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In this report we analyse the Volkswagen Financial ratio and gives the recommendation of whether to invest in this company or not. The Time period is considered from 2019-2022. We used the ratio analysis tool to analyze the company.
Liquidity Ratio
Liquidity ratio analyse the company ability to pay its short-term obligations and tell us whether the company has enough short-term assets such as Cash or Cash equivalents, Inventory, receivables, Prepaid expenses to pay for short term obligations or current liabilities such as Accounts Payable, Income taxes Payable, Unearned revenue etc.
Current ratio
Current ratio is a liquidity ratio which measures the firm ability to pay its short-term obligations. It is calculated by dividing the Current assets by Current liabilities.
Current ratio = Current assets/Current liabilities
Quick ratio
Quick ratio is another liquidity ratio but it is more robust ratio. It considers the company most liquid assets as current assets such as Cash or Cash equivalents, receivables, marketable securities and exclude assets such as Inventory and Prepaid expenses.
Quick ratio = (Current Assets-Inventory-Prepaid Expenses)/Current liabilities
The ratio for each of the year from 2019-2022 is given below.
Current ratio over the years has been increasing steady and remains almost same. The firm ability to pay its short-term obligations has not much changed much and company liquidity is effectively managed.
Quick ratio over the years has been increasing steady and over the last 3 years, its remains at almost same level. The difference between quick ratio and current ratio is not much either which tells us that company is not heavenly dependent on inventory and thus company liquidity is effectively managed.
Efficiency ratio
Efficiency ratio are the financial ratio which tells us how efficiently the company is managing its assets to generate sales or income.
Receivable Turnover
Receivable Turnover measures how efficiently the company collection procedures are and how many times the company is collecting its receivables in a given period. It is calculated by the formula
Receivable Turnover = Sales/Account Receivables
Inventory Turnover
Receivable Turnover measures how efficiently the company is selling its inventory and how many times the inventory is sold or used in a given period. It is calculated by the formula
Inventory Turnover = Cost of Goods Sold/ Inventory
Collection Period
Collection Period is the number of days taken by the company to collect its receivables. It is a reciprocal of the Receivable Turnover.
Assets Turnover
Assets Turnover tells us how efficiently the company is using its resources to generate sales. It is calculated by the formula.
Assets Turnover = Sales/Total assets
The ratio for each of the year from 2019-2022 is given below.
Receivable Turnover has been remained constant over the last two years which means the company efficiency has been remained same over the last two years and there is no change in the company credit collection procedures.
Inventory Turnover also has been remained almost same over the 4 last years which tells us that company sales level has not shown much change over the years and they have been remain at same level.
Collection Period which is a reciprocal of the Receivable Turnover has been decreased in the year 2022 which is a good sign and tell us company credit policy get strict but still company have high collection period days which is not a good sign and show weakness in the company credit policy.
Assets Turnover also has been remained at level of 0.50 times over the last 4 years and tell us company has not been able to generate much sales from the assets and lacking in to manage to its assets.
Overall, company efficiency ratios have not shown much improvement which is a weak sign and show inefficiency to generate sales.
Solvency ratio
Solvency ratio are the financial ratios that measures the company financial health or whether the company is in too much debt or at what debt level or the likelihood that a company will default on its debt.
Total Debt ratio
Total Debt ratio measures the company total debt in proportion to its debt and measures the extent of the financial leverage. It is calculated by dividing the total debt by total assets.
Long term Debt ratio
This ratio takes into account of only long-term debt. Debt ratio measures the company total long-term debt in proportion to its debt and measures the extent of the financial leverage. It is calculated by dividing the total long term by total assets.
Debt to Equity
Debt to Equity measures the company debt in proportion to its equity and it is calculated by dividing the company debt by Total equity.
Times Interest Earned
Times Interest Earned is a coverage ratio that measures the company ability to pay its interest income based on its operating income.
Volkswagen Total debt ratio has decreased in 2022 which is a good sign and shows that company has become less solvent but it is still high and company debt level is a problem of concern.
Volkswagen Long term debt ratio has been at low level in the past 4 years which is very good and show the solvency risk is very low.
Volkswagen debt to equity ratio is very high and thus indicate the company is highly leverage and higher risk of bankruptcy
Times Interest Earned is very high in 2022 and thus indicates the company has higher ability to pay its interest expense from its current operating income.
Overall, the company solvency risk is at moderate, its long-term debt and Total debt are low especially long-term debt. Debt to Equity is very high and can be a problem in the future if not controlled. Time interest ratio is also very good.
Profitability Ratio
Profitability ratio measures the firm ability to generate income relative to revenue, assets, equity etc. These ratios are one of the most important ratios for the shareholders perspective as they look largely into firm Profitability to analyse whether the firm is generating income effectively for its shareholders.
Net Profit margin
Net Profit margin is the financial Profitability ratio that measures the firm income relative to its revenue. It is calculated by dividing the Net Income by Net revenue.
Net Profit margin = Net Income/Net revenue
Operating Profit margin
Operating Profit margin is the financial Profitability ratio that measures the firm Operating income relative to its revenue. It is calculated by dividing the Operating Income by Net revenue.
Operating Profit margin = Operating Income/Net revenue
Return on Equity
Return on Equity is the financial Profitability ratio that measures how much income company is generating per dollar of invested capital. It is calculated by dividing the Net Income by Shareholder Equity.
Return on Equity = Net Income/Shareholder Equity
Return on Assets
Return on Assets is the financial Profitability ratio that measures how much income company is generating per dollar of Total assets. It is calculated by dividing the Net Income by Total assets.
Return on Assets = Net Income/Total assets
Volkswagen Net profit margin hit a low in 2020 when it was only 3.74% but in 2021, they recovered it well. In 2022, its decreases but only slightly and they are still earning good profit.
Volkswagen Operating profit margin also hit a low in 2020 when it was only 4.51% but in 2021, they recovered it well. In 2022 too, ratio increases which is a good sign and its show strength in company operations.
Volkswagen return on equity also was at low level of 6.47% in 2020 because of Covid but they recovered it well to 10.16% in 2021. In 2022, the ratio again slightly take a hit and close to 8.34% in 2022. The ratio is still very good and this trend is just temporary as the company Profitability is very good and there is long term uptrend.
Volkswagen return on assets also was at low level of 1.68% in 2020 but they recovered it well to 2.81% in 2021. In 2022, the ratio slightly decreases.
Overall, company Profitability ratio are very good and all the ratios are positive and there is evidence of long-term upward trend. In 2020, company Profitability were affected because of Covid but they recovered it very well in 2021 and 2022 which shows efficiency in company management.
Conclusion:
Volkswagen liquidity ratio is good and above 1, efficiency and profitability ratio is also well above the benchmark and has a long term upward trend. Solvency ratio is also at moderate level which is good for creditors when they look to extend debt to the company. From investor point of view, profitability ratio is very good. I would recommend to invest in the company for long term to generate sufficient capital and dividend gains.
References
VOLKSWAGEN AG (VWAGY) Stock Price, Quote, History & News – Yahoo Finance. (n.d.). Finance.yahoo.com.
https://finance.yahoo.com/quote/vwagy?ltr=1
Vaidya, D. (2019, March 11).Dheeraj Vaidya. Learn Investment Banking: Financial Modeling Training Courses Online.
https://www.wallstreetmojo.com/ratio-analysis/
What Is Ratio Analysis in Accounting? Definition and How it Works. (n.d.). Indeed Career Guide.
https://www.indeed.com/career-advice/career-development/what-is-ratio-analysis
Appendix
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