the author finds herself in the role of a consultant, whose client intends to acquire VW. The objective of this paper is to provide an assessment of VW's financial performance and financial position to prepare a proposal to the client, that assists in deciding whether acquiring VW is financially beneficial.

For a comprehensive insight into VW's financial performance and position, the approach was as follows.

Hereafter, in chapter two, the theoretical background provides the reader with knowledge about VW and describes the meaning of DD in M&A processes.

Chapter three, the financial statement analysis, is subdivided into FDD and CDD. In the FDD profitability ratios, asset and capital structure KPIs, and liquidity ratios are described and reviewed. The ratios are based in each case on the corresponding statement, the income statement, the balance sheet, and the CFS. The annual reports of VW from the years 2017-2019 serve as a reference for the financial KPIs. The CDD is based on Porter’s Five Forces framework, which considers future trends, and in addition, includes a brief benchmarking to identify competition between global car manufacturers within this framework. To conclude chapter three, the results of FDD and CDD are summed up.

In chapter four, a proposal to the client is provided, which speaks for the fact that VW is worth buying in terms of the numbers considered.

2 Theoretical background

2.1 About the Volkswagen Group

Founded in Berlin in 1937, VW became the world's largest car manufacturer measured by vehicle sales. Led by CEO Diess, the Group holds twelve brands named Volkswagen, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Nutzfahrzeuge, Scania, and MAN. Besides that, VW also sells financial services, such as retailer and customer financing, leasing, banking, and insurance (Volkswagen AG, 2021a).

The all-time high of the stock Volkswagen Vz. respectively Volkswagen St. was €246.99 resp. €250.62 in March 2015, before the diesel scandal became public. The share is currently trading around €195.00 resp.

€232.00 (08.03.2021). Based on the share price the market capitalisation of VW amounts to €91.93 billion (see Appendix A). The major shareholder with 31.3% of the VW shares is Porsche Automobil Holding SE, as can be seen in the below figure (Volkswagen AG, 2020).

Figure 1: Shareholder structure of VW in 2019

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Source: Own illustration referred to Volkswagen AG (2020)

2.2 The relevance of the Due Diligence

Since companies do not have a defined price, and instead the value of the company is highly dependent on financial performance and financial position, the potential buyer must perform a DD to determine the company value. The DD takes place chronologically before the acquisition pricing negotiation. When acquiring a company, all public company data needs to be taken into consideration as well as market data to check risks in financial terms. Due to the DD, the data is assessed based on compliance risks. The identified risks are evaluated to determine what expenses will be generated by the company acquisition. The results of the buy-side DD determine the enterprise value and are thus used to determine the acquisition value (Pomp, 2015, p.18).

3 Financial statement analysis of the Volkswagen Group

3.1 Financial Due Diligence

3.1.1 Profitability ratios based on the income statement

For a structured financial analysis this paper considers the income statement, the balance sheet, and the CFS. The income statement shows profitability ratios that are used to identify the company’s potential to make a profit from its operations (Lessambo, 2018). Selected ratios can be found below.

Table 2: Profitability KPIs of VW

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Source: Own calculations (Appendix A) referred to Volkswagen AG (2017), Volkswagen AG (2018) and Volkswagen AG (2019)

The EBIT margin has developed positively in the last years and belongs with an EBIT margin of 7.9% in 2019 to a good up to a very good range in comparison with the competition (see figure 6).

The ROS is directly linked to the operating profit margin. It indicates how much profit is generated per euro of sales. The increasing ROS shows that VW is growing efficiently. The guideline is greater than 5%, however, the values are strongly dependent on the industry. The numbers in the above table show that VV’s ROS is slightly above the guideline.

The ROA indicates how profitable VW is relative to the total assets, so the higher the percentage is the better it is. ROAs that are above 5% are esteemed to be good. In this case, it means that VW derives comparably fewer euros of earnings from each euro of its assets (Vollmuth and Zwettler, 2016).

3.1.2 Asset and capital structure based on the balance sheet

The balance sheet analysis is a systematic review of the annual financial reports 2019, 2018, and 2017. It includes assets and provides information about the source of the company’s capital. The KPIs below have been selected due to their significance for the client company's investment decision.

Table 3: Asset structure and capital structure of VW

Abbildung in dieser Leseprobe nicht enthalten

Source: Own calculations (Appendix A) referred to Volkswagen AG (2017), Volkswagen AG (2018) and Volkswagen AG (2019)

The above table confirms that VW has solid financial results. The reference value for the fixed asset ratio for manufacturing companies is 40-70%. From 2017 until 2019 the fixed asset ratio of VW varies close to 60%, that is, at the lower limit of the upper third of the range.

The working capital ratio puts working capital and current assets to each other and the reference value is greater than 30%. As can be seen in the above table VW’s numbers are greater than 30%.

The equity ratio is used as an indicator of the liability substance and the resistance of the portfolio to potential losses and as a benchmark for the risk of over-indebtedness. The guideline value here is 20- 25%, so VW is in the good range in the three years reviewed. The debt ratio represents the addition of up to 100%. When the equity ratio is in the range of 20-25%, the average debt ratio is between 300-400% (Vollmuth and Zwettler, 2016).

3.1.3 Liquidity ratios based on the cash flow statement

The CFS generates insights into a company’s financial and investing activities. It represents the company’s strategy, as it shows how much the company is investing to build its sustainable competitive advantage and reflects how well a business is generating cash from its core operations (Robinson et al., 2012, pp. 277). The CFS is of special importance for the judgement of a company’s performance and its future direction as it provides information about the company’s profitability. The CFS is, besides the balance sheet and income statement, one of the three main financial statements (Ali et al., 2018, p.66).

Liquidity ratios provide information on the ability of a business to repay short-term debt. Liquidity ratios are assigned on the active side. Liquid companies have higher current assets than current liabilities. Low liquidity ratios indicate that the company is struggling to cover short-term liabilities and long-term operations. High liquidity ratios imply that the firm is more likely to cover current liabilities (Saleem and Rehman, 2011)

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