Applied Financial Management writing topic : (Deutsche Telekom)

Analyze the consolidated financial statements (+ / – 3,000 words) for the years 2023 and 2022 considering the following aspects: 1. Operating leverage 2. Financial leverage 3. Combined leverage 4. Relationship between ROA, ROE and WACC in the company 5. Liquidity and solvency ratios 6. Company’s dividend policy & strategy (last 10 years) 7. Stock price development (last 10 years) 8. Credit risk, Market risk, Operational risk and Liquidity risk 9. Impact of IFRS 16 in the company (optional) Evaluate your findings and decide what you would do next.

Recommendations: 1. Use consolidated figures. Be aware of the differences between Group and AG, Inc, SA etc. 2. Include in the Appendix the annual report’s consolidated figures (Balance Sheet and Income Statement) 3. Use ONLY the official information from the company’s webpage 4. Explain how the results are calculated using tables, formulas and sources closed to the results, for example:

5. You can supplement your analysis with graphics. As an example: (check the uploaded file)

5. You can supplement your analysis with graphics. As an example: (check the uploaded file)

6. When calculating Ratios be aware of minority interests (non-controlling interest), Spin-offs, discontinued operations, restatements (revision of one or more of a company’s previous financial statements to correct an error or to include a new reporting standard), and extraordinary items

7. Be aware of Style Guide (check uploaded file)

I want the paper to have 0 plagiarism and use proper in-text citations following APA 7 guidelines to acknowledge sources.

i will also upload an example paper from last years student.

Applied Financial Management Paper
Analyze the consolidated financial statements (+ / – 3,000 words) for the years
2023 and 2022 considering the following aspects:
1. Operating leverage
2. Financial leverage
3. Combined leverage
4. Relationship between ROA, ROE and WACC in the company
5. Liquidity and solvency ratios
6. Company’s dividend policy & strategy (last 10 years)
7. Stock price development (last 10 years)
8. Credit risk, Market risk, Operational risk and Liquidity risk
9. Impact of IFRS 16 in the company (optional)
Evaluate your findings and decide what you would do next.
1
Recommendations:
1. Use consolidated figures. Be aware of the differences between Group and AG,
Inc, SA etc.
2. Include in the Appendix the annual report’s consolidated figures (Balance Sheet
and Income Statement)
3. Use ONLY the official information from the company’s webpage
4. Explain how the results are calculated using tables, formulas and sources
closed to the results, for example:
5. You can supplement your analysis with graphics. As an example:
2
6. When calculating Ratios be aware of minority interests (non-controlling
interest), Spin-offs, discontinued operations, restatements (revision of one or
more of a company’s previous financial statements to correct an error or to
include a new reporting standard), and extraordinary items
7. Be aware of Style Guide
3
4
Industry Sectors
5
Frequently Asked Questions
1. Hi Roberto, I hope your having a good easter. I just have a quick question
regarding the paper. I saw all the documents and what has been uploaded and
I am aware of the calculations on what we have to do. But what exactly is the
paper meant to be based on, like to topic title and what is the best website to
find the financial statements of the company. Because I chose Lufthansa and I
have been on Morningstar but I just want to be sure that I am using the right
one. (smile) Thank you
Answer:
Dear „XXX”, Thank you very much for your mail. The issues you need to describe
in your paper are clearly mentioned in the Word file: “Applied Financial
Management Paper” in Stupo. The best way to do this is considering ONLY the
“OFFICIAL INFORMATION” from the company’s webpage:
https://www.lufthansagroup.com/en/themes/annual-report-2020.html or
https://www.lufthansagroup.com/en/themes/annual-report-2019.html
Afterwards you need to answer the topics (i.e. operating and financial leverage)
according to the information previously analyzed in the annual reports. Please let
me know if you have additional questions
Many greetings Roberto
6
2. Hello Mr. Anero, I have a question concerning the ROIC and ROA. I did the
calculations just like we have learned in the course but they dont correspond
with the ROIC and ROA on their website. Which ones should i use and why is
there a difference?
Answer:
As I’ve mentioned in the course, the companies can decide how to calculate
ratios like ROCE, ROIC etc. That’s why it is a little bit annoying because you
need to understand how each company calculates them. Please use the
calculation used in the annual reports and compare the results what we
discussed in class
7
3. Hola Roberto, ich hoffe, dir geht es gut und du bist gesund.
Vielleicht kannst du mir bei einer Frage bez. unserer Hausarbeit weiterhelfen.
Ich war gerade dabei die Ratios fuer die BayerAG auszurechnen und da ist mir
aufgefallen, dass die Zahlen z.B. fuer Total Assets sehr verschieden sind.
Bayer’s annual report fuer 2019 sagt beispielsweise 84,586 million und auf
Morningstar sind 126,258 million eingetragen.
Mit welchen Zahlen soll ich nun rechnen? Ich weiss, dass die Unternehmen
ihre annual reports teilweise mit kreativen Accountingtricks “manipulieren” aber
naja, ich weiss jetzt nicht so recht, welche Zahlen verlaesslicher sind.
Vielen Dank und liebe Gruesse,
Answer:
Hi XXX, gut dass du es fragst. Ganz wichtig: Immer die Infos aus der ersten
Quelle nehmen. D.h. aus den Jahresabschlüssen der Unternehmen.
https://www.bayer.com/sites/default/files/2021-02/Bayer-Annual-Report2020.pdf
Laut dem Jahresabschluss die Total Assets für das Jahr 2019 betrug 126.648
Mio. Eur. Könnte es sein, dass Deine Werte, die von der Bayer AG sind und
nicht die konsolidierten Zahlen der Bayer Gruppe?
Sorry… 126.174 Mio. Eur
Ich habe nicht aufgepasst. Der andere Wert ist
der Anfangsbestand für 2019…
8
9
CBS
International Business School
Financial Analysis:
A case study on BMW st
Term paper for “Applied Financial Management.”
Summer Semester 2023
Lecturer: Roberto Anero
Student’s name: Maather AL Nuumani
BA International Business/ Finance
Student No. 2201979
1
Table of Contents
1. Introduction …………………………………………………………………………………………… 3
1.1
BMW St and its business ………………………………………………………………….. 3
1.2
Motivation and current importance ……………………………………………………. 3
1.3
Aim of paper …………………………………………………………………………………… 3
2. BMW st – A Case Study …………………………………………………………………………. 4
2.1
Operating Leverage …………………………………………………………………………. 5
2.2
Financial Leverage ………………………………………………………………………….. 5
2.3
Combined Leverage …………………………………………………………………………. 5
2.4
Return on assets ………………………………………………………………………………. 6
2.5
Return on equity ……………………………………………………………………………… 6
2.6
Weighted Average Cost of Capital (WACC) ………………………………………. 6
2.7
Liquidity Ratios ………………………………………………………………………………. 7
2.8
Solvency Ratios ………………………………………………………………………………. 7
2.9
Dividend policy ………………………………………………………………………………. 8
2.10 Stock Price Development …………………………………………………………………. 9
3. Main Findings ……………………………………………………………………………………….. 9
4. Outlook………………………………………………………………………………………………..10
References …………………………………………………………………………………………………12
2
1. Introduction
1.1 BMW St and its business
Bayerische Motoren Werke ST (BMW) is a German multinational luxury automobile and
motorcycle manufacturer (Sheppard, n.d). The company was founded in 1916 as a manufacturer
of aircraft engines and later expanded into motorcycles and automobiles. It is one of the world’s
leading premium automotive brands, known for its high-performance vehicles and luxury
vehicles under the BMW, MINI, and Rolls-Royce brands. Over the years, BMW has experienced
fluctuations in its financial performance, influenced by various factors such as global economic
conditions, automotive industry trends, market demand for luxury vehicles, currency exchange
rates, and company-specific factors (Nobanee et al., 2021).
1.2 Motivation and current importance
The company’s revenue has shown a growth trend over the years, with periodic fluctuations.
These fluctuations have been influenced by both internal and external factors (Nobanee et al.,
2021). BMW’s operating profit has also shown fluctuations over the years. Operating profit has
been shown to be influenced by sales volume, product mix, production costs, research and
development expenses, and other operating expenses (Nobanee et al., 2021). In the fiscal year
2020, BMW’s Group operating profit was €4.83 billion, a decrease of 26.4% compared to the
previous fiscal year, mainly due to the impact of the COVID-19 pandemic and higher upfront
investments in electrification and digitalization (Dobrin, 2021). Lastly, the net income has also
shown fluctuations over the years, reflecting the company’s operating performance, as well as
non-operating items such as taxes, interest expenses, and other gains or losses. In the fiscal year
2020, BMW’s Group’s net profit was €3.86 billion, a decrease of 23.2% compared to the previous
fiscal year, primarily due to the impact of the COVID-19 pandemic and higher upfront
investments.
1.3 Aim of paper
This paper analyzes the financial statements of Bayerische Motoren Werke ST (BMW)
organization to determine its operating leverage, financial leverage, combined leverage, the
relationship between ROA, ROE and WACC in the company, liquidity and solvency ratios, the
company’s dividend policy in the last ten years, stock price development, credit risk, market risk,
operational risk, liquidity risk and the impact of IFRS in the company in 2021 and 2022.
3
2. BMW st – A Case Study
This paper analyzes the financial statements of Bayerische Motoren Werke ST (BMW) between
2021 and 2022. All data has been organized together with definitions and arithmetic formulas.
Figures relevant to the analysis are also included.
The analysis covers the following elements:
Figure 1: Key figure in billion USD.
Figure
2021
2022
% Change
Net income
14649
18903
6.97%
Average total assets
271.55
94.14
-65.3%
EBIT
15.845
14.749
-6.91%
EBT
4.27
4.76
11.47%
Shareholders equity
88.88
96.18
8.21%
Total debt
96.18
56.33
41.4%
Current assets
101.951
96.14
-5.7%
Current liabilities
90.467
88.95
-1.7%
4
2.1 Operating Leverage
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑓
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 6.97%
=
% = 0.25%
𝐼𝑛 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
28.2%
An analysis of the income statement shows that an increase in sales leads to a corresponding
increase in operating income. Sales, operating profit, and net income increased between 2021
and 2022. Operating income increased by 13.8%, while revenue increased by 28.2%. Operating
leverage calculations show an operating leverage of 0.25% due to a negative change in the %
EBIT. Operating leverage is a financial term that gauges a company’s operating income’s
sensitivity to changes in sales and revenue. Operating leverage varies depending on market
conditions, production levels, pricing strategy, and cost management. As an automotive
manufacturer, BMW’s operating leverage depends on its cost structure, production capacity, and
fixed costs. Companies with higher fixed costs relative to variable costs tend to have higher
operating leverage, as changes in sales volume can have a larger impact on their operating
income.
2.2 Financial Leverage
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛
𝐸𝑃𝑆
147.49%
=
= 3.1
𝐸𝐵𝐼𝑇
47.9%
The financial leverage was x3.1. Financial leverage refers to the use of borrowed funds or debt to
finance a company’s operations and investments. It involves using debt to magnify the returns on
equity for shareholders. However, financial leverage comes with an elevated risk as the company
needs to repay the debt along with interest regardless of its financial performance (Ibrahim &
Isiaka, 2020). BMW requires substantial capital to invest in research and development,
production facilities, and marketing. They may use debt to fund these operations, which can
affect their financial leverage. BMW’s financial leverage was the lowest in 2022 in the last five
years, which means that the company acquired more debts than assets.
2.3 Combined Leverage
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑜𝑓
𝐸𝑃𝑆
147.49%
=
% = −28.9%
𝑆𝑎𝑙𝑒𝑠
−5.1%
Combined leverage typically refers to the overall level of debt used by a company, takin
g into account both long-term and short-term debt. It is often measured using financial ratios,
such as the debt-to-equity ratio or the total debt ratio, which compare a company’s total debt to
its equity or total assets, respectively. An analysis of BMW’s combined leverage shows a
5
combined leverage of 6.38 between 2021 and 2022. The combined leverage was at 14.43 in
2021, but it fell to 0.16 in 2022.
2.4 Return on assets
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 2022 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 = 18903bn/ 94.146bn = 200 %
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 2021 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 = 14649bn/ 271.55bn = 53.95 %
ROA is a measure of how efficiently a company uses its assets to generate profit. It is derived by
dividing net income by total assets. A higher ROA indicates that a company is generating more
profit per dollar of assets, which is generally considered favorable (Momčilović et al., 2021).
BMW illustrates an increase in ROA from 2021 to 2022.
2.5 Return on equity
𝑅𝑂𝐸 2022 =
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
18903𝑏𝑛
=
= 196.5 %
′
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 96.18𝑏𝑛
ROE, on the other hand, measures a company’s profitability in relation to its shareholders’ equity.
It is determined by dividing net income by shareholders’ equity. ROE reflects the return on
investment for shareholders and is typically used as a gauge of a company’s profitability from an
equity perspective. A higher ROE is generally considered favorable, as it indicates that the
company is generating more profit per dollar of shareholders’ equity. BMW illustrates an
increase in ROE from 2021 to 2022.
𝑅𝑂𝐸 2021 =
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
14649𝑏𝑛
=
= 164.82%
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦 88.88𝑏𝑛
2.6 Weighted Average Cost of Capital (WACC)
𝐸
𝑑
𝑊𝐴𝐶𝐶 = (𝑉 ∗ 𝑅𝑒) + (𝑣 ∗ 𝑅𝑑 * (1 – Tc)) = 6.4%
WACC, which is the average rate of return a company must earn on its investments in order to
meet its obligations to all stakeholders, including shareholders, creditors, and other providers of
capital. It is a weighted average of the cost of debt and the cost of equity, taking into
consideration the proportion of debt and equity in the company’s capital structure. A greater
WACC shows that the company’s cost of capital is higher. The WACC of BMW is currently at
6.4%. Generally, the ROA and ROE are higher than WACC, which indicates good performance.
6
2.7 Liquidity Ratios
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 2022 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
97.146𝑏𝑛
=
= 1.09
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
88.95𝑏𝑛
The current ratio assesses a firm’s capacity to satisfy its short-term obligations. It is calculated by
dividing a company’s current assets by its current liabilities. A higher current ratio indicates
better short-term liquidity, as it indicates that the company has more current assets to cover its
current liabilities. The current ratio was at 1.09 in 2022 and 1.12 in 2021.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 2021 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
101.951𝑏𝑛
=
1.12
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
90.467𝑏𝑛
The quick ratio is also another liquidity and solvent matrix that can be used to assess the
financial status of BMW.
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 2022 =
(𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦) 97.146𝑏𝑛 − 21.077𝑏𝑛
=
= 0.85
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
88.95
This liquidity ratio is a more stringent measure of a company’s ability to meet its short-term
obligations. It is determined by dividing current assets minus inventory by current liabilities. The
quick ratio eliminates inventory from current assets since inventory cannot be converted to cash
as quickly in the short term. BMW’s quick ratio has been increasing from 2010 to 2022.
However, between 2021 and 2022, the quick ratio decreased, which indicates worsening shortterm liquidity.
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 2021 =
(𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
=
101.9516𝑏𝑛−18.444𝑏𝑛
90.467𝑏𝑛
= 0.92
2.8 Solvency Ratios
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑎𝑠𝑠𝑒𝑡𝑠 𝑟𝑎𝑡𝑖𝑜 2022 =
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
88946𝑚
=
= 0.36
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
246926𝑚
The firm’s debt to assets ratio in 2022 was ta 36%. This was a decrease from 2021 thus a better
ratio.
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑎𝑠𝑠𝑒𝑡𝑠 𝑟𝑎𝑡𝑖𝑜 2021 =
𝐸𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 2022 =
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
90467𝑚
=
= 0.39
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
229527𝑚
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
96.18𝑏𝑛
=
= 0.39
𝐴𝑠𝑠𝑒𝑡𝑠
246.926𝑏𝑛
7
Equity ratio is also another solvency ratio that can be used to assess BMW’s financial situation.
The equity ratio in 2021 is similar to that of 2022.
𝐸𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 2021 =
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
88.88𝑏𝑛
=
= 0.39
𝑎𝑠𝑠𝑒𝑡𝑠
229.527𝑏𝑛
The interest coverage ratio also measure show fast an organization can pay interest on debts.
𝐼𝑛𝑡𝑒𝑟𝑡𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 2022 =
𝐸𝐵𝐼𝑇
13.975𝑏𝑛
=
= 𝑁/𝐴
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑠𝑒𝑠
𝑈𝑛𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒
The interest coverage ratio for 2022 was unavailable due to a lack of interest expenses in the
official income statements.
𝐼𝑛𝑡𝑒𝑟𝑡𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 2021 =
𝐸𝐵𝐼𝑇
13.381𝑏𝑛
=
= 95.6𝑥
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
0.14𝑏𝑛
The interest coverage ratio for 2021 was at 95.6 which means there are enough funds to cover
95.6% of interest expenses.
The Debt-to-Equity Ratio analyzes the difference between a company’s total debt and equity of
its owners… It is computed by dividing a company’s total debt by the equity of its owners. A
lower debt-to-equity ratio indicates lower leverage and potentially lower financial risk, as it
indicates that the company has less debt relative to its equity.
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 2022 =
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
56.33𝑏𝑛
=
= 0.59
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 96.18𝑏𝑛
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 2021 =
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
90.46𝑏𝑛
=
= 1.02
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 88.88𝑏𝑛
The debt-to-equity ratio of BMW over the year ending 2022 was 0.59 (BMW, 2023). The debtto-equity ratio has been decreasing from 2021 to 2022.
2.9 Dividend policy
Dividend policy refers to the approach a company takes in determining the amount and
frequency of dividends it pays to its shareholders. Companies may have different dividend
policies depending on various factors, such as their financial condition, growth prospects, cash
flow position, and overall corporate strategy. Dividend strategy refers to the overall approach
and considerations a company takes into account when making decisions on dividend payments
(Walter, 1963). It may include factors such as the company’s financial goals, capital
requirements, growth prospects, tax implications, and shareholder expectations.
8
BMW’s dividend policy is that dividends are paid once annually in May to shareholders with
more than 1800 stocks. The price per share has also been increasing in the last ten years from
$69.9 to $95.15 (BMW, 2023).
2.10
Stock Price Development
The stock price of BMW, like any publicly traded company, is subject to market forces,
economic conditions, industry trends, company performance, and other factors that can influence
stock prices. Historical stock price development of BMW over the past ten years shows that the
highest stock price between 2021 and 2022 was 100.420 USD, while the lowest was 32.84 USD.
The average percentage fluctuation in stock price was 15.437% (Investing, n.d).
3. Main Findings
An analysis of the consolidated financial statements for BMW shows that the sales, operating
profit, and net income increased between 2021 and 2022. The company’s financial leverage was
the lowest in 2022 (2.8x) from 2021’s (3.1x) in the last five years, which means that the company
acquired more debts than assets. BMW’s combined leverage was at 14.43 in 2021, but it fell to
0.16 in 2022. ROE AND ROE are seen to decrease between 2021 and 2022, although they
remained above the WACC, which indicates good organizational performance. An analysis of
the liquidity-to-solvency ratio shows a decreasing debt-to-equity ratio, an increasing current
ratio, and decreasing quick ratio. BMW’s dividend payouts and yield amounts have been
increasing due to increased revenue. The stock value has also increased sharply from 2021 to
2022. Lastly are company risks, where a decrease in credit and operational risks is observed
between 2021 and 2022. Liquidity risk remained constant as free cash flow increased. The IFRS
also affected BMW by increasing net financial assets by € 2.3 billion and decreasing returns on
capital by 49.8%.
Considering these metrics, the financial statement of BMW is in good standing. This company is
an excellent choice for investors looking into profitable long-term and short-term ventures. This
analysis is, however, limited by the sources of information where some data was not published in
official BMW statements.
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4.
Outlook
This analysis illustrates that just like other global organizations, BMW relies on global supply
chains forces to maintain a positive balance sheet. For instance, it relies on complex global
supply chains that involve sourcing raw materials, components, and parts from various suppliers.
Disruption in the supply chain due to factors like the novel COVID-19 and Ukrainian disrupted
the supply chain in 2021, thus decreasing the supply by 4.8%. However 2022, activities on the
supply chain will increase by 10.6% by the end of 2022 (Waldersee 2023). Sales in China grew
by 12.7% while those in Europe by 10.9%. Operational risks can also arise from production
disruptions which result in delays in production, increased costs, and potential damage to the
company’s reputation if product quality is compromised. In 2022, the BMW production company
in Europe faced a raw material supply crisis amid the Ukrainian war (Eddy, 2022).
Car manufacturing companies may also face the risk of product recalls, which can occur due to
quality defects, safety concerns, or regulatory non-compliance. Product recalls can result in high
costs for the replacement or repair of the affected vehicles, legal liabilities, and reputational
damage. BMW has also encountered a significant number of vehicle recalls. Between 2021 and
2022, 14,000 electric vehicles were recalled after malfunctioning (Francisco, 2023).
BMW is also subject to various environmental regulations, such as emissions standards, waste
disposal regulations, and energy consumption requirements. Noncompliance with these
requirements may result in fines, penalties, and reputational loss. BMW has a strict renewable
energy production model that was introduced in 2006. Through this model, up to 99% of the
energy used in production is recycled (BMW, 2023). The company is also subject to quality
control and warranty risks, IT and cyber security risks, workforce management risks, currency
and commodity price risks, and sales and distribution risks.
BMW is also affected by changes in accounting like the recent IFRS 16. IFRS 16 is the global
accounting standard issued by the International Accounting Standards Board (IASB) that
governs the accounting treatment for leases. The adoption of IFRS 16 by BMW has significant
implications for the company’s financial statements, key financial metrics, and financial ratios.
With the introduction of IFRS in 2019, BMW experienced an increase in net financial assets in
the automotive segment as a result of € 2.3 billion worth of leases that were previously classified
as liabilities (BMW group, 2019).
BMW also observed higher lease liabilities on its balance sheet due to the capitalization of lease
obligations for leases that were previously classified as operating leases under IAS 17. This
increases total liabilities on the balance sheet. Shortly after the implementation of IFRS to BMW,
increasing liabilities worth € 2.3 billion were also recorded (BMW group, 2019). The returns on
capital also decreased by 49.8% due to the introduction of leases by IFRS. Nevertheless, the
target long-term RoCE in the automotive department was attained (BMW group, 2019).
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The adoption of IFRS 16 May also affected financial ratios like the leverage ratios, profitability
ratios, and liquidity ratios. For example, measures like debt-to-equity ratio and leverage ratio
may increase due to higher lease liabilities, while measures like return on assets and return on
equity may be affected by higher assets and liabilities. The adoption of IFRS may also induce
changes in lease expense recognition. Under IFRS 16, lease expenses are recognized as a
combination of amortization of the ROU asset and interest on the lease liability, whereas under
IAS 17, operating lease expenses are recognized on a straight-line basis. This can result in
changes in the timing and amount of lease expense recognition in BMW’s income statement.
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References
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BMW group. (2023). BMW sales recover in the fourth quarter as supply chain issues ease By
Victoria Waldersee 2023.
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Dobrin, G. I. (2021). BMW Group Economic Position Analysis in the Situation Created by
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Eddy, N. (2022). BMW’s European production takes a big hit from Ukraine crisis supply
disruption https://europe.autonews.com/automakers/bmws-european-production-takesbig-hit-ukraine-crisis-supplydisruption#:~:text=BMW%20is%20pausing%20production%20in,countries%20because
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Ibrahim, U. A., & Isiaka, A. (2020). Effect of financial leverage on firm value: Evidence from
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Investing. (n.d). Bayerische Motoren Werke AG (BMWG).
https://www.investing.com/equities/bay-mot-werke-historical-data
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