Volkswagen Group Case Solution
An analysis of liquidity position of the group.
Liquidity ratios measure the efficiency of the company to pay off its debt and available safety margin. And computation for this metrics is performed through current ratio and quick ratio which assumes highly liquid current assets only excluding inventory and prepaid expense as less like able. This ratio can be analyzed and compared internally and externally as well. A measure of 1 means that assets can be cashed on the equal amount owed by the company. The ideal liquidity depends on the nature of business and industry.
Volkswagen acid test ratio has decreased to 0.64 :1 from 0.74:1 and current asset ratio has decreased to 0.88 :1 from 0.98 :1, the reason of this adversative ratio is that there is a rise in liability with more proportion than the increase in the current and quick asset.which means that Volkswagen currently not capable enough to pay all current debt.Some of the current assets are improved by 10,338 million euros due to a major increase in inventory, service receivables and marketable securities. While the increase in total current liability was by 29,026 million euros and mainly comprise of tax provision and fiscal responsibility.
Current ratio and quick ratio of the nearest competitor are considered which was 1.13:1 and 0.79:1 which also shows that Volkswagen has not achieved its liquidity accordingly with the industry norms.
An Analysis of Capital Structure of the Company
The capital structure shows how the corporationis financed to continue and grow its overall operations. The business capital structure is one of the most important choices which needs to have a careful balance between its equity and debt.The company can raise money by two ways i.e. equity and debt.
Companies preferred to issue debt as it is a cheaper source of finance, it does not create new owners and tax advantages on interest payment. Shares arean expensive sources of funding, it creates owners and have no tax benefit and are least preferred especially when interest rates are low. Although issuing debentures significantly and making structure imbalance will ultimately move these debentures to higher cost.
Volkswagen’s total debt against total equity was 3.3 times in 2015 which increased to 3.4times in recent year (Showing how much the company relied on particular finance resource to its assets). In 2015 and 2016 the financial gearing (“Leverage ratio”- Non-Current Debentures/Equity) of the company is 0.83 which is reduced to 0.71 although in contrast closest competitor has 0.6 and 0.58 respectively. Although Volkswagen decreased its long term debentures but still have a higher proportion of debt financing comparatively. If this greater percentage leads to imbalance financing, then Volkswagen will face a higher cost of capital. Balance depends on nature, risk profile, asset, capacity and credibility, etc. which marks each corporation to have a diverse mix. Volkswagen may maintain higher proportion of debenture with the balance.
2015 was the year of misfortune for Volkswagen due to involved in critical event and diesel issues.Volkswagen has anet loss in the respective year which made an adverse effect on interest cover ratio. Although in 2016 Volkswagen have recovered itself from adversity and have interest cover of 2.2but significantly lower when compared externally.
Interest cover ratio states that how much a company is able to pay off interest from one-year profit directly. Interest cover matters to investors and having lower interest cover means increasing the risk of investors because of which corporation will find difficulty in attracting new debtors and may pay a higher cost to them. Interest cover ratio can be improved through improving profitability and reducing high paid interested bentures.
Almost all the ratios above when compared with the industry or close competitor are unfavourable due to the scandal and under performance in the recent years. But Volkswagen is still on top of the automobile sector due to its highest capacity and a huge gathering of brands. Volkswagen have secured to top position due to fruitful strategy managements in the past. Volkswagen needs to utilize its strength efficiently which includes the widest portfolio among all rivals, diversified strategy, having synergy between the acquired brands, a joint venture with Chinese automakers to overcome its weaknesses and threats like decreasing market share, lower profitability and settlement of fines and penalty issues. Toyota is the second biggest company giving a neck to neck competition to Volkswagen as Toyota maintains high capabilities in terms of finance, product, strategy making and having growth with more proportion in contrast. It can secure the position if the mission of Volkswagen is not efficiently managed.
Investor’s Trust Level
Investors trust in any company depends on several factors with the biggest factor being a company’s price to earnings (P/E) ratio. The ratio is calculated using the company’s share price and dividing it by the earning per share (EPS) of the enterprise. However, even when we use EPS for price earning we have to decide upon using the current EPS or forecasted EPS. Many sources indicate that using forecasted EPS is more feasible as it increases the relevancy of the information along with giving a general outlook of future performance of the company.
The P/E ratio of Volkswagen is 13.45 obtained from the share price of the company which stood at $137.8. However, the company’s recent performance has increased its EPS ratio dramatically from ($3.20) in the year ended 2015 to $10.24 at the end of 2016. This improved the financial performance of the company hence leading to improvement in its P/E ratio. This dramatic increase in P/E ratio would boost investors’ confidence in the company and increase overall investments…………………………
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