Commercial Activities: The Ultimate Guide

Introduction 

The financial ratios have gained a worldwide recognition in commercial activities and mainly entail the quantitative analysis of all material financial elements as disclosed in the financial statements of a business. As a general observation, the majority concern of analysis in a company is the financial analysis. While numerous beneficial factors could be owed to this trend, the modern business practice has made financial analysis mandatory ( Brenner, & Herrmann, 2018 ). Furthermore, the more people, especially stakeholders to a given venture, understand the essence of financial analysis, the more likely they will require concise disclosure of financial information of a company. The disclosure normally takes the form of boiling down the key financial components such as profits or losses, sales, equity and debts owed to and from a business. The financial analysis thus is interpretive by nature. 

In this paper, the traditional and modern ratio analysis will be measured and used to compare the various financial components between the selected companies. This paper is designed purposefully to shed light on the rapidly growing auto industry. First, the paper will describe the basic current economic and financial factors surrounding this industry. The paper will take an analytical approach to the 3 major leading companies in the Automotive sector namely: Ford Motor Company (Ford), Daimler AG Corporation (DC) and the General Motors Corporation (GM). Additionally, the paper will also analyze the key financial ratios of these companies. Lastly, the paper, through a concise ratio and risk analysis, will determine which of these companies is best positioned to lead the auto industry and as such, provide the greatest shareholder value in the future. 

An Overview of the Automotive Industry 

The prominent economic indicators assist investors to make sound and informed decisions regarding various market segments and the economy at large. Such indicators include, but are not limited to, the Gross Domestic Product (GDP). The auto industry stands out from other industry in that its growth is considered inconsistent with the economic growth (King, 2018). It follows, therefore, that the industry is evaluated using distinct indicators including the Durable Orders Index (DOI) and Automotive Sales Index (ASI). The DOI indicates the new demand for durable goods, which aids in increasing the future delivery of finished hard goods. The automotive industry contributes close to 30 percent to the DOI exclusive of defense spending. The automotive industry’s chief indicator is the ASI. Over the recent years, the ASI has indicated inconsistent trends. Foster (2004) finds that the increasing prices of vital compliments to automotive products such as gasoline has made the general demand for efficient automobiles to rise significantly. 

I chose the automotive industry because it has experienced a tremendous growth over the recent past, with creative and innovative designs emerging every day. The sector affects almost all other sectors in the economy and automotive products have significantly improved the running of various social and commercial activities. As such, analyzing this industry is of great significance from both an economical and an investment point of view. 

Selection Criteria 

The automotive industry involves a high capital-intensive investment. As such, most companies operating under this sector utilize a tremendous debt in their capital structure. As such, the ratio analysis employed capitalization as a selection criterion of the three companies. Figure 1 shows the percentage of debt in capital structure for the major automobile manufacturers in the U.S. 

Figure 1 

A high debt-to-equity ratio is indicative of possible financial risks. Nonetheless, automobile companies require a lot of capital, which requires external sourcing of finances. The leading companies in as far as capitalization is concerned are Ford and Daimler. The two companies have the major part of their capital structure comprising of debts. As such, their general competition strength relative. The massive debt investment has impacted significantly on the companies’ market penetration and the overall market share. Ford has more than 80% debt-to-capital ratio, which implies that most of its finances are obtained from loans. Likewise, Daimler’s debt to capital ratio is considerably high, which impacts on its competitiveness and market share. Therefore, the two automotive giants are ideal for illustrating how well capitalization affects the competition and risks in the automobile industry. 

General Motors (GM), which has the lowest debt-to-capital ratio of 45.6%, is ideal in comparative terms, as it allows an informed understanding of the correlation between debt investments and the growth and expansion of a company in the market. The significant difference between General Motors’ debt-capital ratio is a vital concern for investors. The comparison of the three companies is essentially a two against one approach and is aimed at elucidating the impact capitalization has on leverage. It is worth noting that the companies’ debt-to-capital ratios are in the extreme ends, which is essential in elucidating why and how too little or a high leverage affects the competitiveness and risks in the automobile industry. 

Ratio Analysis 

A ratio analysis is essentially a quantitative analysis of financial information reported in periodical financial statements. As such, financial information pertaining to the three selected automotive giants can be used to formulate underlying financial behavior and trends, or of which are important to an investor intending to enter in the sector. The financial information was obtained from annual reports of the three companies from their websites and other U.S.-based financial databases. 

5-Year Trend Analysis of the Selected Companies 

A trend analysis is meant to particularly equip the users of the financial information with the information of how the company’s earnings, financial position, and other key financial components have varied within a given timeframe. 

Ford Motors Company 

The Ford Motor Co. is an American global automotive manufacturer and seller. Some of the company’s brands include Ford cars, trucks, electrified vehicles, and SUVs. Lincoln Luxury Vehicles is the company’s primary financier, through Ford Motor Credit Company. The global markets for Ford’s products are in America as well as other parts of the world. In the recent past, the company has seen tremendous innovation and restructuring to fully grasp the opportunities available in the automotive industry. Figure 2 shows Ford’s financial 5-year trend. 

Figure 2 : Ford’s Financial Trends (Macro Trends, 2018) 

Ford’s ROE is constant through the five years. However, the company saw a significant fall in 2015. The ROE in 2013 was a near-record, but following the consequent the tremendous cash outflow in Venezuelan operations and other investments, the company’s income for the fiscal year 2014/2015 dropped significantly. 2014 recorded a 56 percent drop in the company’s earnings, which amounted to $3.2 billion. The decline in earnings greatly affected the company’s net income, which also fell signifivantly in the fourth quarter. Consequently, the drop in ROE affected shareholders’ equity. 

General Motors Company 

The General Motors Company designs build and sell various types of vehicles and automobile parts. The General Motors Financial Company Inc. funds the companies’ operations. GM brands and markets its brands such as Buick, GMC, Chevrolet and Cadillac within and outside North America. Since its inception, the company has been reputed for the after-sale customers offered to its customers. GM financials, one of the company’s key financier, is also involved in automobile finance solutions. Figure 3 shows the GM stock trends for five consecutive years. 

Figure 3 : GM Stock Trends between 2o14 to 2018 

The company’s earnings have been improving over the recent past, following various brand improvement and improvements entailing internal controls. Table 1 shows GM’s Return on Equity since 2013 

Table 1 : General Motors Co. ROE Calculations (Stock Analysis, 2018) 

	ROE	Net income (loss) attributable to stockholders	Stockholders' equity
Dec 31, 2013	12.55%	5,346	42,607
Dec 31, 2014	11.14%	3,949	35,457
Dec 31, 2015	24.30%	9,687	39,871
Dec 31, 2016	21.51%	9,427	43,836
Dec 31, 2017	-11.04%	-3,864	35,001

. 

To better determine the general trend of ROE for the five years, the data above is represented graphically, as shown in Figure 4 below. 

Figure 4 : ROE Trend for Five Years 

The trend general net income attributed to stakeholders has been slightly decreasing as indicated by the Net Income trend line. It follows, therefore, that the stakeholders’ equity has also been decreasing for the past five years as shown in Figure 4. 

Daimler AG Group 

The company is the largest manufacturer of commercial vehicles, with its brands stretching in Europe and North America. Table 2 shows the how the company’s income has grown over the past five years. 

Table 2 : Daimler AG Group ROE Trend for Five Years 

	ROE
Dec 31, 2013	15.81%
Dec 31, 2014	16.13%
Dec 31, 2015	17.33%
Dec 31, 2016	15.29%
Dec 31, 2017	17.26%

Over the five years, the company’s income has grown steadily, following tremendous investments and expansion of the company’s subsidiary firms. Figure 3 shows the general trend of income earned by Daimler AG from 2013 to 2017. 

Figure 5 : Daimler AG Income Trend 

As shown in Figure 5 above, the financial year 2015/2016 recorded a tremendous decrease in income. The loss was associated with the merger deal made Daimler AG and the American company Chrysler. 

Competitive Analysis 

The automotive industry is diversifying and has faced tremendous technological development. A competitive analysis in the automotive sector will aid investors and users of financial information in understanding the strength and weaknesses of the companies operating within the sector. Table 3 shows a set of the key financial ratios grouped according to the four main categories of financial ratios used to measure the competitive strength of companies. 

Table 3 : Financial Ratios in Compliance with Four Main Standards 

Profitability	Liquidity	Debt	Return on Equity
Net Income (loss)	Current ratio	Debt on Total Assets	Return on Equity (ROE)
Return on Assets (ROA)	Quick, or Acid Test	Time interest earned	Return on Invested Capital
Margin on Revenue	Receivables Turnover		Earnings Per Share (EPS)
Earnings Before Tax Margin	Inventory Turnover
Financial Leverage	Fixed Assets Turnover
	Working Capital

Profitability Analysis of U.S. Leading Automobiles Manufacturers 

The vigorous efforts invested in innovation within the automotive sector have impacted on the efficiency and service delivery of automobiles. Following the invention of cost-effective manufacturing equipment, the profits have risen considerably. Table 4 shows the compilation of the profitability ratios for the three companies. 

Table 4 : Profitability Analysis for the Leading Automobile Manufacturers 

(in millions $ except for ratio data			2013	2014	2015	2016	2017	Average
Ford Motors Co.	Net Income (Loss)	(in million $)	8,691	3,871	8,956	5,583	9,234	7,268
	ROA	%	3.65	1.55	3.40	1.99	3.07	3
	Gross Margin	%	18.2	13.2	16.8	16.9	16.2	16
	Net Margin	%	4.87	2.21	4.93	3.03	4.85	4
	Financial Leverage	%	7.66	8.41	7.85	8.16	7.39	8
General Motors	Net Income (Loss)	(in million $)	6,493	4,797	11,766	11,450	(4,693)	5,963
	ROA	%	13.2	11.4	16.7	19.2	21.1	16
	Gross Margin	%	6.6	7.3	8.5	7.9	7.9	8
	Net Margin	%	2.43	1.80	6.36	5.67	-2.67	3
	Financial Leverage	%	4.21	5.01	4.88	5.06	6.07	5
Daimler AG	Net Income (Loss)	(in million $)	8,311	8,481	10,232	10,356	12,784	10,033
	ROA	%	4.13	3.89	4.14	3.71	4.22	4
	Gross Margin	%	6.6	7.3	8.5	7.9	7.9	8
	Net Margin	%	5.33	5.80	5.36	5.56	6.40	6
	Financial Leverage	%	3.95	4.34	4.05	4.19	3.99	4

The profitability analysis summarized in Table 4 show that Daimler AG earned the highest average profits within the five-years timeframe followed by Ford Motors Company. The company with the least average net profits is the General Motors Company, a case that was factored by the low income earned in 2017. 

Liquidity Analysis of U.S. Leading Automobiles Manufacturers 

Liquidity ratios are essential in measuring the ability of a business to meets its financial obligations when they fall due ( Saleem & Rehman, 2011 ). Such obligations are normally met through the business’ current assets such as liquid cash, cash at bank and transfer of accounts receivable. Table 5 summarizes the liquidity ratios for the three multinational automobile manufacturers. 

Table 5 : Liquidity Analysis for Leading Automobiles Manufacturers 

(in millions $ except for ratio data			2013	2014	2015	2016	2017	Average
Ford Motors Co.	Working Capital	(in million $)	69,787	66,434	77,990	75,119	-83,861	41,094
	Current Ratio	Times	1.77	1.71	1.79	0.64	0.63	1
	Quick Ratio	Times	1.67	1.60	1.69	0.56	0.55	1
	Receivables Turnover	Times	1.73	1.60	1.54	2.68	14.45	4
	Inventory Turnover	Times	16.62	15.86	15.33	14.70	13.70	15
	Fixed Assets Turnover	Times	5.59	4.99	4.96	4.88	4.65	5
	Payables Period	Average days	3.91	4.22	4.31	3.82	3.84	4
General Motors	Working Capital	(in million $)	56.59	58.46	59.30	59.93	61.95	59
	Current Ratio	Times	1.31	1.27	1.09	0.89	0.89	1
	Quick Ratio	Times	0.83	0.82	0.70	0.66	0.68	1
	Receivables Turnover	Times	16.42	17.71	17.50	18.51	16.36	17
	Inventory Turnover	Times	9.39	9.98	9.36	9.90	9.40	10
	Fixed Assets Turnover	Times	5.64	4.87	3.53	2.73	1.95	4
	Payables Period	Average days	65.99	61.00	66.26	68.30	80.85	68
Daimler AG	Working Capital	(in million $)	13,766	12,354	17,936	21,372	23,844	17,854
	Current Ratio	Times	1.19	1.15	1.19	1.21	1.23	1
	Quick Ratio	Times	0.83	0.70	0.74	0.76	0.77	1
	Receivables Turnover	Times	3.91	4.22	4.31	3.82	3.84	4
	Inventory Turnover	Times	5.27	5.32	5.27	4.94	5.09	5
	Payables Period	Average days	35.37	34.57	32.14	33.27	33.75	34

Debt Ratio 

Table 6 : Debt Analysis for Leading Automobiles Manufacturers 

(in millions $ except for ratio data			2013	2014	2015	2016	2017	Average
Ford Motors Co.	Debt on Total Assets	Times	2.90	3.23	3.14	0.46	0.35	2
General Motors	Debt on Total Assets	Times	0.17	0.25	0.20	0.22	0.31	0
Daimler AG	Debt on Total Assets	Times	0.99	1.11	1.05	1.13	1.15	1

Return on Equity 

Table 7 : Return on Equity Analysis for Leading Automobiles Manufacturers 

(in millions $ except for ratio data			2013	2014	2015	2016	2017	Average
Ford Motors Co.	ROE	%	33.81	12.45	27.59	15.90	23.73	23
General Motors	ROE	%	11.54	7.48	25.72	22.52	-9.84	11
Daimler AG	ROE	%	15.81	16.13	17.33	15.29	17.26	16

Growth Projection 

Table 8 : Growth Projection for the three Companies 

(in millions $ except for ratio data			2013	2014	2015	2016	2017	Average
Ford Motors Co.	Year over Year Operation Income	%	9.43	-1.93	3.80	1.50	3.28	3
	Year over Year Net Income	%	-5.43	-24.15	59.75	-54.26	45.37	4
	EPS	%	23.94	-54.55	130.00	-37.50	65.22	25
General Motors	Year over Year Operation Income	%	—	-70.91	196.79	94.92	4.93	56
	Year over Year Net Income	%	13.61	-26.13	145.30	-2.68	—	33
	EPS	%	-36.24	-18.49	-30.67	258.18	1.52	35
Daimler AG	Year over Year Operation Income	%	-2.69	21.35	32.32	-3.74	7.54	11
	Year over Year Net Income	%	12.26	1.75	21.00	1.21	23.45	12
	EPS	%	12.08	1.72	20.89	1.27	23.46	12

Company with the Best Shareholder Value 

From the analysis carried out above, General Motors Co. stands out to be the company with the best shareholder value as it has an average Earning Per Share (EPS) of 35 percent. The considerably high EPS makes GM a powerful predator. There exist several possible acquisition targets for GM. Key among them is the American Axle & Manufacturing Holdings Inc. (NYSE: AXL). The company operates in the locomotive sector and manufactures driveline and drivetrain systems. AAM also manufactures metal-formed parts of sports utility vehicles, passenger cars, passenger trains and commercial vehicles. 

The target is located in Indiana, Michigan, and Ohio, and also has its offices in Asia, Europe, and the Middle East. The Wall Street consensus price target is $20.09. There exist various ways in which valuation of a potential target is done. The most applicable criterion, in this case, is the time value of money. Looking at the cash flows of AAM, General Motors would need to consider the possibility of the target, AAM, demanding for a considerably high-interest rate to be discounted on the firm’s cash flows. 

Key Market Changes in the Automotive Industry 

The Automotive industry is subjected to tremendous changes in the foreseeable future. Companies operating within this sector are investing heavily in information technology to see to it that operational costs are minimized, and quality is delivered. The companies operating under this segment are also seeking effective ways to open new markets (Akay et al., 2017). The internet is changing the means through which transactions take place. Most car buyers consult the internet before buying, which challenges automobiles sellers to adapt to key technological advancements. On social terms, the perspective on cars is changing gradually. Ten years ago, fancy cars were considerably few. However, with time the notion of who should drive what car is changing. The demand for fancy cars is on the rise. 

Additionally, the advancement of the automotive industry has attracted legal concerns, which has seen the amendments and introduction of various laws concerning the manufacture, sale, and distribution of automobiles. The tendency is also prone to continue as governments worldwide seek means to control standards in the automotive industry effectively. 

References 

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