Faculty of Business and Management

Academic Year 2023/24

Module Name: Managing Financial Resources

Module Code: IBMFR

Module Leader: Dr. Asiya Sohail

Student ID: 230952

Name: Ali Al Jahwari

Table of Contents
INTRODUCTION ............................................................................................................................................. 3
SUMMARY OF EXTERNAL REFERENCES......................................................................................................... 3
FINANCIAL RATIOS......................................................................................................................................... 4
Common-Size Statements: ........................................................................................................................ 4
Debt Ratios: ............................................................................................................................................... 5
Times Interest Earned: .......................................................................................................................... 5
Debt-to-Capital Ratio (calculated as BV Debt / (BV Debt + MV Equity): ............................................... 5
Comments: ............................................................................................................................................ 5
Profitability Ratios: .................................................................................................................................... 6
Net Margin (aka, profit margin): ........................................................................................................... 6
Gross Margin (calculated as gross profit / revenues):........................................................................... 6
Comments: ............................................................................................................................................ 6
Valuation Ratios: ....................................................................................................................................... 7
PE Ratio: ................................................................................................................................................ 7
Market / Book Ratio: (calculated as market value equity / book value equity) .................................... 7
Comments: ............................................................................................................................................ 7
Payout Ratios: ........................................................................................................................................... 7
Dividend Payout Ratio (sometimes just called, ‘payout ratio’): ............................................................ 7
Total Payout Ratio (calculated as [Dividends + Repurchases] / Net Income) ........................................ 8
Comments: ............................................................................................................................................ 8
Return-on-Invested-Capital (ROIC):........................................................................................................... 8
Working Capital Management Ratios: ...................................................................................................... 9
Cash Conversion Cycle: ......................................................................................................................... 9
Comments: ............................................................................................................................................ 9
VALUATION .................................................................................................................................................. 10
Observations: ...................................................................................................................................... 10
CONCLUSIONS ............................................................................................................................................. 11
INTRODUCTION
Volkswagen is an automobile manufacturer from Germany, it is one of the leading manufacturers in the
automobile sector. Volkswagen, which translates “people’s car” in German, was founded in 1937 with
the aim of producing affordable cars to the normal folk of the country. Volkswagen rose to become the
largest and most prominent car manufacturer in the world in the coming years, thanks to its strategy of
acquiring other companies and disrupting the market with affordable and reliable car models, the iconic
Beetle still resonates with its customers and has a huge following. The company now owns a diverse
portfolio of car brands such as Audi, Porche, Skoda, SEAT, Lamborghini etc.

Volkswagen has made significant strides in electrical mobility as well in recent years by launching an ID
series of cars that work on electric motors instead of IC engines and are built on a MED platform. This
commitment to sustainability in mobility underlines the company’s commitment to address future issues
while maintaining brand value and business standards. Volkswagen also ventured into the Information
technology sector through a subsidiary to provide solutions to automobile industry through information
technology. The company’s commitment to technology growth and market development has impacted
the automotive industry as a whole.

Ford is the company's main competitor. General Motors, BMW, and Toyota are also rivals. These are
obvious peers because they are all among the main automobile manufacturers using IC engines.

SUMMARY OF EXTERNAL REFERENCES

External references consulted are the Management Discussion and Analysis (MD&A) from the firm’s
most recent annual report. The annual report, data from different websites like Fitch articles, Google
articles, Wikipedia, Simfin and stock analysis.

Links:

https://uploads/Annual_Financial_Statements_of_Volkswagen_AG_as_of_December_31_2022.pdf

These documents reveal several useful pieces of information about the firm. For example, the MD&A
states plainly the following: The company's financial performance, influenced by factors such as
production efficiency, global market expansion, and innovation in electric and autonomous vehicles, has
far-reaching implications for investors, stakeholders, and the automotive sector as a whole. Over the
years, Volkswagen has faced challenges, including the "Diesel gate" scandal in 2015, which underscores
the complex interplay between business ethics, corporate governance, and financial consequences.

As the automotive industry undergoes a transformative phase, with a focus on sustainability and
technological disruption, Volkswagen's financial decisions and strategic initiatives remain critical.
Navigating the transition to electric mobility, addressing regulatory requirements, and managing the
complexities of a global supply chain are all integral aspects of Volkswagen's business finance landscape.
This introduction sets the stage to delve into Volkswagen's financial intricacies, its strategic positioning in
the automotive market, and the broader implications of its business decisions in the ever-evolving realm
of business and finance.
FINANCIAL RATIOS
Common-Size Statements:

We begin by examining the firm’s horizontal and vertical income statements, using the most recent three
annual financial statements (source: simfin):

Particulars FY 2019 FY 2020 FY 2021

Revenue 100.00% 100.00% 100.00%
Cost of revenue -80.55% -82.53% -81.12%
Gross Profit 19.45% 17.47% 18.88%
Operating Expenses -12.74% -13.13% -11.18%
Selling, General & Administrative -12.17% -12.48% -11.85%
Operating Income (Loss) 6.71% 4.34% 7.70%
Non-Operating Income (Loss) 0.55% 0.89% 0.34%
Pretax Income (Loss), Adjusted 7.27% 5.23% 8.04%
Pretax Income (Loss) 7.27% 5.23% 8.04%
Income Tax (Expense) Benefit, net -1.71% -1.28% -1.88%
Income (Loss) from Continuing Operations 5.55% 3.96% 6.17%
Income (Loss) Including Minority Interest 5.55% 3.96% 6.17%
Minority Interest -0.06% 0.02% -0.02%
Net Income 5.50% 3.98% 6.15%

Particulars FY 2019 FY 2020 FY 2021

Revenue 100.00% -10.17% 16.41%
Cost of revenue 100.00% -7.96% 14.42%
Gross Profit 100.00% -19.30% 25.78%
Operating Expenses 100.00% -7.39% -0.93%
Selling, General & Administrative 100.00% -7.91% 10.57%
Operating Income (Loss) 100.00% -41.92% 106.59%
Non-Operating Income (Loss) 100.00% 45.22% -55.73%
Pretax Income (Loss), Adjusted 100.00% -35.29% 78.89%
Pretax Income (Loss) 100.00% -35.29% 78.89%
Income Tax (Expense) Benefit, net 100.00% -33.09% 71.36%
Income (Loss) from Continuing Operations 100.00% -35.97% 81.32%
Income (Loss) Including Minority Interest 100.00% -35.97% 81.32%
Minority Interest 100.00% -130.62% -210.93%
Net Income 100.00% -34.99% 79.90%
The financial data of Volkswagen across the given time periods displays a combination of issues and
favorable conditions. The vertical columns show that the gross profit has stayed nearly same in the three
years which shows the stability of the company.

Whereas the horizontal comparisons show different changes in the company finances. The company's
sales fell by 10.17% in FY 2020, owing to global economic uncertainty, which may be worsened more by
the COVID-19 pandemic. However, there was a considerable return in revenue in FY 2021, with a 16.41%
growth, demonstrating the ability of adaptation of the company as soon as the markets were favorable.
The Gross profit margins fluctuated, falling by 19.30% in the year 2020 then rebounding strongly with a
25.78% gain in year 2021. This shows that Volkswagen handled their expenses successfully and
enhanced operation efficiency. Operating income fell by 41.92% in FY 2020, again may be as a result of
the pandemic and the subsequent slowdown of economy that have impacted production and sales.
However, FY 2021 saw recovery, with operating income soaring by 106.59%, indicating effective cost
controls and operational adjustments.

Debt Ratios:

Times Interest Earned:

2019 2020 2021

Volkswagen -10.50 -6.45 -19.12
Ford -8.88 -1.84 -5.81
General Motors -25.06 -17.71 -22.50
BMW -26.90 -23.96 -120.64

Debt-to-Capital Ratio (calculated as BV Debt / (BV Debt + MV Equity):

2021
Volkswagen 1.22
Ford 0.65
General Motors 1.15
BMW 0.83

For the debt-to-capital ratios, we simplify and use only LT Debt from simfin (rather than a more accurate
but also more complicated calculation that includes short-term debt and leases). The TIE table also has
data leading upto 2021 as Volkswagen data for 2022 and onwards is not available, so the most recent 3
years are taken into consideration.

Comments:

Volkswagen has a negative Times Interest Earned (TIE) ratio from 2019 to 2021, this shows a worrying
trend. A negative TIE indicates that the earnings of the were not able to cover the interest expenditures,
indicating trouble in the finances of the company. This condition needs attention and may indicate
difficulties in debt commitments. In comparison with its competitors like Ford, General Motors, and
BMW which saw TIE ratio changes, but none recorded persistently negative levels like Volkswagen. BMW
saw a significant drop in 2021, signaling probable financial difficulty.

The 2021 Debt-to-Capital Ratio demonstrates that Volkswagen has a BV Debt is 122% of total capital,
showing a high load of debt in comparison to its rivals. This can also be an indication that Volkswagen is
heavily reliant on debt financing, thus exposing the corporation to higher financial risk and reducing its
financial flexibility.

To achieve financial stability, Volkswagen should prioritize correcting the negative TIE ratios and
controlling the high Debt-to-Capital Ratio. Monitoring and strategic changes are critical, since
Volkswagen's reliance on debt may limit its capacity to weather economic uncertainty and invest in
future undertakings.

Profitability Ratios:

Net Margin (aka, profit margin):

2019 2020 2021

Volkswagen 5.50% 3.98% 6.15%
Ford 0.03% -1.01% 13.16%
General Motors 4.91% 5.25% 7.89%
BMW 4.72% 3.81% 11.13%

Gross Margin (calculated as gross profit / revenues):

2019 2020 2021

Volkswagen 19.45% 17.47% 18.88%
Ford 13.60% 11.32% 15.91%
General Motors 10.18% 20.37% 20.83%
BMW 17.33% 13.72% 19.76%

Comments:

It is evident from the tables above that Volkswagen has a steady increase in Net Margin, from 5.50% in
2019 to 6.15% in 2021, indicates successful cost control and profit development. In comparison to this
Ford had a huge change from negative margins to a solid 13.16%, which is a high rebound. Over the
years, General Motors and BMW have maintained reasonably consistent and competitive Net Margins.

When it comes to Gross Margins, Volkswagen has seen a progressive improvement indicating
operational efficiency. In comparison, General Motors' Gross Margin climbed significantly, Ford and
BMW also improved their gross margins. This is a reflection on the industry and overall growth of the
industry with sales and efficiency in manufacturing. Overall, Volkswagen's strong developments in Net
and Gross Margins point to effectiveness and efficiency of the company for increasing profitability in a
competitive automotive industry.
Valuation Ratios:

PE Ratio:

2021
Volkswagen 4.75
Ford 4.09
General Motors 8.62
BMW 4.71

Market / Book Ratio: (calculated as market value equity / book value equity)

2023
Volkswagen 0.77
Ford 1.71
General Motors 1.29
BMW 0.77

Comments:

The Price-to-Earnings (P/E) ratios for major automakers in 2021 provide fascinating information.
Volkswagen, Ford and BMW have similar P/E ratios which indicate that the market values these
companies less when compared to their corresponding profits. This reflects the overall mood of the
markets when it comes to automobile industry, the market sentiment may have been low as the industry
is known for its risks and in case of Volkswagen the 2015 diesel gate case may have also lessened the
following of the company. The P/E ratio for General Motors stands at 8.62, which is almost double that of
the others in the peer group indicating perhaps better investor confidence or expectations for future
profits growth. Volkswagen's lower P/E ratio may indicate that the market is undervaluing the firm. This
may present an opportunity for investors seeking for possibly discounted equities, but it also seeks a
deeper look at the variables driving the market's opinion.

The Market/Book ratio doesn’t provide any significant insight, rather is one of the ratios under valuation
ratios.

Payout Ratios:

Dividend Payout Ratio (sometimes just called, ‘payout ratio’):

2019 2020 2021

Volkswagen 16% 25% 15%
Ford 65% -112% 22%
General Motors 32% 8% 0%
BMW 46% 44% 10%
Total Payout Ratio (calculated as [Dividends + Repurchases] / Net Income)

2019 2020 2021

Volkswagen 16% 0% 20%
Ford 3126% -47% 2%
General Motors 42% 12% 2%
BMW 32% 32% 8%

Comments:

The Dividend Payout Ratio and Total Payout Ratio generally gives insight into the capital allocation
methods. Volkswagen's dividend payout ratio is lowering from 25% in 2020 to 15% in 2021, this is a
trend of preserving earnings for investments or other financial goals instead of paying dividends to the
investors. Ford has a negative Dividend Payout Ratio in 2020 indication that the firm paid out more
dividends than it earned, this is a financial stress on the company. Volkswagen has a Total Payout Ratio of
20% in 2021 demonstrating a strategy to distribute income to shareholders when both dividends and
share repurchases are included. Ford's unusually high Total Payout Ratio in 2019 and negative value in
2020 may imply financial concerns, whereas General Motors and BMW kept their ratios largely steady,
matching with more sustainable capital distribution methods.

These measures demonstrate the many ways organizations take in balancing shareholder returns,
reinvestment in the business, and financial health for investors. Volkswagen's cautious payment policy
may be viewed as smart, allowing it flexibility in handling industry problems and pursuing strategic
objectives.

Return-on-Invested-Capital (ROIC):

2019 2020 2021

Volkswagen 5.04% 2.74% 5.37%
Ford -0.03% -2.26% 2.07%
General Motors 2.58% 2.67% 3.71%
BMW 2.65% 1.81% 4.97%

Here we are using the formula for invested capital = BV Debt + BV Equity – Cash +BV Other LT Liabilities
from simfin financial statements.

The numbers for Volkswagen are calculated and shown on the spreadsheet on the ‘Financial Ratios’ tab.
For purposes of brevity, numbers for the other firms are simply taken from an anonymous online source.
As before, for each firm the latest available three years data are shown.

The return-on-invested-capital (ROIC) statistic is a measure of efficiency of the company in earning the
returns on its invested capital. Looking at the ROIC reveals important information about the operational
efficiency and capital use. Volkswagen with its ROIC has shown varied results over the last three years,
rising from 2.74% in 2020 to 5.37% in 2021. This can be interpreted as Volkswagen has effectively
improved its capacity to create returns on capital invested, this also means that there is strong
operational management or efforts. Ford, on the other hand, can been seen to have encountered
difficulties, with a negative ROIC in 2019 and 2020. The upward move to 2.07% in 2021, on the other
hand, implies probable measures to bring the firm around.

General Motors and BMW have maintained very steady ROIC numbers during the selected time period,
which represents sustained capital usage. The incremental rise by General Motors from 2.67% in 2020 to
3.71% in 2021 demonstrates a small but encouraging trajectory. BMW demonstrates better capital
efficiency, maybe through efficient cost management or successful business strategies, with a
noteworthy rise from 1.81% in 2020 to 4.97% in 2021.

Volkswagen with an increase in ROIC indicates attempts and success to maximize capital use, which
might be accomplished through better operational efficiency, strategic investments, or cost-cutting
activities. The disparities in ROIC trends among peers show the unique way each firm encounters the
market. These measures may be important to investors and stakeholders in analyzing the overall
financial health and efficiency of these automotive giants.

Working Capital Management Ratios:

Cash Conversion Cycle:

Volkswagen Ford General Motors BMW

Days Sales
Outstanding
(DSO) 101.61 128.91 98.13 125.53
Days Inventory
(DOH) 76.05 34.81 38.84 61.20
Days Payable 41.09 67.81 67.43 40.03
Cash Conversion
Cycle 136.58 136.57 152.7 146.7

Comments:

The Cash Conversion Cycle (CCC) of any company generally gives insight into the effectiveness of their
working capital management. A lower CCC often suggests better cash flow and a faster conversion of
resources to cash. Volkswagen and Ford have quite similar CCCs of around 136 days, implying equal
efficiency in the cash conversion process. The breakdown of components, shows otherwise, Volkswagen
has a lower Days Sales Outstanding (DSO) and a longer Days Inventory (DOH) than Ford, indicating a
more efficient sales collection procedure but need for improvement in Inventory management.

CCCs for General Motors and BMW are 152.7 and 146.7 days, respectively. The high CCC of General
Motors is mostly due to a longer Days Payable period, which shows advantageous payment
arrangements with its suppliers. Meanwhile, BMW's CCC is impacted by both a longer DSO and a higher
DOH, which means opportunities for improvement in sales collection and inventory turnover.

Companies with shorter CCCs, like Volkswagen and Ford, are more likely to satisfy short-term obligations
and reinvest in the business more swiftly. Analysis of the CCC components identifies particular areas of
improvement that businesses may look at in order to be more efficient and optimize their working
capital. Focusing on inventory management might be a concern for Volkswagen, while General Motors
may look into ways to streamline payables. These insights are critical for businesses seeking to manage
liquidity, operational efficiency, and profitability.

VALUATION
Using simfin standardized financial statements and an assumed tax rate of 22%, the following input is
obtained:

• FCFF (2021): Approximately, $45.214 Billion.

In addition, simfin shows the firm having $45 billion in cash. The figure of firm debt as of 2021 is $40
Billion, which is calculated per the firm’s actual financial statements as explained in the WACC PP rather
than only using the “Long Term Debt” figure from simfin. Yahoo Finance lists the firm as having non-
diluted shares outstanding of 5013 million.

For Estimate I, the calculation uses the FCFF calculation for 2021 as above and assumes only a constant,
long-term growth of 2.5%, roughly in-line with WACC of the company and long-term growth of
automotive industry.

For Estimate II, we consider a short term growth rate of 4% given the expansion in EV cars from the firm
and also given rise to investment by many countries to change to EV cars to reduce emissions.

For Estimate III, we use for the short-term ROIC our figure of 5.37%, obtained above. For the long-term
ROIC, we subjectively set ROIC to approximately half of the ROIC 5.37% and its WACC of 5.7% which is
2.5%.

The price per share from each estimate and the actual price per share (as of December 31st, 2021) are
presented below:

Estimate I Estimate II Estimate III Actual Value (Dec 31st, 2021)

$277.07 $306.32 $31.76 $195

Observations:

Comparing these estimates to the Actual Value of $195 on December 31st, 2021, indicates a variance in
market expectations. This discrepancy could be influenced by factors such as market sentiment,
economic conditions, or specific events affecting the automotive industry. Such variation in the valuation
estimates inherently are due to the complexities and subjectivity of the market in determining the worth
of a company. This also indicates the need for various ways of valuation to arrive at a near value by the
investors and stakeholders. The market is very dynamic and is reliant on the sentiment of the investors
and the historical brand value of a company that makes it popular and makes the investors pay premium
for shares of the company. The variations in estimates highlight the importance of thorough analysis and
a comprehensive understanding of factors shaping the company's financial standing and market
perception.

CONCLUSIONS
In conclusion, we have understood Volkswagen’s journey in the automotive sector is a reflection of a
dynamic interplay of business strategy, financial decisions, and technological innovation. The financial
analysis of the company is nuanced and gives a perspective on Volkswagen's performance. Despite facing
challenges, such as the "Diesel gate" scandal in 2015, the company demonstrated resilience and
adaptability. Key financial metrics, including profitability ratios, debt ratios, and return-on-invested-
capital, highlight both positive trends and areas for improvement for the company. Notably, the
consistent improvement in net and gross margins reflect effective cost control and operational efficiency.

However, the negative TIE ratios and a high debt-to-capital ratio raise red flags about the company's
financial risk and debt management. These issues are to be addressed and are crucial for Volkswagen to
enhance financial stability and withstand economic uncertainties. The valuation estimates further
underscore the complexity of determining a company's worth. The variations in estimates, ranging from
$31.76 to $306.32, emphasize the subjective nature of market expectations. While Estimate I and
Estimate II suggest a relatively optimistic outlook, Estimate III and the actual market value present a
more conservative valuation.

Volkswagen's cautious dividend payout and total payout ratios demonstrate a prudent approach to
capital allocation, allowing flexibility for internal investments and strategic goals. The company's lower
price-to-earnings (P/E) ratio, compared to peers, may indicate an undervaluation, presenting
opportunities for investors but necessitating a deeper understanding of market sentiments.

In the ever-evolving automotive landscape, Volkswagen shows that the financial decisions and strategic
initiatives play a crucial role. The decision by the company to shift to electric mobility, managing global
supply chains, and addressing regulatory requirements all give raise to a healthy business outlook. This
analysis provides a comprehensive overview of Volkswagen financials, allowing stakeholders to make
informed decisions in the dynamics of business and finance. As Volkswagen continues to shape the
future of the automotive industry, a strategic focus on financial health and sustainable practices will be
essential for long-term success.